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The Hanover Reports Fourth Quarter Net Income and Operating Income of $2.76 and $2.01 per Diluted Share, Respectively; Full Year Net Income and Operating Income of $10.46 and $8.16 per Diluted Share, Respectively; Full Year Combined Ratio of 95.6%; Full Year Combined Ratio, Excluding Catastrophes, of 91.8%

WORCESTER, Mass. , Feb. 4, 2020 /PRNewswire/ -- The Hanover Insurance Group, Inc. (NYSE: THG) today reported net income of $109.8 million , or $2.76 per diluted share, in the fourth quarter of 2019, compared to $123.6 million , or $2.88 per diluted share, in the prior-year quarter. Operating income (1) was $80.2 million, or $2.01 per diluted share, for the fourth quarter of 2019. This compared to operating income of $64.9 million , or $1.51 per diluted share, in the prior-year quarter. The difference between net and operating income in the fourth quarter of 2019 was primarily due to an after-tax increase in the fair value of equity securities of $24.7 million , or $0.62 per fully diluted share, which is excluded from operating income.

The Hanover Insurance Group, Inc. Logo. (PRNewsFoto/The Hanover Insurance Group, Inc.) (PRNewsfoto/The Hanover Insurance Group, In)

Net income for the full year 2019 was $425.1 million , or $10.46 per diluted share. This compares to net income of $391.0 million , or $9.09 per diluted share, in the prior year. Operating income was $331.6 million , or $8.16 per diluted share, in 2019, compared to operating income of $292.1 million , or $6.79 per diluted share, in the prior year.

Fourth  Quarter and Full Year Highlights

  • Fourth quarter combined ratio of 96.2%; combined ratio, excluding catastrophes (2) of 93.1%
  • Net premiums written increase of 5.6%* in the fourth quarter and 4.5% during the year, reflected growth in more profitable businesses
  • Price increases in the quarter of 7.9% in Core Commercial Lines (3) and 5.1% in Personal Lines (4)
  • Current accident year loss and loss adjustment expense ("LAE") ratio, excluding catastrophes (5) , of 61.8%, in the fourth quarter, reflecting elevated property loss experience, while liability lines continued to perform in line with expectations
  • Net investment income of $72.7 million in the fourth quarter, up 4.8% from the prior-year quarter, and $281.3 million for the full year, up 5.2% from the prior year, driven by increased operational cash flows and the temporary investment of proceeds from the Chaucer sale prior to their deployment
  • Completed the deployment of the remaining Chaucer equity through a $150 million accelerated share repurchase ("ASR") agreement and a special cash dividend of $2.50 per share announced in December
  • On December 5, 2019 , the Board of Directors approved an increase to the regular quarterly dividend of 8.3%, to $0.65 per common share
  • Book value per share of $75.94 , down 2.7% from September 30, 2019 , primarily driven by capital actions, including the payment of special and regular cash dividends ( $3.15 per share in aggregate), which was partially offset by earnings

"2019 was an excellent year for our company, marked by record earnings and solid growth in our most profitable segments, further strengthening our market position as we begin 2020," said John C. Roche , president and chief executive officer at The Hanover . "As the market environment becomes increasingly complex with significant changes to profit pools, loss trends and rate movements we are focused on ensuring that we continue to achieve broad-based profitability across our businesses. We have accomplished this to date through effective portfolio management and rate increases.  

"Reflecting the success of our strategy, we delivered an annual operating ROE (6) of 12.0%, and an adjusted ROE (6) of 12.8% in 2019, while growing premiums 4.5%," said Roche. "Our growth was highlighted by strong results in Core Commercial, Personal Lines and most Specialty businesses, driven by price increases 7.9% in Core Commercial and 5.1% in Personal Lines in the fourth quarter as well as robust new business and new product initiatives. We look forward to building on the momentum we generated throughout the past year, as we leverage our proven ability to navigate the current dynamic market."

"We are pleased with our performance during the year, with an operating income of $8.16 per diluted share, a combined ratio of 95.6%, and a combined ratio, excluding catastrophes, of 91.8%," said Jeffrey M. Farber , executive vice president and chief financial officer. "While property loss pressure emerged across select businesses throughout the year and in the fourth quarter, liability trends continued to be in line with our expectations, helped by our prior mix and pricing initiatives.  At the same time, we improved our expense ratio by 50 basis points, to 31.6%, while we continued to invest in our businesses.

"In 2019, we promptly deployed approximately $850 million in equity generated by the Chaucer sale, through three accelerated share repurchase programs and two special dividends," said Farber. "We will continue to deploy our capital with our shareholder interests in mind. Our balance sheet remains strong and we look forward to another successful year in 2020."


Three months ended


Year ended



December 31


December 31


  ($ in millions, except per share data)

2019


2018


2019


2018


Net premiums written

$1,103.0


$1,044.7


$4,581.7


$4,384.8


Net income

109.8


123.6


425.1


391.0


per diluted share

2.76


2.88


10.46


9.09


Operating income

80.2


64.9


331.6


292.1


per diluted share

2.01


1.51


8.16


6.79


Net investment income

72.7


69.4


281.3


267.4


Book value per share

$75.94


$69.81


$75.94


$69.81


Ending shares outstanding (in millions)

38.4


42.3


38.4


42.3


Combined ratio

96.2 %


97.4 %


95.6 %


96.1 %


Catastrophe ratio

3.1 %


4.6 %


3.8 %


5.2 %


Combined ratio, excluding catastrophes

93.1 %


92.8 %


91.8 %


90.9 %


Current accident year combined ratio,
  
excluding catastrophes (2)

93.2 %


92.8 %


91.8 %


90.9 %


(1)

See information about this and other non-GAAP measures and definitions used throughout this press release on the final pages of this document. The Hanover Insurance Group, Inc. may also be referred to as "The Hanover" or "the Company" interchangeably throughout this press release.

*

Unless otherwise stated, net premiums written growth and other growth comparisons are to the same period of the prior year

Fourth  Quarter Operating Highlights

Commercial Lines
Commercial Lines operating income before taxes was $73.0 million in the quarter, compared to $57.4 million in the fourth quarter of 2018. The Commercial Lines combined ratio was 96.1%, compared to 98.2% in the prior-year quarter. Catastrophe losses in the fourth quarter of 2019 were $27.8 million , or 4.1 points of the combined ratio, including favorable prior-year reserve development of $6.5 million , or 1.0 point in the quarter. This compared to catastrophe losses of $47.0 million, or 7.3 points of the combined ratio, in the prior-year quarter.

Fourth quarter 2019 results included $11.6 million , or 1.7 points, of net favorable prior-year reserve development, driven primarily by continued favorability in workers' compensation, partially offset by unfavorable development in the program business, reported in other commercial lines ("OCL"). This compared to net favorable prior-year reserve development of $16.0 million , or 2.5 points, in the fourth quarter of 2018.

Commercial Lines current accident year combined ratio, excluding catastrophes, increased 0.3 points to 93.7%, from 93.4% in the prior-year quarter. The current accident year loss and LAE ratio, excluding catastrophes, increased by 1.1 points to 59.4%, driven primarily by elevated property losses in commercial multiple peril and certain specialty businesses, including marine, specialty industrial property and programs, each reported in OCL.  

The expense ratio (7) improved by 0.8 points to 34.3% in the fourth quarter of 2019, primarily attributable to fixed cost leverage from premium growth.

Net premiums written were $638.7 million in the quarter, up 6.5% from the prior-year quarter. Core Commercial price increases averaged 7.9% for the fourth quarter, which is driven by both rate and exposure, with retention at 84.1%.

The following table summarizes premiums and the components of the combined ratio for Commercial Lines:  


Three months ended


Year ended



December 31


December 31


  ($ in millions)

2019


2018


2019


2018


Net premiums written

$638.7


$600.0


$2,707.2


$2,610.7


Net premiums earned

679.5


644.4


2,654.2


2,548.4


Operating income before taxes

73.0


57.4


300.1


265.7


Loss and LAE ratio

61.8%


63.1%


60.6%


61.5%


Expense ratio

34.3%


35.1%


34.6%


34.9%


Combined ratio

96.1%


98.2%


95.2%


96.4%


Prior-year development ratio

(1.7)%


(2.5)%


(1.1)%


(1.3)%


Catastrophe ratio

4.1 %


7.3 %


3.1 %


5.6 %


Combined ratio, excluding catastrophes

92.0 %


90.9 %


92.1 %


90.8 %


Current accident year combined ratio,
  
excluding catastrophes

93.7 %


93.4 %


93.2 %


92.1 %


Personal Lines
Personal Lines operating income before taxes was $36.2 million in the quarter, compared to $36.5 million in the fourth quarter of 2018. The Personal Lines combined ratio was 96.5%, compared to 96.0% in the prior-year quarter. Catastrophe losses in the fourth quarter of 2019 were $7.3 million , or 1.6 points of the combined ratio, compared to $3.0 million, or 0.7 points of the combined ratio, in the prior-year quarter.

Fourth quarter 2019 results included $10.2 million , or 2.2 points, of net unfavorable prior-year reserve development, primarily driven by bodily injury severity in personal auto. This compared to net unfavorable prior-year reserve development of $15.4 million , or 3.5 points, in the fourth quarter of 2018.

Personal Lines current accident year combined ratio, excluding catastrophe losses, increased by 0.9 points to 92.7%, from 91.8% in the prior-year quarter. The current accident year loss and LAE ratio, excluding catastrophes, increased by 1.4 points to 65.5%, driven primarily by property, including non-catastrophe weather losses in home and auto, and to a lesser extent, auto bodily injury.

The expense ratio improved by 0.5 points to 27.2% in the fourth quarter of 2019, attributable to fixed cost leverage from premium growth, while continuing to invest in the business.

Net premiums written were $464.3 million in the quarter, up 4.4% from the prior-year quarter, driven by targeted rate increases and organic new business momentum. Personal Lines average rate increases in the fourth quarter of 2019 were 5.1%.

The following table summarizes premiums and components of the combined ratio for Personal Lines:    


Three months ended


Year ended



December 31


December 31


  ($ in millions)

2019


2018


2019


2018


Net premiums written

$464.3


$444.7


$1,874.5


$1,774.1


Net premiums earned

464.8


437.6


1,820.3


1,706.0


Operating income before taxes

36.2


36.5


144.9


146.2


Loss and LAE ratio

69.3%


68.3%


68.9%


67.7%


Expense ratio

27.2%


27.7%


27.4%


27.8%


Combined ratio

96.5%


96.0%


96.3%


95.5%


Prior-year development ratio

2.2 %


3.5 %


1.5 %


2.0 %


Catastrophe ratio

1.6 %


0.7 %


4.7 %


4.5 %


Combined ratio, excluding catastrophes

94.9 %


95.3 %


91.6 %


91.0 %


Current accident year combined ratio,
  
excluding catastrophes

92.7 %


91.8 %


90.1 %


89.0 %


Full Year 2019 Operating Highlights

Net income for the full year of 2019 was $425.1 million , compared to $391.0 million in 2018. Operating income before taxes and interest expenses was $453.6 million for the full year of 2019, with a combined ratio of 95.6%. In 2018, operating income before taxes and interest expense was $406.5 million , with a combined ratio of 96.1%.

Catastrophe losses were $169.3 million , or 3.8 points of the combined ratio in 2019, compared to $219.2 million , or 5.2 points, in the prior year. For both years, prior year development, excluding catastrophes, was immaterial overall, with offsetting increases and decreases among lines.

The current accident year combined ratio, excluding catastrophe losses, was 91.8% in 2019, compared to 90.9% in 2018, driven by an increase in the current accident year loss and LAE ratio.

Commercial Lines operating income before taxes was $300.1 million in 2019, which included $83.2 million , or 3.1 points, of catastrophe losses, and $28.7 million , or 1.1 points, of net favorable prior-year reserve development. In 2018, Commercial Lines operating income before taxes was $265.7 million , which included $142.3 million , or 5.6 points, of catastrophe losses, and $34.1 million , or 1.3 points, of net favorable prior-year reserve development. The Commercial Lines current accident year combined ratio, excluding catastrophe losses, was 93.2%, compared to 92.1% in the prior-year, driven by an increase in the current accident year loss and LAE ratio. The loss and LAE ratio increase was primarily driven by increased large property loss activity in specialty businesses, reported in OCL. This was partially offset by an improvement in the commercial auto current accident year loss and LAE ratio due to substantial earned rate increases and underwriting actions during the year.

Personal Lines operating income before taxes was $144.9 million , which included $86.1 million , or 4.7 points, of catastrophe losses, and $26.6 million , or 1.5 points, of net unfavorable prior-year reserve development. In 2018, Personal Lines operating income before taxes was $146.2 million , which included $76.9 million , or 4.5 points, of catastrophe losses, and $33.3 million , or 2.0 points of net unfavorable prior-year reserve development. The Personal Lines current accident year combined ratio, excluding catastrophes, increased to 90.1% from 89.0% in the prior-year, driven by an increase in the current accident year loss and LAE ratio. The loss and LAE ratio increase was driven by an increase in property losses, primarily due to non-catastrophe weather in homeowners and comprehensive auto coverages, as well as elevated auto bodily injury loss severity.

Total net premiums written were $4.6 billion in 2019, up 4.5% from 2018, driven by Personal Lines growth of 5.7% and Commercial Lines growth of 3.7%.

Investments
Net investment income was $72 .7 million for the fourth quarter of 2019, compared to $69 .4 million in the prior-year quarter. The increase was driven by the investment of higher operational cash flows, higher income from mortgages and equities and the temporary investment of excess equity from the sale of Chaucer. This increase was partially offset by the impact of lower new money yields.  The average pre-tax earned yield on fixed maturities was 3.56% and 3.62% for the quarters ended December 31 , 2019 and 2018, respectively. Total pre-tax earned yield on the investment portfolio for the quarter ended December 31 , 2019 was 3.72%, up from 3.71% in the prior-year quarter.

Net realized and unrealized investment gains and losses recognized in earnings were gains of $34 .3 million in the fourth quarter of 2019 and losses of $54 .5 million in the fourth quarter of 2018, primarily due to changes in the fair value of equity securities.

Net investment income was $281.3 million in 2019, compared to $267.4 million in 2018. The increase was driven by the investment of higher operational cash flows and the temporary investment of excess equity from the sale of Chaucer. This increase was partially offset by the impact of lower new money yields. The average pre-tax earned yield on fixed maturities was 3.58% and 3.62% for the year ended December 31, 2019 and 2018, respectively. Total pre-tax earned yield on the investment portfolio for the year ended December 31 , 2019 was 3.65%, down from 3.74% in 2018.

Net realized and unrealized investment gains and losses recognized in earnings were gains of $109.4 million in 2019 and losses of $50.7 million in 2018, primarily due to changes in the fair value of equity securities.

The Company held $8 .2 billion in cash and invested assets on December 31, 2019 .  Fixed maturities and cash represented 84% of the investment portfolio. Approximately 95% of the Company's fixed maturity portfolio is rated investment grade. Net unrealized gains on the fixed maturity portfolio as of December 31, 2019 were $234.9 million before taxes, a decline in fair value of $18.9 million since September 30, 2019 and an increase of $319.3 million since December 31, 2018 . The change in the fourth quarter was due to higher interest rates, and the year-to-date change was primarily due to lower prevailing interest rates and tighter credit spreads.

Shareholders' Equity and Capital Actions                                       
On December 31, 2019 , book value per share was $75.94 , down 2.7% from September 30, 2019 . The decrease was driven primarily by capital actions, including the payment of special and regular cash dividends ( $3.15 per share in aggregate), which were partially offset by earnings.

As previously announced, the Company entered into an ASR agreement with Wells Fargo to repurchase $150 million of the Company's common stock. As of the initial settlement date of December 9, 2019 , the company paid $150 million and received an initial delivery of approximately 900,000 shares of its common stock, or 80% of the total shares expected to be repurchased under the ASR agreement. The Company expects to receive the remaining shares at the conclusion of the ASR buyback period, at the end of the first quarter of 2020. In addition, the company paid a special dividend of $2.50 per share, or approximately $100 million in aggregate, concluding the capital deployment from the December 2018 sale of Chaucer.

During the quarter, the Company also repurchased approximately 103,000 shares of common stock in the open market for $13.6 million , at an average price of $132.10 per share. After accounting for these shares and the $150 million ASR, the Company has approximately $335 million of remaining capacity under its existing $900 million share repurchase program.

Earnings Conference Call
The Company will host a conference call to discuss its fourth quarter results on Wednesday, February 5 , at 10:30 a.m. E.T.  A PowerPoint slide presentation will accompany the prepared remarks and has been posted on The Hanover's 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 1-844-413-3975 in the U.S. and 1-412-317-5458 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.

About The Hanover
The Hanover Insurance Group, Inc. is the holding Company for several property and casualty insurance companies, which together constitute one of the largest insurance businesses in the United States . The Company provides exceptional insurance solutions through a select group of independent agents and brokers. Together with its agents, The Hanover offers standard and specialized insurance protection for small and mid-sized businesses, as well as for homes, automobiles, and other personal items. For more information, please visit  hanover.com .

Contact Information

Investors:

Media:



Oksana Lukasheva

Michael F. Buckley

Emily P. Trevallion


Email: olukasheva@hanover.com

Email:  mibuckley@hanover.com

Email:  etrevallion@hanover.com


1-508-855-2063


1-508-855-3099


1-508-855-3263











Definition of Reported Segments
Continuing operations include three operating segments: Commercial Lines, Personal Lines and Other. 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 management and professional liability, marine, Hanover Programs and surety. The Personal Lines segment markets automobile, homeowners and ancillary coverages to individuals and families. The "Other" segment includes Opus Investment Management, Inc., which provides investment management services to institutions, pension funds and other organizations, the operations of the holding Company, as well as a block of voluntary pools business in which we have not actively participated since 1995.

Financial Supplement
The Hanover's fourth quarter earnings news release and financial supplement are available in the "Investors" section of the Company's website at hanover.com .

Condensed Financial Statements and Reconciliations

...

The Hanover Insurance Group, Inc.










Condensed Consolidated Income Statements


Three months ended


Year ended




December 31


December 31


($ in millions)


2019


2018


2019


2018


Revenues










Premiums earned


$1,144.3


$1,082.0


$4,474.5


$4,254.4


Net investment income


72.7


69.4


281.3


267.4


Net realized and unrealized investment gains (losses):










 Net realized gains (losses) from sales and other


3.9


(2.6)


4.9


(2.7)


 Net change in fair value of equity securities


31.2


(50.1)


106.5


(43.4)


 Net other-than-temporary impairment losses on
  
investments recognized in earnings