WORCESTER, Mass., Oct. 30 /PRNewswire-FirstCall/ -- The Hanover Insurance
Group, Inc. (NYSE: THG) today reported net income for the third quarter of
$33.4 million, or $0.65 per share, compared to a net loss of $562.4 million,
or $10.51 per share, in the third quarter of last year. As previously
announced, the current quarter's results include a $34 million charge, or
$0.66 per share, of after-tax net losses related to Hurricane Katrina. Last
year's third quarter net loss is attributed to a $474.6 million after-tax net
loss on the sale of the variable life insurance and annuity business and $140
million in after-tax net catastrophe losses related to Hurricane Katrina.
(Logo: http://www.newscom.com/cgi-bin/prnh/20051031/NEM023LOGO )
Income from continuing operations was $28.5 million for the third quarter,
or $0.56 per share, compared to a loss of $105.4 million, or $1.97 per share,
in the third quarter of last year. Results for both quarters include the
impact of the aforementioned catastrophe losses related to Hurricane Katrina
and several other much less significant items.
Total Property and Casualty pre-tax segment income was $52.8 million in
the quarter, compared to a loss of $127.7 million in the third quarter of last
year. As previously announced, the current quarter's results include $64.2
million of net pre-tax catastrophe losses and loss adjustment expenses, of
which $52.1 million relate to a reserve increase attributable to Hurricane
Katrina. In addition, current quarter results also include the benefit of a
$7.0 million litigation settlement related to Opus Investment Management, Inc.
Results from the third quarter of last year include pre-tax net catastrophe
related losses of $245.5 million, primarily attributed to Hurricane Katrina.
"We continue to be very pleased with the progress we are making throughout
our organization," said Frederick H. Eppinger, chief executive officer of The
Hanover Insurance Group, Inc. "In spite of the additional Hurricane Katrina
losses, we generated solid results in the quarter, reflected in the positive
momentum we have established in both commercial and personal lines."
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 (loss). 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
September 30
(In millions)
2006 2005
Property and Casualty:
Personal Lines(1) $35.0 $(27.8)
Commercial Lines(2) 7.7 (101.0)
Other Property and Casualty 10.1 1.1
Total Property & Casualty 52.8 (127.7)
Life Companies (1.1) (0.9)
Interest expense on corporate debt (10.0) (10.0)
Total pre-tax segment income (loss) 41.7 (138.6)
Federal income tax (expense) benefit (14.1) 29.6
Total segment income (loss) after taxes (3) $27.6 $(109.0)
(1) Includes Personal Lines pre-tax net impact of catastrophes of $20.7
million and $101.7 million for the third quarter of 2006 and 2005,
respectively.
(2) Includes Commercial Lines pre-tax net impact of catastrophes of $43.5
million and $143.8 million for the third quarter of 2006 and 2005,
respectively.
(3) See reconciliation from segment income (loss) to net income (loss) at
the end of this document.
Property and Casualty Property and Casualty pre-tax segment income was $52.8 million in the
third quarter of 2006, compared to a net loss of $127.7 million in the third
quarter of 2005, an increase of $180.5 million due to lower catastrophe
related losses in the current quarter. The pre-tax net impact of catastrophes
was $64.2 million in the current quarter compared to $245.5 million in the
third quarter of 2005. Excluding the pre-tax net impact of catastrophes,
property and casualty pre-tax segment income was $117.0 million in the current
quarter compared to $117.8 million in the prior year quarter. Benefiting the
current quarter's results was improved loss performance and the previously
mentioned $7.0 million litigation settlement, offset by increased expenses.
Property and Casualty highlights:
* Net premiums written were $602.9 million in the third quarter of 2006,
compared to $542.0 million in the third quarter of 2005. Excluding the
effect of reinsurance reinstatement premiums of $27.0 million, which
were incurred following Hurricane Katrina, net premiums written were
$569.0 million in the third quarter of 2005, which equates to 6.0%
current quarter growth.
* Net premiums earned were $562.6 million in the third quarter of 2006,
compared to $519.7 million in the third quarter of 2005. Excluding the
effect of reinsurance reinstatement premiums of $27.0 million, net
premiums earned were $546.7 million in the third quarter of 2005.
* New business net premiums written were $157.4 million in the third
quarter of 2006, representing an increase of 67% over $94.4 million in
the third quarter of 2005.
* Favorable development of prior-year loss and LAE reserves was $39.2
million in the third quarter of 2006, compared to favorable development
of $23.4 million in the third quarter of 2005.
The following table summarizes the components of the GAAP combined ratio
for the Property and Casualty segment:
Quarter ended
September 30
2006 2005 Adjusted
2005(1)
Personal Lines losses
(excluding catastrophes) 50.7% 53.1% 50.4%
Personal Lines catastrophe-related
losses 4.7% 24.8% 23.6%
Total Personal Lines losses 55.4% 77.9% 74.0%
Commercial Lines losses
(excluding catastrophes) 36.1% 49.3% 47.0%
Commercial Lines catastrophe-related
losses 18.7% 70.4% 67.1%
Total Commercial Lines losses 54.8% 119.7% 114.1%
Total P&C Losses 55.2% 93.4% 88.7%
Loss adjustment expenses 10.8% 10.1% 9.6%
Hurricane Katrina-related loss
adjustment expenses 1.5% 0.7% 0.7%
Policy acquisition and other
underwriting expenses 34.9% 31.6% 30.1%
Combined Ratio 102.4% 135.8% 129.1%
(1) The Adjusted 2005 ratios have been adjusted to exclude the impact of
the reinsurance reinstatement premiums.
Personal Lines Personal Lines pre-tax segment income was $35.0 million in the quarter,
compared to a loss of $27.8 million in the prior-year quarter, an increase of
$62.8 million. The pre-tax net impact of catastrophes was $20.7 million in
the current quarter, compared to $101.7 million in the third quarter of 2005.
Excluding the pre-tax net impact of catastrophes, personal lines pre-tax
segment income was $55.7 million in the current quarter, compared to $73.9
million in the prior-year quarter. This decrease was primarily due to higher
expenses.
Underwriting and loss adjustment expenses were higher in the quarter due
to several factors, including: an increase in variable compensation expenses,
an unusual premium tax refund in the third quarter of last year, increased
claims spending principally related to the operating model, the impact of new
accounting for stock-based compensation, increased technology spending, 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 $383.2 million in the third quarter of 2006,
compared to $353.5 million in the third quarter of 2005. Excluding the
effect of reinsurance reinstatement premiums of $17.6 million, net
premiums written were $371.1 million in the third quarter of 2005, which
equates to 3.3% current quarter growth.
* Net premiums earned were $353.1 million in the third quarter of 2006,
compared to $331.4 million in the third quarter of 2005. Excluding the
effect of reinsurance reinstatement premiums of $17.6 million, net
premiums earned were $349.0 million in the third quarter of 2005.
* New business net premiums written were $77.0 million in the third
quarter of 2006, representing an increase of 91% over $40.3 million in
the third quarter of 2005.
* The Personal Lines GAAP combined ratio was 98.4% in the third quarter,
versus 117.1% in the prior year quarter. Excluding the effect of
reinsurance reinstatement premiums, the Personal Lines GAAP combined
ratio was 111.3% in the third quarter of 2005.
* The pre-tax net impact of catastrophes was $20.7 million, or 5.9 points
of the combined ratio, for the third quarter of 2006, compared to $101.7
million, or 30.0 points of the combined ratio, for the third quarter of
2005.
* Favorable development of prior-year loss and LAE reserves was $13.6
million in the current quarter, compared to favorable development of
$13.4 million in the third quarter of 2005; improving the Personal Lines
combined ratio by 3.9 points and 3.8 points, excluding reinsurance
reinstatement premiums, respectively.
Commercial Lines Commercial Lines pre-tax segment income was $7.7 million in the quarter,
compared to a loss of $101.0 million in the third quarter of 2005. The pre-tax
net impact of catastrophes was $43.5 million in the current quarter, compared
to $143.8 million in the third quarter of 2005. Excluding the pre-tax net
impact of catastrophes, commercial lines pre-tax segment income was $51.2
million in the current quarter, compared to $42.8 million in the prior-year
quarter. This increase was primarily driven by favorable development of
prior-year reserves and growth in specialty lines, partially offset by higher
expenses.
In the current quarter, development of prior-year loss and loss adjustment
expense reserves were favorable by $25.7 million, compared to $11.2 million in
the third quarter of 2005. The increase in favorable prior-year reserve
development was driven by Workers' Compensation, Commercial Auto and
Commercial Multi-Peril lines.
Underwriting and loss adjustment expenses were higher in the quarter due
to several factors which include: an increase in variable compensation
expenses, increased technology spending, higher expenses in support of our
specialty lines, the impact of new accounting for stock-based compensation,
certain other miscellaneous items, 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 $219.7 million in the third quarter of 2006,
compared to $188.5 million in the third quarter of 2005. Excluding the
effect of reinsurance reinstatement premiums of $9.4 million, net
premiums written were $197.9 million in the third quarter of 2005, which
equates to 11.0% current quarter growth.
* Net premiums earned were $209.5 million in the third quarter of 2006,
compared to $188.3 million in the third quarter of 2005. Excluding the
effect of reinsurance reinstatement premiums of $9.4 million, net
premiums earned were $197.7 million in the third quarter of 2005.
* New business net premiums written were $80.4 million in the third
quarter of 2006, representing an increase of 49% over $54.1 million in
the third quarter of 2005.
* The Commercial Lines GAAP combined ratio was 109.2% in the third
quarter, versus 167.8% in the prior year quarter. Excluding the effect
of reinsurance reinstatement premiums, the Commercial Lines GAAP
combined ratio was 159.9% in the third quarter of 2005.
* The pre-tax net impact of catastrophes was $43.5 million, or 20.8 points
of the combined ratio, for the third quarter of 2006, compared to $143.8
million, or 76.0 points of the combined ratio, for the third quarter of
2005.
* Favorable development of prior-year loss and LAE reserves was $25.7
million in the current quarter, compared to favorable development of
$11.2 million in the third quarter of 2005; improving the Commercial Lines combined ratio by 12.3 points and 5.7 points, excluding
reinsurance reinstatement premiums, respectively.
Other Property & Casualty Other Property & Casualty pre-tax segment income was $10.1 million in the
quarter, compared to $1.1 million in the prior-year quarter. Excluding the
previously mentioned $7.0 million litigation settlement benefit related to
Opus Investment Management, Inc., pre-tax segment income was $3.1 million in
the current 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 $1.1
million in the current quarter of 2006, compared to a loss of $0.9 million in
the third quarter of 2005.
Loss on Disposal of the Variable Life Insurance and Annuity Business:
For the current quarter, the company recorded, as expected, a loss on the
sale of the variable life insurance and annuity business of $2.9 million, net
of tax, relating primarily to net transition service expenses.
Gain on Sale of Financial Profiles:
During the quarter, the company sold all of the outstanding shares of
Financial Profiles, Inc., a wholly-owned subsidiary. The developer and
distributor of financial planning software, was originally acquired by the
company in 1998 in connection with the company's then-ongoing life insurance
and annuity operations. The company received pre-tax proceeds of $21.5
million from the transaction and recognized an after-tax gain of $7.8 million
during the third quarter of 2006.
Investment Results
Net investment income was $78.3 million for the third quarter of 2006,
compared to $79.4 million in the same period of 2005. Net investment income
in the Life Companies decreased $4.9 million to $22.2 million, driven by lower
average invested assets, resulting from the maturities of long-term funding
agreements and continued cash outflows from life operations. This was
partially offset by an increase in net investment income in the Property and
Casualty segment of $3.7 million, to $55.9 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.
Third quarter 2006 pre-tax net realized investment gains were $2.1
million, compared to $1.9 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 $3.6 million primarily from the sale
of fixed maturities. These gains were partially offset by $1.5 million of
capital losses resulting from impairments on certain fixed maturity
securities. In the third quarter of 2005, the company experienced pre-tax net
realized investment gains of $6.7 million, primarily from the sale of fixed
maturities. These gains were partially offset by $4.8 million of capital
losses resulting from impairments on certain fixed maturity securities.
Balance Sheet
Shareholders' equity was $1.90 billion, or $37.49 per share at September
30, 2006, compared to $1.95 billion or $36.30 per share at December 31, 2005.
This change is primarily due to the company's share repurchase program in the
first half of 2006. Excluding accumulated other comprehensive income, book
value was $39.20 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 third
quarter results on Tuesday, October 31st 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 third quarter earnings press release and statistical
supplement are also available in the Investors section at
http://www.hanover.com.
Forward-Looking Statements and Non-GAAP Financial Measures
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 and
medical costs, 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 (and with respect to 2005, reinsurance
reinstatement premiums).
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
September 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 or reinsurance
reinstatement premiums. 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 provides measures of net premiums written, net premiums earned
and loss ratios that exclude the effects of catastrophe reinsurance
reinstatement premiums. Catastrophe reinsurance reinstatement premiums are a
reduction to net written and earned premiums, and represent the cost to
reinstate the amount of catastrophe reinsurance coverage that the Company has
used as the result of a reinsurance loss payment under the terms of the
reinsurance contract. The company believes that the loss ratios excluding the
effects of catastrophe reinsurance reinstatement premiums represent a better
measure of underlying loss trends. The presentation of loss ratios calculated
excluding the effects of catastrophe reinstatement premiums 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 through 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
property and casualty insurers in the United States.
HG-68
10/30/06
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
September 30
2006 2005
Net income (loss) $33.4 $(562.4)
Net income (loss) per share(1) $0.65 $(10.51)
Weighted average shares 51.3 53.5
The following is a reconciliation from segment income (loss) to net income
(loss) (2):
PER SHARE DATA (DILUTED) (1) Quarter endedSeptember 30
2006 2005
Segment Income $ Per Share $ Per Share
Property and Casualty
Personal Lines $35.0 -- $(27.8) --
Commercial Lines 7.7 -- (101.0) --
Other Property & Casualty 10.1 -- 1.1 --
Total Property and
Casualty 52.8 -- (127.7) --
Life Companies (1.1) -- (0.9) --
Interest expense on
corporate debt (10.0) -- (10.0) --
Total segment income
(loss) 41.7 $0.81 (138.6) $(2.59)
Federal income tax
(expense) benefit on
P&C segment income (15.2) -- 40.8 --
Federal income tax
benefit (expense)
on other segment income 1.1 -- (11.2) --
Total federal income
tax (expense) benefit
on segment income (14.1) (0.27) 29.6 0.55
Total segment income
(loss) after federal
income taxes 27.6 0.54 (109.0) (2.04)
Net realized investment
gains (losses),
net of amortization 2.0 0.04 (2.0) (0.04)
Gain on derivatives 0.1 -- 0.2 --
Restructuring costs (0.5) (0.01) (0.4) (0.01)
Federal income tax
(expense) benefit
on non-segment income (0.7) (0.01) 5.8 0.12
Income (loss) from
continuing operations,
net of taxes 28.5 0.56 (105.4) (1.97)
Income from discontinued
variable life insurance
and annuity business,
net of taxes -- -- 17.6 0.33
Loss on disposal of variable
life insurance and annuity
business, net of taxes (2.9) (0.06) (474.6) (8.87)
Gain on Sale of Financial
Profiles, net of taxes 7.8 0.15 -- --
Income (loss) before
cumulative effect
of accounting change 33.4 0.65 (562.4) (10.51)
Cumulative effect
of change in accounting
principle, net of taxes -- -- -- --
Net income (loss) $33.4 $0.65 $(562.4) $(10.51)
(1) Basic net income per share was $0.66 for the quarter ended September
30, 2006. Per share data for the quarter ended September 30, 2005
represents basic loss per share due to antidilution.
(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 September 30, 2006
(In millions)
Personal Commercial Other Property Life Total
Lines Lines & Casualty Companies
Net realized investment
gains $0.6 $1.0 -- $0.4 $2.0
Gain on
derivatives -- -- -- 0.1 0.1
Restructuring
costs -- -- -- (0.5) (0.5)
Loss on disposal
of variable life
insurance and
annuity business,
net of taxes -- -- -- (2.9) (2.9)
Gain on Sale of
Financial Profiles,
net of taxes -- -- -- 7.8 7.8
Quarter ended September 30, 2005
(In millions)
Personal Commercial Other Property Life Total
Lines Lines & Casualty Companies
Net realized investment
(losses)
gains $(0.3) $(0.3) $0.1 $(1.5) $(2.0)
Gain on
derivatives -- -- -- 0.2 0.2
Restructuring
costs -- -- -- (0.4) (0.4)
Income from
discontinued
variable life
insurance and
annuity business
net of taxes -- -- -- 17.6 17.6
Loss on disposal
of variable life
insurance and
annuity business,
net of taxes -- -- -- (474.6) (474.6)
All figures reported are unaudited.
SOURCE The Hanover Insurance Group, Inc.
Contact: Investors: Sujata Mutalik, 1-508-855-3457, smutalik@hanover.com, or Media: Michael F. Buckley, +1-508-855-3099, mibuckley@hanover.com