Net Income of $0.75 Per Share Compared to $0.86 Per Share Last Year; Net
Income from Continuing Operations of $1.12 Per Share Compared to $0.75 Per
Share Last Year
WORCESTER, Mass., May 1 /PRNewswire-FirstCall/ -- The Hanover Insurance
Group, Inc. (NYSE: THG) today reported net income for the first quarter of
$40.5 million, or $0.75 per share, compared to $46.5 million, or $0.86 per
share in the first quarter of last year. Net income from continuing
operations was $60.0 million for the first quarter, or $1.12 per share,
compared to $40.4 million, or $0.75 per share, in the first quarter of last
year. The decline in net income was primarily due to an increase of $20.1
million, or $0.38 per share, to the previously recorded loss on the disposal
of our variable life insurance and annuity business.
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Total Property and Casualty pre-tax segment income was $91.7 million in
the quarter, compared to $61.8 million in the first quarter of last year. The
Personal Lines segment reported pre-tax segment earnings of $49.0 million in
the first quarter of 2006, compared to $39.2 million in the first quarter of
2005, while the Commercial Lines segment reported pre-tax segment earnings of
$39.0 million in the quarter, versus $20.5 million in 2005.
"I am very pleased with the continued strength of our Property and
Casualty results," said Frederick H. Eppinger, chief executive officer of The
Hanover Insurance Group, Inc. "Our first quarter results reflect continued
strong Property and Casualty earnings. Our new business growth is
significant, driven by the success of our Connections(TM) Auto product and
continued momentum in our Commercial Lines business. At the same time our
margins remain strong."
Segment Results
The Hanover conducts its business in four operating segments. Property
and casualty operations consist of three operating segments: Personal Lines,
Commercial Lines, and Other Property and Casualty. The Personal Lines segment
markets automobile, homeowners and ancillary coverages to individuals and
families. The Commercial Lines segment offers a suite of products targeted at
the small to mid-size business markets, which include commercial multiple
peril, commercial automobile, workers' compensation and other commercial
coverages. The Other Property and Casualty segment includes a block of
run-off voluntary pools business in which we have not actively participated
since 1995; AMGRO, Inc., a premium financing business; Opus Investment
Management, Inc., which provides investment management services to
institutions, pension funds and other organizations; and earnings on holding
company assets. The Life Companies, our fourth operating segment, include the
run-off business of First Allmerica Financial Life Insurance Company (FAFLIC),
principally consisting of traditional life insurance and retirement
businesses.
The following table shows pre-tax segment income. It is presented in a
manner consistent with the way management evaluates results and is set forth
in accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information."
Quarter ended
March 31
(In millions)
2006 2005
Property and Casualty:
Personal Lines (1) $49.0 $39.2
Commercial Lines (2) 39.0 20.5
Other Property and Casualty 3.7 2.1
Total Property & Casualty 91.7 61.8
Life Companies (1.9) (9.3)
Interest expense on corporate debt (10.0) (10.0)
Total pre-tax segment income 79.8 42.5
Federal income tax expense 23.6 9.8
Total segment income after taxes (3) $56.2 $32.7
(1) Includes Personal Lines pre-tax catastrophe losses of $3.7 million and
$6.8 million for the first quarter of 2006 and 2005, respectively.
(2) Includes Commercial Lines pre-tax catastrophe losses of $3.6 million
and $5.5 million for the first quarter of 2006 and 2005, respectively.
(3) See reconciliation from segment income to net income at the end of
this document.
Property and Casualty
Property and Casualty segment income was $91.7 million in the first
quarter of 2006, up from $61.8 million in the first quarter of 2005. Earnings
were higher in the quarter due primarily to favorable loss performance in both
Personal Lines and Commercial Lines, partially offset by increased expenses.
Property and Casualty highlights:
* Net premiums written were $574.0 million in the first quarter of 2006,
compared to $548.4 million in the first quarter of 2005, up 4.7%.
* Net premiums earned were $540.9 million in the first quarter of 2006,
compared to $550.2 million in the first quarter of 2005.
* New business net premiums written were $134.2 million in the first
quarter of 2006, representing an increase of 75% over the $76.5 million
in the first quarter of 2005.
* Favorable development of prior-year reserves was $24.9 million in the
first quarter of 2006, compared to favorable development of $13.7
million in the first quarter of 2005, driven primarily by our Personal
Auto and Commercial-Multi Peril Lines.
The following tables summarize the components of the GAAP combined ratio
for the Property and Casualty segment:
Quarter ended
March 31
2006 2005
Personal Lines losses (excluding catastrophes) 53.5% 58.6%
Personal Lines catastrophe-related losses 1.1% 1.9%
Total Personal Lines losses 54.6% 60.5%
Commercial Lines losses (excluding catastrophes) 41.6% 51.7%
Commercial Lines catastrophe-related losses 1.8% 2.9%
Total Commercial Lines losses 43.4% 54.6%
Total P&C Losses 50.4% 58.5%
Loss adjustment expenses 10.1% 8.9%
Policy acquisition and other underwriting expenses 33.9% 31.5%
Combined Ratio 94.4% 98.9%
Personal Lines
Personal Lines pre-tax segment income was $49.0 million in the quarter
compared to $39.2 million in the prior-year quarter. The improvement in
earnings is primarily due to relatively favorable current accident year loss
performance, as well as lower catastrophes, partially offset by an increase in
expenses and slightly lower favorable development of prior-year reserves.
The loss ratio in the current quarter was 54.6% versus 60.5% in the
prior-year quarter. The impact of catastrophes was favorable in the quarter,
resulting in $3.7 million of pre-tax losses compared to $6.8 million of
pre-tax losses in the first quarter of 2005. The loss ratio excluding the
impact of catastrophes was 53.5% in the current quarter versus 58.6% in the
prior-year quarter, an improvement of 5.1 points. The major factors driving
the improvement in the loss ratio excluding catastrophes were lower personal
automobile claims frequency and favorable frequency in our homeowners lines of
business.
Underwriting and loss adjustment expenses were higher in the quarter due
to several factors, including: the impact of the new accounting for
stock-based compensation, investments in technology, claim and employee
related expenses, and to a lesser extent an increase in the proportion of
overhead expenses absorbed by the Property and Casualty segment.
Personal Lines highlights:
* Net premiums written were $341.6 million in the first quarter of 2006,
compared to $335.8 million in the first quarter of 2005, up 1.7%.
* Net premiums earned were $339.8 million in the first quarter of 2006,
compared to $360.5 million in the first quarter of 2005.
* New business net premiums written were $60.0 million in the first
quarter of 2006, representing an increase of 156% compared to $23.4
million in the first quarter of 2005.
* The Personal Lines GAAP combined ratio was 94.6% in the first quarter,
versus 96.7% in the prior-year quarter.
* The pre-tax catastrophe losses were $3.7 million, or 1.1 points of the
combined ratio for the first quarter of 2006 compared to $6.8 million
or 1.9 points of the combined ratio for the first quarter of 2005.
* Favorable development of prior-year reserves was $8.1 million in the
current quarter, compared to favorable development of $9.5 million in
the first quarter of 2005; improving the personal lines combined ratio
by 2.4 points and 2.6 points, respectively.
Commercial Lines
Commercial Lines pre-tax segment income was $39.0 million in the quarter,
compared to $20.5 million in the first quarter of 2005. The improvement in
segment results in the quarter is primarily due to relatively favorable loss
performance, partially offset by an increase in expenses.
The loss ratio in the current quarter was 43.4% versus 54.6% in the
prior-year quarter. The impact of catastrophes was favorable in the quarter,
resulting in $3.6 million of pre-tax losses in the current quarter compared to
$5.5 million of pre-tax losses in the first quarter of 2005. The loss ratio
excluding the impact of catastrophes was 41.6% in the current quarter versus
51.7% in the prior-year quarter, an improvement of 10.1 points. The
improvement in the loss ratio excluding catastrophes was primarily due to
favorable development of prior-year loss reserves, as well as improved current
accident year loss performance. In the current quarter favorable development
of prior year loss reserves was $14.0 million, or 7.0 points of the loss
ratio, compared to $1.6 million, or 0.8 points of the loss ratio in the first
quarter of 2005. The increase of $12.4 million was driven primarily by an
increase in favorable development in commercial multi-peril. Additionally,
the development of the prior year reserves in the workers' compensation line
was slightly favorable in the current quarter versus somewhat unfavorable in
last year's quarter. The improvement in the current accident year loss ratio
was due to continued favorable frequency trends, improvement in the current
year underwriting results related to certain involuntary pools, and the
continued shift in product mix to lower loss ratio lines of business,
particularly inland marine and bonds.
Underwriting and loss adjustment expenses were higher in the quarter due
to several factors, including: the impact of the new accounting for
stock-based compensation, investments in technology, other claim and employee
related expenses, and to a lesser extent an increase in the proportion of
overhead expenses absorbed by the Property and Casualty segment.
Commercial Lines highlights:
* Net premiums written were $232.4 million in the first quarter of 2006,
compared to $212.6 million in the first quarter of 2005, up 9.3%.
* Net premiums earned were $201.1 million in the current quarter, compared
to $189.7 million in the prior-year quarter.
* New business net premiums written were $74.2 million in the first
quarter of 2006, representing an increase of 39% compared to $53.2
million in the first quarter of 2005.
* The Commercial Lines GAAP combined ratio was 94.1% in the first quarter,
compared to 102.8% in the prior year quarter.
* The pre-tax catastrophe losses were $3.6 million, or 1.8 points of the
combined ratio for the first quarter of 2006 compared to $5.5 million
or 2.9 points of the combined ratio for the first quarter of 2005.
* Favorable development of prior-year reserves was $17.1 million in the
current quarter, compared to favorable development of $4.9 million in
the first quarter of 2005; improving the Commercial Lines combined
ratio by 8.5 points and 2.6 points, respectively.
Other Property & Casualty
Other Property & Casualty pre-tax segment income was $3.7 million in the
quarter, compared to $2.1 million in the prior year quarter. Other Property &
Casualty includes our run-off voluntary pools, premium financing and
investment management operations.
Life Companies
Continuing Operations:
The continuing operations of the Life Companies now include the FAFLIC
retained business. The retained business primarily includes various blocks of
traditional life insurance, group retirement business, guaranteed investment
contract (GIC) businesses, and our discontinued group life and health
business, including group life and health voluntary pools, which are all in
run-off.
The Life Companies continuing operations reported a segment loss of $1.9
million in the current quarter of 2006, compared to a loss of $9.3 million in
the first quarter of 2005, primarily attributable to lower expenses and
decreased losses from the GIC business.
Loss on Disposal of the Variable Life Insurance and Annuity Business:
For the current quarter, we recorded a loss on the sale of the variable
life insurance and annuity business of $20.1 million, net of tax, primarily
due to an addition of $15.0 million to the existing provision for our
estimated potential liability for certain contractual indemnities to Goldman
Sachs relating to the pre-sale activities of the business sold recorded under
FAS Interpretation No. 45 Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN
45"). This additional provision relates to preliminary estimated expenses,
reimbursements, penalties and other costs of remediating certain pre-closing
processing errors relating to tax reporting to certain policyholders and
others for a subset of our former variable annuity business.
Investment Results
Net investment income was $80.3 million for the first quarter of 2006 and
the first quarter of 2005. Net investment income in the Property and Casualty
segment increased $5.7 million to $56.5 million primarily due to increased
operating cash flows and higher holding company investment income from the
proceeds of the sale of the variable life insurance and annuity business.
This was offset by a decrease in the net investment income in the Life
Companies of $5.8 million to $23.7 million, driven by lower average invested
assets, primarily resulting from the maturities of long-term funding
agreements.
First quarter 2006 pre-tax net realized investment gains were $5.6
million, compared to $12.0 million of pre-tax net realized investment gains in
the same period of 2005. In the current quarter, pre-tax net realized gains on
sales of fixed maturities of $10.4 million were partially offset by $4.8
million of capital losses resulting from impairments on certain fixed maturity
securities and other invested assets. In the first quarter of 2005, pre-tax
net realized gains on sales of fixed maturities of $14.1 million were
partially offset by $2.1 million of capital losses resulting from impairments
on certain fixed maturity securities.
Balance Sheet
Shareholders' equity was $1.8 billion, or $35.35 per share at March 31,
2006, compared to $2.0 billion or $36.30 per share at December 31, 2005,
primarily due to the share repurchase program. Excluding accumulated other
comprehensive income book value was $37.77 per share at the close of the
current quarter, compared to $37.33 per share at December 31, 2005.
Other Items
The company has effectively completed a share repurchase program of up to
$200 million. As of April 27th, 2006, we have purchased 4,022,314 shares, at
an average price of $49.65, for a total principal amount of $199.7 million.
Earnings Conference Call
The Hanover will host a conference call to discuss the company's first
quarter results on Tuesday, May 2nd at 10:00 a.m. Eastern Time. A PowerPoint
slide presentation will accompany our prepared remarks and has been posted on
our web site. Interested investors and others can listen to the call and
access the presentation through The Hanover's web site, located at
http://www.hanover.com. Web-cast participants should go to the web site 15
minutes early to register, download, and install any necessary audio software.
A re-broadcast of the conference call will be available on this web site two
hours after the call.
Statistical Supplement
The Hanover's first quarter earnings press release and statistical
supplement are also available in the Investors section at
http://www.hanover.com.
Forward-Looking Statements
Certain statements in this release or in the above referenced conference
call may be considered to be forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Use of the words
"believes," "anticipates," "expects," "projections," "outlook," "should,"
"plan," "guidance" and similar expressions is intended to identify
forward-looking statements. The company cautions investors that any such
forward-looking statements are not guarantees of future performance, and
actual results could differ materially. Investors are directed to consider
the risks and uncertainties in our business that may affect future performance
and that are discussed in readily available documents, including the company's
annual report and other documents filed by The Hanover with the Securities and
Exchange Commission and which are also available at http://www.hanover.com
under "Investors." These uncertainties include the possibility of adverse
catastrophe experience (including terrorism) and severe weather, the
uncertainties in estimating property and casualty losses (particularly with
respect to products with longer tails and with respect to losses incurred as
the result of Hurricanes Katrina and Rita), the ability to increase or
maintain certain property and casualty insurance rates, the impact of new
product introductions (such as the multi-variate private passenger auto
product), adverse loss development and adverse trends in mortality and
morbidity, change in the current favorable frequency and loss trends generally
being experienced industry-wide, the ability to improve renewal rates and
increase new property and casualty policy counts, investment impairments,
heightened competition (including rate pressure), adverse state and federal
legislation or regulation or regulatory actions, financial ratings actions,
uncertainties in estimating the FIN 45 liability recorded in conjunction with
certain indemnity obligations to Goldman Sachs in connection with the sale of
the variable annuity business (including with respect to existing and
potential litigation and regulatory actions and the remediation of certain
processing errors in connection with tax reporting), and various other
factors.
The Hanover uses non-GAAP financial measures as important measures of the
company's operating performance, including total segment income, property and
casualty segment income, and measures of segment income and loss ratios
excluding catastrophe losses.
Segment income is net income excluding federal income taxes and net
realized investment gains and losses, including gains or losses on certain
derivative instruments, because fluctuations in these gains and losses are
determined by interest rates, financial markets and the timing of sales.
Segment income also excludes net gains and losses on disposals of businesses,
discontinued operations, restructuring costs, extraordinary items, the
cumulative effect of accounting changes and certain other items. Property and
Casualty segment income is the sum of the segment income of the three
operating segments of The Hanover's property and casualty operations:
Personal Lines, Commercial Lines and Other Property and Casualty. The Hanover
believes that measures of total segment income and Property and Casualty
segment income provide investors with a valuable measure of the performance of
the company's ongoing businesses because they highlight net income
attributable to the normal operations of the business.
The Hanover also provides measures of segment income and loss ratios that
exclude the effects of catastrophe losses. A catastrophe is a severe loss,
resulting from natural or manmade events, including risks such as fire,
hurricane, earthquake, windstorm, explosion, terrorism or other similar
events. Each catastrophe has unique characteristics. Catastrophes are not
predictable as to timing or loss amount in advance. The Hanover believes that
a discussion of the effect of catastrophes is meaningful for investors to
understand the variability of periodic earnings and loss ratios.
Net income is the most directly comparable GAAP measure for total segment
income, Property and Casualty segment income and measures of segment income
that exclude the effects of catastrophe losses. Segment income, Property and
Casualty segment income and measures of segment income that exclude the
effects of catastrophe losses should not be construed as a substitute for net
income determined in accordance with GAAP. A reconciliation of net income to
segment income and Property and Casualty segment income for the quarters ended
March 31, 2006 and 2005 is set forth in the table at the end of this document
and in the statistical supplement. Loss ratios calculated in accordance with
GAAP are the most directly comparable GAAP measure for loss ratios calculated
excluding the effects of catastrophe losses. The presentation of loss ratios
calculated excluding the effects of catastrophe losses should not be construed
as a substitute for loss ratios determined in accordance with GAAP.
The Hanover Insurance Group, Inc., based in Worcester, Mass., is the
holding company for a group of insurers that includes The Hanover Insurance
Company, also based in Worcester, Citizens Insurance Company of America,
headquartered in Howell, Michigan, and their affiliates. The Hanover offers a
wide range of property and casualty products and services to individuals,
families and businesses thorough an extensive network of independent agents,
and has been meeting its obligations to its agent partners and their customers
for more than 150 years. Taken as a group, The Hanover ranks among the top 35
of more than 950 property and casualty insurers in the United States.
Contact Information
Investors: Media:
Sujata Mutalik Michael F. Buckley
E-mail: smutalik@hanover.com E-mail: mibuckley@hanover.com
1-508-855-3457 1-508-855-3099
THE HANOVER INSURANCE GROUP, INC.
(In millions, except per share data)
Quarter ended
March 31
2006 2005
Net income $40.5 $46.5
Net income per share (1) $0.75 $0.86
Weighted average shares (diluted) 53.6 53.8
The following is a reconciliation from segment income to net income (2):
PER SHARE DATA
(DILUTED) (1) Quarter ended
March 31
2006 2005
$ Per Share $ Per Share
Property and Casualty
Personal Lines $49.0 -- $39.2 --
Commercial Lines 39.0 -- 20.5 --
Other Property &
Casualty 3.7 -- 2.1 --
Total Property and
Casualty 91.7 -- 61.8 --
Life Companies (1.9) -- (9.3) --
Interest expense on
corporate debt (10.0) -- (10.0) --
Total segment income 79.8 $1.49 42.5 $0.79
Federal income tax
expense on P&C segment
income (28.9) -- (17.4) --
Federal income tax
benefit on other segment
income 5.3 -- 7.6 --
Federal income tax expense
on segment income (23.6) (0.44) (9.8) (0.18)
Total segment income after
federal income taxes 56.2 1.05 32.7 0.61
Net realized investment
gains, net of
amortization 5.8 0.11 11.3 0.20
Loss on derivatives -- -- (0.2) --
Restructuring costs (0.3) (0.01) (0.7) (0.01)
Federal income tax expense
on non-segment income (1.7) (0.03) (2.7) (0.05)
Income from continuing
operations, net of taxes 60.0 1.12 40.4 0.75
Income from discontinued
variable life and annuity
business, net of taxes -- -- 6.1 0.11
Loss on disposal of
variable life insurance
and annuity business,
net of taxes (20.1) (0.38) -- --
Income before cumulative
effect of accounting
change 39.9 0.74 46.5 0.86
Cumulative effect of
change in accounting
principle, net of taxes 0.6 0.01 -- --
Net income $40.5 $0.75 $46.5 $0.86
(1) Basic net income per share was $0.76 and $0.87 for the quarters ended
March 31, 2006 and 2005, respectively.
(2) In accordance with Statement of Financial Accounting Standards No.
131, Disclosure about Segments of an Enterprise and Related
Information, the separate financial information of each segment is
presented consistent with the way results are regularly evaluated by
the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Management evaluates the results of the aforementioned segments on a
pre-tax basis. Segment income (loss) is determined by adjusting net income
(loss) for net realized investment gains and losses including certain gains or
losses on derivative instruments, because fluctuations in these gains and
losses are determined by interest rates, financial markets and the timing of
sales. Also, segment income (loss) excludes net gains and losses on disposals
of businesses, discontinued operations, restructuring and reorganization
costs, extraordinary items, the cumulative effect of accounting changes and
certain other items.
Net income includes the following items by segment:
Quarter ended March 31, 2006
Personal Commercial Other Property Life Total
Lines Lines & Casualty Companies
Net realized
investment gains
(losses) 2.2 2.2 5.2 (3.8) 5.8
Restructuring costs -- -- -- (0.3) (0.3)
Loss on disposal of
variable life and
annuity business,
net of taxes -- -- -- (20.1) (20.1)
Cumulative effect of
change in accounting
principle, net of
taxes 0.2 0.3 -- 0.1 0.6
Quarter ended March 31, 2005
Personal Commercial Other Property Life Total
Lines Lines & Casualty Companies
Net realized
investment (losses)
gains (0.7) (0.7) -- 12.7 11.3
Losses on derivative
instruments -- -- -- (0.2) (0.2)
Restructuring costs -- -- -- (0.7) (0.7)
Income from
discontinued variable
life insurance and
annuity business,
net of taxes -- -- -- 6.1 6.1
All figures reported are unaudited.
SOURCE The Hanover Insurance Group, Inc.
-0- 05/01/2006
/CONTACT: Investors: Sujata Mutalik, +1-508-855-3457,
smutalik@hanover.com, or Media: Michael F. Buckley, +1-508-855-3099,
mibuckley@hanover.com, both of The Hanover Insurance Group, Inc. /
/Photo: NewsCom: http://www.newscom.com/cgi-bin/prnh/20051031/NEM023LOGO
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PRN Photo Desk, photodesk@prnewswire.com /
/Web site: http://www.hanover.com /
(THG)
CO: The Hanover Insurance Group, Inc.
ST: Massachusetts
IN: FIN INS
SU: ERN CCA
AH-AC
-- NEM041 --
0259 05/01/200616:17 EDThttp://www.prnewswire.com