WORCESTER, Mass., July 31 /PRNewswire-FirstCall/ -- The Hanover Insurance
Group, Inc. (NYSE: THG) today reported net income for the second quarter of
$50.9 million, or $0.99 per share, compared to $72.0 million, or $1.34 per
share in the second quarter of last year. Last year's second quarter net
income includes a federal income tax benefit of $12.9 million, or $0.23 per
share, primarily related to the company's discontinued variable life insurance
and annuity business. Income from continuing operations was $53.7 million for
the second quarter, or $1.04 per share, compared to $57.1 million, or $1.06
per share, in the second quarter of last year.
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Total Property and Casualty pre-tax segment income was $86.2 million in
the quarter, compared to $90.1 million in the second quarter of last year.
Total Property and Casualty pre-tax catastrophe losses were $19.5 million in
the current quarter, compared to $7.0 million in the second quarter of last
year.
"Our companies continue to deliver strong results," said Frederick H.
Eppinger, chief executive officer of The Hanover Insurance Group, Inc. "Our
second quarter results reflect better loss ratios and strong growth in both
commercial lines and personal lines. Property and Casualty segment earnings,
excluding catastrophe losses, improved significantly from the prior year."
Segment Results
The Hanover conducts its business in four operating segments. Three of
these operating segments, Personal Lines, Commercial Lines, and Other Property
and Casualty, are included in our Property and Casualty operations. 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, such as fidelity and surety, and inland marine.
The Other Property and Casualty segment includes 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, as well as a block of
run-off voluntary pools business in which we have not actively participated
since 1995. The Life Companies, the company's 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
June 30
(In millions)
2006 2005
Property and Casualty:
Personal Lines (1) $53.7 $57.4
Commercial Lines (2) 30.2 31.0
Other Property and Casualty 2.3 1.7
Total Property & Casualty 86.2 90.1
Life Companies (1.0) (7.5)
Interest expense on corporate debt (9.9) (9.9)
Total pre-tax segment income 75.3 72.7
Federal income tax expense 23.6 19.5
Total segment income after taxes (3) $51.7 $53.2
(1) Includes Personal Lines pre-tax catastrophe losses of $8.9 million and
$4.4 million for the second quarter of 2006 and 2005, respectively.
(2) Includes Commercial Lines pre-tax catastrophe losses of $10.6 million
and $2.6 million for the second 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 pre-tax segment income was $86.2 million in the
second quarter of 2006, down from $90.1 million in the second quarter of 2005,
a decrease of $3.9 million. Pre-tax catastrophe losses were $19.5 million in
the current quarter compared to $7.0 million in the second quarter of 2005.
Excluding the pre-tax impact of catastrophe losses, property and casualty
pre-tax segment income was $105.7 million in the current quarter compared to
$97.1 million in the prior year quarter. This increase was primarily due to
favorable loss performance in both Personal Lines and Commercial Lines,
partially offset by increased expenses.
Property and Casualty highlights:
* Net premiums written were $598.4 million in the second quarter of 2006,
compared to $557.5 million in the second quarter of 2005, up 7.3%.
* Net premiums earned were $549.4 million in the second quarter of 2006,
compared to $549.8 million in the second quarter of 2005.
* New business net premiums written were $151.8 million in the second
quarter of 2006, representing an increase of 72% over the $88.1 million
in the second quarter of 2005.
* Favorable development of prior year loss and LAE reserves was $27.2
million in the second quarter of 2006, compared to favorable
development of $15.9 million in the second quarter of 2005, driven
primarily by our Personal Auto, Workers' Compensation, and Commercial
Auto lines.
The following table summarizes the components of the GAAP combined ratio
for the Property and Casualty segment:
Quarter ended
June 30
2006 2005
Personal Lines losses (excluding catastrophes) 49.3% 53.3%
Personal Lines catastrophe-related losses 2.6% 1.2%
Total Personal Lines losses 51.9% 54.5%
Commercial Lines losses (excluding catastrophes) 41.2% 49.3%
Commercial Lines catastrophe-related losses 5.2% 1.3%
Total Commercial Lines losses 46.4% 50.6%
Total P&C Losses 49.9% 53.2%
Loss adjustment expenses 11.2% 9.3%
Policy acquisition and other underwriting expenses 33.8% 31.2%
Combined Ratio 94.9% 93.7%
Personal Lines Personal Lines pre-tax segment income was $53.7 million in the quarter
compared to $57.4 million in the prior year quarter, a decrease of $3.7
million. Pre-tax catastrophe losses were $8.9 million in the current quarter
compared to $4.4 million in the second quarter of 2005. Excluding the pre-tax
impact of catastrophe losses, personal lines pre-tax segment income was $62.6
million in the current quarter compared to $61.8 million in the prior-year
quarter. This increase was primarily due to improved loss performance,
partially offset by higher expenses.
The loss ratio in the current quarter was 51.9% versus 54.5% in the prior
year quarter. Pre-tax catastrophe losses added 2.6 points to the loss ratio
in the current quarter compared to 1.2 points in the prior-year quarter. The
loss ratio excluding the impact of catastrophes was 49.3% in the current
quarter versus 53.3% in the prior-year quarter, an improvement of 4.0 points.
The factors driving the improvement in the loss ratio excluding catastrophes
were both the favorable development of prior-year loss reserves and favorable
underwriting results from our involuntary pools, primarily the Massachusetts
Commonwealth Automobile Reinsurers pool (CAR).
In the current quarter, development of prior-year loss reserves was
favorable by $16.3 million, or 4.7 points of the loss ratio, compared to $8.8
million favorable, or 2.5 points of the loss ratio in the second quarter of
2005. The improvement in prior-year reserve development was primarily a
result of favorable development in Personal Auto.
Underwriting and loss adjustment expenses were higher in the quarter due
to several factors, including: the implementation of a new claims operating
model, the impact of the new accounting for stock-based compensation, 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 $360.7 million in the second quarter of 2006,
compared to $347.7 million in the second quarter of 2005, up 3.7%.
* Net premiums earned were $344.5 million in the second quarter of 2006,
compared to $353.3 million in the second quarter of 2005.
* New business net premiums written were $71.0 million in the second
quarter of 2006, representing an increase of 120% compared to $32.2
million in the second quarter of 2005.
* The Personal Lines GAAP combined ratio was 92.9% in the second quarter,
versus 91.5% in the prior year quarter.
* The pre-tax catastrophe losses were $8.9 million, or 2.6 points of the
combined ratio for the second quarter of 2006, compared to $4.4 million,
or 1.2 points of the combined ratio for the second quarter of 2005.
* Favorable development of prior-year loss and LAE reserves was $17.3
million in the current quarter, compared to favorable development of
$9.6 million in the second quarter of 2005; improving the personal lines
combined ratio by 5.0 points and 2.7 points, respectively.
Commercial Lines Commercial Lines pre-tax segment income was $30.2 million in the quarter,
compared to $31.0 million in the second quarter of 2005. Pre-tax catastrophe
losses were $10.6 million in the current quarter compared to $2.6 million in
the second quarter of 2005. Excluding the pre-tax impact of catastrophe
losses, commercial lines pre-tax segment income was $40.8 million in the
current quarter compared to $33.6 million in the prior year quarter. This
increase was driven by growth in specialty lines, improved current
accident-year loss performance, and favorable development of prior-year
reserves, partially offset by higher expenses.
The loss ratio in the current quarter was 46.4% versus 50.6% in the
prior-year quarter. Pre-tax catastrophe losses added 5.2 points to the loss
ratio in the current quarter compared to 1.3 points in the prior-year quarter.
The loss ratio excluding the impact of catastrophes was 41.2% in the current
quarter versus 49.3% in the prior-year quarter, an improvement of 8.1 points.
In the current quarter, development of prior-year loss reserves was
favorable by $8.7 million, or 4.3 points of the loss ratio, compared to $3.9
million, or 2.0 points of the loss ratio in the second quarter of 2005. The
increase in favorable prior-year reserve development was driven by Workers'
Compensation and Commercial Auto lines. The current accident-year loss results
also improved, driven primarily by improvement in Commercial Multi-peril and
growth in specialty lines.
Underwriting and loss adjustment expenses were higher in the quarter due
to several factors which include: a continued shift in product mix to
specialty lines that typically carry a relatively higher expense ratio, the
impact of the new accounting for stock-based compensation, investments in
technology, implementation of a new claims operating model 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 $237.4 million in the second quarter of 2006,
compared to $209.6 million in the second quarter of 2005, up 13.3%.
* Net premiums earned were $204.7 million in the current quarter, compared
to $196.3 million in the prior year quarter.
* New business net premiums written were $80.8 million in the second
quarter of 2006, representing an increase of 44% compared to $55.9
million in the second quarter of 2005.
* The Commercial Lines GAAP combined ratio was 98.4% in the second
quarter, compared to 97.4% in the prior year quarter.
* The pre-tax catastrophe losses were $10.6 million, or 5.2 points of the
combined ratio for the second quarter of 2006, compared to $2.6 million,
or 1.3 points of the combined ratio for the second quarter of 2005.
* Favorable development of prior-year loss and LAE reserves was $10.9
million in the current quarter, compared to favorable development of
$6.8 million in the second quarter of 2005; improving the Commercial
Lines combined ratio by 5.3 points and 3.5 points, respectively.
Other Property & Casualty Other Property & Casualty pre-tax segment income was $2.3 million in the
quarter, compared to $1.7 million in the prior-year quarter. Other Property &
Casualty includes the company's premium financing business, investment
management operations, earnings on holding company assets, as well as run-off
voluntary pools.
Life Companies
Continuing Operations:
The continuing operations of the Life Companies now include the FAFLIC
retained business. The retained business primarily includes the closed block
of traditional life insurance, group retirement business, guaranteed
investment contract (GIC) businesses, and the company's 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 $1.0
million in the current quarter of 2006, compared to a loss of $7.5 million in
the second quarter of 2005, primarily attributable to lower expenses.
Loss on Disposal of the Variable Life Insurance and Annuity Business:
For the current quarter, the company recorded an expected loss on the sale
of the variable life insurance and annuity business of $2.8 million, net of
tax, relating primarily to net transition service expenses.
Investment Results
Net investment income was $79.2 million for the second quarter of 2006,
compared to $78.3 million in the same period of 2005. Net investment income in
the Property and Casualty segment increased $4.6 million to $56.0 million
primarily due to increased operating cash flows and higher investment income
from the proceeds on the sale of the variable life insurance and annuity
business. This was partially offset by a decrease in net investment income in
the Life Companies of $3.8 million to $23.0 million, driven by lower average
invested assets, primarily resulting from the maturities of long-term funding
agreements.
Second quarter 2006 pre-tax net realized investment gains were $2.9
million, compared to $4.2 million of pre-tax net realized investment gains in
the same period of 2005. In the current quarter, the company experienced
pre-tax net realized investment gains of $4.8 million primarily from the sale
of fixed maturities. These gains were partially offset by $1.9 million of
capital losses resulting from impairments on certain fixed maturity securities
and other invested assets. In the second quarter of 2005, the company
experienced pre-tax net realized investment gains of $5.6 million primarily
from the sale of fixed maturities. These gains were partially offset by $1.4
million of capital losses resulting from impairments on certain fixed maturity
and equity securities.
Balance Sheet
Shareholders' equity was $1.8 billion, or $34.77 per share at June 30,
2006, compared to $2.0 billion or $36.30 per share at December 31, 2005,
primarily due to the share repurchase program and an increase in unrealized
losses. Excluding accumulated other comprehensive income, book value was
$38.46 per share at the close of the current quarter, compared to $37.33 per
share at December 31, 2005.
Earnings Conference Call
The Hanover will host a conference call to discuss the company's first
quarter results on Tuesday, August 1st 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 second 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 experiences (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 personal 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 life
insurance and 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
June 30, 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 the more than 950 property and casualty insurers in the United States.
Contact Information
Investors: Media:
Sujata Mutalik Amy Lynn Banek
E-mail: smutalik@hanover.com E-mail: abanek@hanover.com
1-508-855-3457 1-508-855-4486
THE HANOVER INSURANCE GROUP, INC.
(In millions, except per share data)
Quarter ended
June 30
2006 2005
Net income $50.9 $72.0
Net income per share(1) $0.99 $1.34
Weighted average shares (diluted) 51.6 53.9
The following is a reconciliation from segment income to net income (2):
PER SHARE DATA
(DILUTED) (1) Quarter ended
June 30
2006 2005
Segment Income $ Per Share $ Per Share
Property and Casualty
Personal Lines $53.7 -- $57.4 --
Commercial Lines 30.2 -- 31.0 --
Other Property &
Casualty 2.3 -- 1.7 --
Total Property and
Casualty 86.2 -- 90.1 --
Life Companies (1.0) -- (7.5) --
Interest expense on
corporate debt (9.9) -- (9.9) --
Total segment income 75.3 $1.46 72.7 $1.35
Federal income tax
expense on P&C segment
income (30.3) -- (26.8) --
Federal income tax
benefit on other
segment income 6.7 -- 7.3 --
Total federal income
tax expense on segment
income (23.6) (0.46) (19.5) (0.36)
Total segment income
after federal income
taxes 51.7 1.00 53.2 0.99
Net realized investment
gains, net of
amortization 3.6 0.07 3.6 0.07
Change in prior years
tax reserves -- -- 2.3 0.04
Gain (loss) on derivatives 0.1 -- (0.3) (0.01)
Restructuring costs (0.6) (0.01) (0.2) --
Federal income tax
expense on non-segment
income (1.1) (0.02) (1.5) (0.03)
Income from continuing
operations, net of taxes 53.7 1.04 57.1 1.06
Income from discontinued
variable life insurance
and annuity business,
net of taxes -- -- 14.9 0.28
Loss on disposal of
variable life insurance
and annuity business,
net of taxes (2.8) (0.05) -- --
Income before cumulative
effect of accounting
change 50.9 0.99 72.0 1.34
Cumulative effect of
change in accounting
principle, net of taxes -- -- -- --
Net income $50.9 $0.99 $72.0 $1.34
(1) Basic net income per share was $1.00 and $1.35 for the quarters ended
June 30, 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 is determined by adjusting net income 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 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.
Net income includes the following items by segment:
Quarter ended June 30, 2006
(In millions)
Personal Commercial Other Property Life Total
Lines Lines & Casualty Companies
Net realized
investment gains
(losses) $2.5 $2.5 $(1.5) $0.1 $3.6
Gains on derivative
instruments -- -- -- 0.1 0.1
Restructuring costs -- -- -- (0.6) (0.6)
Loss on disposal of
variable life
insurance and annuity
business, net of taxes -- -- -- (2.8) (2.8)
Quarter ended June 30, 2005
Personal Commercial Other Property Life Total
Lines Lines & Casualty Companies
Change in prior
year's tax reserves $-- $-- $-- $2.3 $2.3
Net realized
investment (losses)
gains 0.2 -- 0.7 2.7 3.6
Losses on derivative
instruments -- -- -- (0.3) (0.3)
Restructuring costs -- -- -- (0.2) (0.2)
Income from
discontinued variable
life insurance and
annuity business, net
of taxes -- -- -- 14.9 14.9
All figures reported are unaudited.
SOURCE The Hanover Insurance Group, Inc.
Contact: Investors: Sujata Mutalik, +1-508-855-3457, smutalik@hanover.com, or Media: Amy Lynn Banek, +1-508-855-4486, abanek@hanover.com, both of The Hanover Insurance Group, Inc.