The Hanover Insurance Group CEO Discusses Q3 2010 Results - Earnings Call Transcript

The Hanover Insurance Group Inc. (

THG

)

Q3 2010 Earnings Call

November 4, 2010 10:00 am ET

Executives

Oksana Lukasheva - Director, IR

Fred Eppinger - President and CEO

Marita Zuraitis - President of Property and Casualty Companies

Steve Bensinger - EVP and CFO

Analysts

Cliff Gallant - KBW

Presentation

Operator

Good morning and welcome to The Hanover Insurance Group third quarter earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Oksana Lukasheva.

Oksana Lukasheva

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Good morning and thank you for joining us for our third quarter conference call. Participating in today's call are Fred Eppinger, our President and Chief Executive Officer; Marita Zuraitis, President of Property and Casualty Companies; and Steve Bensinger, our Executive Vice President and CFO.

Before I turn the call over to Fred for a discussion of our results, let me note that our earnings press release, statistical supplement and a complete slide presentation for today's call are available in the Investors section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session.

Our prepared remarks and responses to your questions today, other than statements of historical facts, include forward-looking statements. These include statements regarding expectations of after-tax operating earnings per share, segment earnings, pricing, accident year results, premiums, expenses, development of loss and LAE reserves, estimates of expense capital, returns on equity and other projections for 2010 and beyond.

There are certain factors that could cause actual results to differ materially from those anticipated by this press release, slide presentation and conference call. We caution you with respect to reliance on forward-looking statements and in this respect refer you to the forward-looking statement section in our press release, Slide 2 of the presentation deck and our filings with the SEC.

Today's discussion will also reference certain non-GAAP financial measures such as total segment income, after-tax earnings per share, segment results excluding the impact of catastrophes and development, ex-CAT loss ratios and accident year loss ratios among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release or the statistical supplement which are posted on our website as I mentioned earlier.

With those comments, I will return the call over to Fred.

Fred Eppinger

Good morning, everyone, and thank you for joining the call. We're very pleased with our third quarter results, especially our continued progress on our strategic initiatives.

We posted after-tax operating income for the quarter of $45 million or $0.98 per share, a 10% increase over last year on a per share basis. We also continued to deliver very strong growth with net written premiums of 17% in the quarter, driven largely by gains in commercial lines, principally as a result of the OneBeacon renewal rates transaction and continued growth in our specialty and niche businesses.

Marita and Steve will review our quarterly results in detail with you shortly.

First, I'd like to take a few minutes to step back and review our progress and business outlook, given market conditions. Specifically, I would like to make three observations about our situation in the market.

First, we believe our company today is in a very strong and improving competitive position with winning agents. Second, given the financial leverage available to us, we believe we can continue to improve our financial performance over the next 12 months regardless of the general market conditions. Finally, we believe we will see growing market disruption over the next 12 to 18 months that will create increasing opportunity for the strongest competitors.

In 2003, we set out to build a company that combined the financial strength, talent and product capabilities of the best national companies with the local market knowledge and the responsiveness of the best regional. Since then, we've maintained an intense focus on that vision, making unprecedented investments across our organization and people, products, technology and service. We accelerated those investments, as you know, over the last couple of years, taking advantage of the market disruption to improve our product mix and expand our geographic position.

The return on these investments and the resulting progress we have made are becoming increasingly apparent, and the earnings power of this organization has increased as evidenced by recent quarterly trends.

Our ex-CAT combined ratio this quarter is at its lowest level in the last four quarters, despite the investments we continue to make in the business. At 51.5%, our ex-CAT next development loss ratio is consistent with the second quarter and is the lowest that it's been during the last 16 quarters. At 18% year-to-date, our topline growth is strong, constituting a key driver of our increasing book value going forward.

Our positive rate momentum is driven by growth in improved accident year profitability, demonstrating our strong underlying earnings power. And our quarterly operating ROE with budgeted caps continues to reflect improvement from quarter-to-quarter, increasing to 8% this quarter.

Since the very beginning of our journey, we've strived to provide distinctive value to our agency partners. Along the way, we've developed a compelling value proposition with focus on product innovation, commitment to partnership and franchise value and distinctive responsiveness and local expertise. Today, in the face of significant industry and economic pressures, our strengthening results continue to validate our strategic focus.

I would like to go over some aspects of how we believe our partner-focused strategy makes us more distinctive than many of our competitors to winning agents.

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