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Hanover Estimates Cat Loss to Affect Q4 Results by $50M

Zacks Equity Research

The Hanover Insurance Group, Inc. THG expects catastrophe loss in the fourth quarter to drag down pre- tax operating income by about $50 million. Fourth-quarter catastrophe loss is primarily attributable to California wildfires and Hurricane Michael. The Zacks Consensus Estimate for the fourth quarter is currently pegged at $1.91, indicating 4.5% year-over-year decrease.

This catastrophe loss represents 4.6% of net premiums earned, higher than 3.6% expected. The company also stated profitability will be affected by large losses and non-catastrophe weather, higher auto bodily injury loss severity, among others. However, this is lower than cat loss of $44.9 million or 4.2% of earned premium in the third quarter of 2018.

The combined ratio for the fourth quarter is projected between 97.4% and 97.8%, taking 2018 combined ratio to 96.2% or 91% excluding catastrophes.

Being a property and casualty insurer, Hanover is vulnerable to natural disasters inducing volatility in underwriting results. In the last reported quarter, the company witnessed an active catastrophe season with Hurricane Florence having a major impact. Nonetheless, combined ratio of 95.1% improved 200 basis points year over year on sustained coastal risk exposure management, prudent underwriting practices and strategic approach to flood coverage.

Recently, Kemper Corporation KMPR estimated pre-tax gross catastrophe loss of $25-$30 million, stemming from California wildfire while Arch Capital Group Ltd. ACGL announced pre-tax gross catastrophe loss estimate of $110-$130 million, stemming from Hurricane Michael and the California wildfire. Previously, insurer Mercury General Corporation MCY had estimated pre-tax gross catastrophe loss of $253 million, stemming from Camp Fire and Woolsey Fire.

Per the report published in Insurance Journal on Dec 12, insured losses from the California wildfire were $9.05 billion, while catastrophe modeler CoreLogic estimated total losses resulting from the wildfires in Northern and Southern California between $15 billion and $19 billion. Per reports from Florida Office of Insurance Regulation, Hurricane Michael is estimated to cause about $4.3 billion in insured losses.

The company is set to report fourth-quarter 2018 results on Jan 30. Our proven model does not conclusively show that the company is likely to deliver a positive surprise in the to-be-reported quarter. Though its favorable Zacks Rank #3 (Hold) increases the predictive power of ESP, the company's Earnings ESP of 0.00% makes surprise prediction difficult. It came up with positive earnings surprise in two of the trailing three quarters.

Shares of The Hanover Insurance Group have gained 1.2% in a year against the industry’s decline of 8.3%. Compelling product portfolio, widening specialty capabilities, strong market presence, strategic investments, effective cost control and a solid capital position should help the stock to trend higher.


You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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