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WIKI ANALYSIS
The Hanover Insurance Group (THG) is an insurance company providing insurance products to both individuals and corporations. The Hanover generates revenue through two main sources 1) collection of premiums for insuring a risk and 2) interest/investment income from its multi-billion dollar investment portfolio. [1] The Hanover's largest expense in a typical year is claims paid on losses by policy holders, therefore earnings results can be choppy reflecting the difficultly of predicting losses that occur for a particular insured risk.
The Hanover's primary source of revenue is the underwriting of insurance policies. In 2007, THG recorded $2.4 billion of insurance premium revenue. The Hanover is comparatively smaller, on a revenue and premium basis, than many of its publicly traded peers, because THG maintains a more regional, rather than national focus. [2] Also, revenue growth for THG is limited because the insurance industry is extensively regulated by state insurance departments and US insurance companies must be licensed. Premium rates The Hanover is permitted to charge for insurance policies must be approved by state regulatory bodies. [3]
Another source of income for insurance companies is investment income earned on the float, or time investment of premiums earned before claims must be paid. In 2007 investment income contributed over $300 million of revenues. Given the turmoil in the financial markets in 2008, investment returns have been challenged.
Property & Casualty Insurance companies like The Hanover, inherently exposed to risk, attempt to mitigate the volatility of results through the purchase of reinsurance. [4] Rising costs in reinsurance due to industry wide loss events, like Hurricane Katrina, or large company specific losses can increase The Hanover's cost of doing business.
Business Overview
The company is geographically focused in the Midwest, South and East Coast, with Michigan, Massachusetts, New York and New Jersey representing the largest concentrations of exposure. [5] The Hanover's primary distribution channel for businesses is through an independent agent network, as opposed to some personal lines insurers line Allstate and State Farm, which operate large captive agency forces.
Business and Financial Metrics
Large personal lines insurance companies are facing difficult pricing conditions, which makes it difficult to grow premiums [6], despite these market conditions The Hanover has grown premiums by 4% in the first nine months of 2008. [7]
Financial Discussion: In 2007 THG generated $2.8 billion of revenue, while recording $253 million of net income which resulting in a profit margin of 9.1%. The Hanover has increased earnings in 4 of the last 5 years, with the only down year being 2005, which contained significant losses from Hurricane Katrina. [9] From 2005 to 2007 The Hanover has grown property and catastrophe net written premiums from $2.2 to $2.4 billion. [10] Pre-tax earnings, excluding catastrophes, has grown from $117 million in 2003 to $460 million in 2007. [11]
Business Segments
The Hanover is a property and casualty insurance company operating through three segments: Personal Lines, Commercial Lines and Other Property and Casualty Lines. [12] In 2007 THG wrote $2.4 billion of net property and casualty premiums through these three operating segments. [13] Net written premiums are total premiums on all policies written by an insurer during a specified period of time, regardless of what portion have been earned, after reinsurance transactions. [14]
Personal Lines (53% of revenue, $1.5 billion of written premiums) [15]
The Personal lines segment contributes $1.5 billion of revenue. Personal lines are comprised of insurance policies written to cover risks for individuals, products include personal auto, homeowners and ancillary (personal watercraft, umbrella). Personal automobile coverage comprises the majority of personal lines business, representing 69% of personal lines net written premiums in 2007. Personal automobile coverage insurers individuals against losses incurred from personal bodily injury, bodily injury to third parties and property damage to vehicles. [17]
Commercial Lines (34% of total revenue, $0.9 billion of written premium)[18]
The Commercial lines segment contributes $0.9 billion of revenue. Commercial lines are comprised of insurance policies written to cover risks on corporations, products within the commercial lines segement include Commercial Multiple Peril, Commercial Auto, Workers Compensation and Specialty (bonds/surety, inland marine). [20]. The Hanover's commercial coverages are designed for small, middle and specialized markets, as opposed to large Fortune 500 corporations. [21]. Commercial Multiple Peril coverage, which represents 37% of Commercial net written premiums, insurers businesses against third party liability from accidents arising from operating the business as well as business property damage cause by fire, wind or other weather events. [22]
Other Property and Casualty Lines (>1% of revenue, >$1 million)[23]
Other Property and Casualty lines contributes less than $1 million of revenue. The other property and casualty segment consists of Opus Investment Management, which provides investment advisory services to affiliates and manages $1.3 billion of assets for unaffiliated institutions. [24]
Investment Income (12% of revenue, $0.3 billion)
Investment Income contributed $0.3 billion to THG's revenue. At the end of 2007 THG held $6.2 billion of investment assets. The vast majority of these assets, 92% are fixed income assets. The Hanover collects income from the yield of these investments. [25]
Key Trends and Forces
The price of reinsurance is a significant expense for THG. Reinsurance prices can be volatile and large natural catastrophes, like Hurricane Katrina in 2005 and Hurricane Ike in 2008, have the potential to increase the cost of reinsurance.
Hurricane Ike which struck the Houston, TX area in September 2008 is estimated to be the third-costliest U.S. hurricane in insured losses. [26] The storm cost The Hanover approximately $100 million, but would have a wider-ranging impact if the storm causes reinsurance prices to increase. [27] Industry research has commented that the rate charged for property catastrophe reinsurance, is expected to increase throughout 2009, and was up 9% during for January contract renewals.[28]
Downgrades from major rating agencies can adversely affect an insurance companies ability to write new business.
Insurance companies are rated by rating agencies to provide customers with information upon which to make informed decisions. Counter-party risk within the insurance industry is important, as insureds want to know the ability of their insurance company to claims in the event of a loss. Certain collateral calls can be associated with ratings assigned by rating agencies. Regulators have the ability to require additional capital be contributed to THG's surplus in the event of a downgrade by certain rating agencies. [29] For example, AIG which competes with THG in some of AIG's still solvent property and casualty companies, has been hampered by rating downgrades and/or negative outlooks from the rating agencies. [30] THG maintains an A- rating from A.M. Best, which benefits THG versus downgraded competitors.
Unanticipated industry-wide events, such as asbestos legislation or financial accounting scandals, can affect insurance companies reserved funds.
The Hanover's net income has benefited from prior year development in the past four years, which is a result of conservatively reserving for potential loss events which the company must react to. Insurance companies set loss reserves to estimate expected payouts of claims that have been incurred, but have not yet been reported to the insurance company. There are inherent uncertainties involved in setting reserves and THG warns that adverse loss development materially affect results. [31] In the past four years, THG has benefited from the release of loss reserves as estimated losses were higher than those actually realized. In 2007 prior year reserves development favorably contributed $153 million. [32]
Financial market volatility can impact the value of THG's investment portfolio and investment income a important source of income for THG.
Major U.S. P&C insurers have reported investment losses due to the financial crisis. One Business Insurance survey estimates losses at a dozen P&C insurers have eclipsed $34 billion in the first nine months of 2008. [33] These losses stem from investments in a range of fixed income assets, namely subprime mortgage-backed securities (MBS) and commercial MBS. The Hanover has maintained that despite write downs in 2008, 92% of the overall portfolio is rated investment grade and much of the unrealized losses are temporary. [34] In 2007, 12% of THG's revenue was from investment income.
Competition
The property and casualty insurance industry is a competitive market. Due to its product offerings, The Hanover competes with national, regional and local companies. [35]
- State Farm is a mutual insurance company offering a broad array of insurance products including among others, homeowners, automobile and life.
- Allstate (ALL) provides a range of insurance products to clients, including auto, homeowner and life insurance.
- American Automobile Association (AAA) has extending its reach into other areas, however, such as offering a variety of financial and travel-arrangement services (foreign currency exchange and travelers checks), as well. [36]
- Progressive (PGR) is an auto insurance company that operates primarily through direct to the customer marketing.
(based on 2007 data)
| THG | ALL [37] | State Farm [38] | PGR [39] | |
| Revenue | $2.8 bil | $36.8 bil | $61.6 bil | $14.7 bil |
| P&C Premiums Written (net) | $2.4 bil | $27.2 bil | N/A | $13.8 bil |
| Combined Ratio | 93.9% | 89.8% | N/A | 92.6% |
| Investment Income (pre-tax) | $0.5 bil [40] | $6.4 bil | $4.6 bil | $0.8 bil |
| Net Income | $0.3 bil | $4.6 bil | $3.7 bil | $1.2 bil |
References
- ↑ The Hanover 3Q 2008 Earnings Presentation.
- ↑ THG 2007 Annual Report pg. 10
- ↑ THG 2007 Annual Report pg. 10
- ↑ THG 2007 Annual Report pg. 9
- ↑ The Hanover AIFA Presentation.
- ↑ "Into the Looking Glass: Trends & Challenges in the P/C Insurance Industry".
- ↑ The Hanover 3Q 2008 Quarterly Financial Results.
- ↑ The Hanover Insurance Group, Inc. 2008 Investor Day Presentation.
- ↑ The Hanover Insurance Group AIFA Insurance Conference Presentation.
- ↑ THG 2007 Annual Report pg. 10
- ↑ The Hanover Insurance Group AIFA Insurance Conference Presentation. p 11
- ↑ THG 2007 Annual Report pg. 2
- ↑ The Hanover 4Q 2007 Quarterly Financial Results.
- ↑ Glossary of Insurance Terms.
- ↑ THG 2007 Annual Report pg. 31
- ↑ The Hanover Insurance Group AIFA Insurance Conference Presentation.
- ↑ THG 2007 Annual Report pg. 3
- ↑ THG 2007 Annual Report pg. 31
- ↑ The Hanover Insurance Group AIFA Insurance Conference Presentation.
- ↑ The Hanover 3Q 10-Q.
- ↑ THG 2007 Annual Report pg. 3
- ↑ THG 2007 Annual Report pg. 3
- ↑ THG 2007 Annual Report pg. 31
- ↑ THG 2007 Annual Report pg. 4
- ↑ THG 2007 Annual Report
- ↑ Business Insurance. losses may make storm third-worst ever "Ike losses may make storm third-worst ever".
- ↑ Business Insurance. turmoil, hurricane losses may turn market "Market turmoil, hurricane losses may turn market".
- ↑ Business Insurance. "Reinsurance rates hardened at renewal".
- ↑ T THG 2007 Annual Report pg. 165
- ↑ http://www.businessinsurance.com/cgi-bin/article.pl?articleId=26449&a=a&bt=downgrade
- ↑ THG 2007 Annual Report pg. 160
- ↑ THG 2007 Annual Report pg. 48
- ↑ Business Insurance. take a hit as financial crisis worsens "Insurers' investments take a hit as financial crisis worsens".
- ↑ The Hanover 3Q 2008 Conference Call Transcript.
- ↑ THG 2007 Annual Report pg. 8
- ↑ Hoovers.
- ↑ ALL 2007 Annual Report
- ↑ State Farm 2007 Annual Report.
- ↑ PGR 2007 Annual Report
- ↑ Assumes 35% tax rate
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