Worcester, MA – The Hanover Insurance Group, Inc. (NYSE: THG) recently reported a net loss of $13.5 million, or $0.32 per diluted share, for the fourth quarter of 2016. This compared to net income of $77.6 million, or $1.76 per diluted share, in the prior-year quarter. Operating loss was $19.7 million, or $0.46 per diluted share, for the fourth quarter of 2016, inclusive of strengthening domestic prior-year loss and loss adjustment expense reserves of $174.1 million ($113.2 million after taxes), compared to operating income of $80.3 million, or $1.82 per diluted share, in the prior-year quarter.
Net income for the full year of 2016 was $155.1 million, or $3.59 per diluted share. This compared to net income of $331.5 million, or $7.40 per diluted share, in the full year of 2015. Operating income was $184.4 million, or $4.27 per diluted share, in 2016, compared to operating income of $280.0 million, or $6.25 per diluted share, in 2015.
“The fundamentals of our business are very strong, and we are pleased with the underlying results in the quarter and for the full year,” said Joseph M. Zubretsky, president and chief executive officer at The Hanover. “The reserve review we conducted during the quarter confirmed that the reserve development was related to business issues we believe we have successfully addressed in the recent past and gave us even greater confidence in the composition of our existing business portfolio. Our underlying performance during the quarter and full year, including the underlying quality of growth, strong retention and underwriting and pricing discipline, reaffirms our confidence in the foundation on which we are building our company. We look forward to sharing our go-forward strategy at our Investor Day later this month, where we will discuss our plan to deliver superior value for our partners, customers and shareholders.”
“We have every reason to be optimistic about our current book of business and momentum,” said Jeffrey Farber, executive vice president and chief financial officer. “Excluding catastrophe losses, Commercial and Personal Lines reported full year current accident year combined ratios(3) of 92.5% and 88.8%, respectively, or 91.1% for domestic lines combined(4), an improvement of 1.7 points over 2015. Our overall results also reflected a modest level of catastrophe losses, and strong results at Chaucer. We were pleased with controlled topline growth, including strong momentum in Personal Lines, thoughtful balancing of pricing and retention in Commercial Lines, and our disciplined approach to navigating the soft market at Chaucer.”
Fourth Quarter Operating Highlights
As a result of the fourth quarter comprehensive reserve review, the company recognized domestic unfavorable prior-year reserve development, excluding catastrophes, of $174.1 million, or approximately 5% of domestic net reserves. Aggregate unfavorable development, including development on prior-year catastrophe losses, for the year was $105.4 million, or approximately 2% of total net reserves.
The fourth quarter domestic reserve development was largely driven by an increase in losses in Commercial Lines liability coverages in high-severity claims, as well as higher than anticipated legal defense costs. As a result, the company updated its assumptions, placing greater weight on recently observed increases in severity.
The adverse development in AIX program business primarily related to terminated programs and businesses, and was predominantly due to the general liability and commercial automobile liability coverages. The adverse development in surety was driven by recent large loss activity emergence in contract surety. Additionally, the company recognized unfavorable development in general liability, commercial multiple peril liability lines and commercial auto lines, partially offset by favorable development in the workers’ compensation line. The adverse prior-year reserve development for the personal auto line was primarily due to higher than expected severity in bodily injury coverages. The adverse prior-year development for the “Other” segment reflects an updated third party actuarial study related to run-off voluntary assumed reinsurance pools business.
Commercial Lines operating loss before taxes was $93.3 million, compared to operating income before taxes of $16.8 million in the fourth quarter of 2015. The Commercial Lines combined ratio was 122.8%, compared to 104.0% in the prior-year quarter. Catastrophe losses were $7.6 million, or 1.3 points of the combined ratio, compared to $17.8 million, or 3.2 points, in the prior-year quarter. Net unfavorable prior-year loss reserve development in the fourth quarter of 2016 was $161.5 million, or 27.6 points of the combined ratio, compared to $26.5 million, or 4.7 points, in the fourth quarter of 2015.
Commercial Lines current accident year combined ratio, excluding catastrophe losses(3), improved by 2.2 points, to 93.9%, compared to 96.1% in the prior-year quarter, due to the net underlying improvement in the business, as well as a reduced expense ratio. Current accident year loss ratios for individual lines within Commercial Lines experienced increases and decreases in the quarter, as the company completed 2016 reserve reviews for each line.
Net premiums written were $530.0 million in the quarter, up 3.3% from the prior-year quarter, driven by pricing increases and higher retention. Core Commercial(8) business pricing increases for the fourth quarter were 3.4%, down 0.5 points from the third quarter of 2016.
The complete results release is available here: The Hanover Q4 and Full Year 2016 Results
Source: The Hanover