The Hanover Insurance Group, Inc. (THG) opened 2024 with an excellent first quarter, delivering robust earnings and effectively executing on its margin recapture and catastrophe mitigation plans. The company's net income for the full year 2023 was $353 million, with annual revenue of $5.99 billion, annual operating cash flow of $361.7 million, and annual free cash flow of $349.8 million.
In the first quarter of 2024, the company reported after-tax operating income of $112 million, or $3.08 per diluted share, generating an operating return on equity of 15%. The company improved its ex-CAT combined ratio by more than 2 points in the quarter, demonstrating the effectiveness of its margin recapture initiatives. Overall growth was subdued in the quarter at 2.3% as the company continues to prioritize profitability improvement actions, but it expects to accelerate the pace of growth throughout 2024 and generate net written premium growth in the mid-single-digit range for the full year.
Business Overview
The Hanover Insurance Group, Inc. operates through four reporting segments: Core Commercial, Specialty, Personal Lines, and Other. The Core Commercial segment includes commercial multiple peril, commercial automobile, workers' compensation, and other commercial coverages provided to small and mid-sized businesses. The Specialty segment includes four divisions of business: Professional and Executive Lines, Specialty Property and Casualty, Marine, and Surety and Other. The Personal Lines segment includes personal automobile, homeowners, and other personal coverages. The Other segment includes the company's investment management services business, Opus Investment Management, Inc., as well as earnings on holding company assets, holding company and other expenses, and run-off businesses.
Specialty Segment Highlights
The Specialty segment delivered another quarter of exceptional profitability, generating a combined ratio of 87.6%. Consistent with the outlook provided on the company's year-end call, Specialty growth picked up from the low watermark in the fourth quarter. The market remains robust, with exciting opportunities across multiple lines, including Excess and Surplus Lines, Marine, Specialty Industrial Property, Healthcare, and Surety. The company expects Specialty net written premium growth in the upper single digits for the full year of 2024 as it further capitalizes on its broad diversification and favorable market dynamics.
Core Commercial Segment Highlights
The Core Commercial segment maintained its focus on driving growth in Small Commercial while executing on margin improvement initiatives in Middle Market. Small Commercial grew by approximately 8% in the quarter, fueled by the continued success of the company's highly intuitive TAP sales platform. In Middle Market, the company continues to achieve better and more consistent earnings performance by aggressively non-renewing bottom-decile property business and adjusting its new business appetite to reflect the changing environment.
Personal Lines Segment Highlights
The Personal Lines segment continues to demonstrate improved profitability and is performing largely on track relative to the company's expectations. The loss ratio in both Auto and Home decreased compared to the first quarter of the prior year, in line with the company's assumptions. Personal Lines renewal price change was a robust 22.8% in the quarter. The company has been taking actions to improve financial results and reduce volatility within its Personal Lines segment, including increasing pricing, changing certain policy terms and conditions, and being more selective on new business quoting.
Financials
The Hanover Insurance Group, Inc. maintains a strong financial position, with a GAAP book value per share of $70.22 as of March 31, 2024. The company's statutory surplus increased by about 5% to $2.8 billion during the first three months of 2024. The company's risk-based capital (RBC) ratio was 402% on the regulatory scale, well above the required levels.
The company generated $58.7 million in net cash from operating activities during the first three months of 2024, an increase of $40.6 million compared to the same period in the prior year. The company has ample liquidity, with $285 million of fixed maturities and cash held at the holding company level. The company's Board of Directors has authorized a stock repurchase program of up to $1.3 billion, of which approximately $330 million remains available for additional repurchases as of March 31, 2024.
Risks and Challenges
The company continues to monitor liability trends, including social inflation pressures, in its Commercial Lines business. While the company's current liability profile, with over 93% of its liability policy limits at or below $1 million, helps it effectively navigate the current environment, it remains vigilant in managing its risk exposure.
For the second quarter of 2024, the company's planned catastrophe load is 8.5%. The company has intended to pick higher on the probability curve in establishing its full-year 2024 catastrophe load of 7%, which is expected to decline for 2025. The company's catastrophe guidance does not yet reflect the ultimate impact of substantial terms and conditions changes in Personal Lines that are currently underway.
Outlook
Looking ahead, the company remains confident in its ability to deliver increasingly stronger results, execute on its strategic priorities, and create value for its shareholders, agent partners, and customers. The company expects to accelerate the pace of growth throughout 2024 and generate net written premium growth in the mid-single-digit range for the full year.
Conclusion
The Hanover Insurance Group, Inc. has delivered an excellent start to 2024, demonstrating the strength, diversification, and resilience of its business. The company's focus on margin recapture initiatives, catastrophe management, and disciplined growth strategies has positioned it well to navigate the current dynamic market environment. With its strong financial position, ample liquidity, and commitment to creating long-term value, the company is well-poised to continue its positive momentum and deliver improved financial performance in the years ahead.