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The Hanover reports Q1 net loss amid equity market declines

29th April 2020 - Author: Luke Gallin

The Hanover Insurance Group, Inc. has reported that COVID-19-induced financial market volatility led to a decline in the fair value of equity securities of more than $107 million in Q1 2020, as the company announces a net loss of $40 million for the period.

the-hanover-insurance-group-logoAt a loss of $40 million, the company’s net result declined significantly from the $122.4 million gain reported in the first-quarter of 2019. At the same time, operating income increased from $80.7 million to $86.8 million in Q1 2020.

The Hanover attributes the stark difference in the quarterly net loss and operating income to the above-mentioned decline in the fair value of equity securities of $107.6 million, as well as after-tax impairment losses on investments of $22.5 million.

Overall, net realised and unrealised investment losses totalled $161.6 million in the first-quarter of 2020, compared with gains of $48.2 million in the same period in 2019.

The Hanover states that the net change in the fair value of equity securities contributed $136.2 million to the pre-tax loss in Q1 2020, mostly as a result of the equity market declines in March as a result of the COVID-19 coronavirus pandemic. In total, investment impairments resulted in a pre-tax loss of $28.5 million for the insurer in Q1, primarily driven by fixed maturity investments.

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Reflecting the after-tax decline in the fair value of fixed income and equity securities, The Hanover’s book value per share fell 5.1% from the end of 2019 to $72.05.

The Hanover reports net investment income of $69.6 million for the first-quarter of 2020 against $70.2 million in the prior-year quarter, driven by the redeployment of Chaucer-related equity throughout last year, and the impact of lower new money yields.

“Our high-quality well-laddered investment portfolio is well positioned to withstand the current market volatility and economic disruption. Our decision in recent years to meaningfully reduce our exposure to more volatile industry classes and transition away from below investment grade assets is serving us well. We will continue to manage our business thoughtfully and conservatively, delivering value to our shareholders and other stakeholders,” said Jeffrey Farber, Executive Vice President and Chief Financial Officer (CFO).

Turning away from investments and looking at the underwriting side of the balance sheet, and the firm’s commercial lines and personal lines segments both remained profitable in the quarter.

Commercial lines operating income reached $54.6 million, which is down on the $80.2 million reported in the same period last year. At 98.2%, the combined ratio deteriorated in Q1 2020 from the 94.2% posted in Q1 2019.

Catastrophe losses increased to $23.8 million in Q1 2020 from $10.4 million in Q1 2019. In addition, the Q1 2020 result also included $3.7 million of net favourable reserve development. Net premiums written reached $707.6 million in Q1 2020, against $677.4 million in Q1 2019.

Within personal lines, The Hanover has reported operating income of $64.9 million, which is up on the $26.8 million posted in the same period last year. The combined ratio hit 90% against 98.2% in the prior-year quarter. The improved combined ratio was assisted by a lesser hit from catastrophes, which amounted to $14.1 million in Q1 2020, versus $29 million in Q1 2019.

Net premiums written jumped by more than 2% year-on-year to $429.3 million, compared with $420.6 million in the first-quarter of 2019.

Overall, The Hanover’s insurance operations recorded net written premiums of more than $1.13 billion in Q1 2020, which is up on the $1.09 billion reported in the same period last year.

At 95.2%, the company’s combined ratio improved slightly from the 95.8% recorded in the same period last year. Excluding catastrophes, the combined ratio in Q1 2020 hit 91.9%, against 92.2% in Q1 2019.

“In these unprecedented times defined by the COVID-19 global pandemic, our thoughts are with our employees, partners, customers, shareholders and our communities.

“I am incredibly proud of our outstanding team of 4,300 employees, which has demonstrated tremendous resiliency and flexibility during this uncertain time. We seamlessly transitioned to a remote work environment, while continuing to provide the highest quality service. I am equally proud of our robust and compassionate response to support all of our stakeholders, through our extensive customer relief program, financial and operational support to our agents and customers, and commitments to local communities, including multiple charitable donations.

From a financial perspective, our company remains very strong, as demonstrated by our strong results in the quarter. Our insurance book of business is built on thoughtful and conservative underwriting practices, a diversified, carefully constructed product portfolio and broad-based profitability.

“We believe these elements, combined with our solid balance sheet and ample liquidity, will allow us to successfully manage through the impacts of COVID-19, while continuing to deliver superior industry results. I have confidence the industry will respond and perform where contractual business interruption insurance exists, but that the sanctity of the contract will prevail in policies where coverage is excluded,” said John Roce, President and Chief Executive Officer (CEO).

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