Hanover Insurance Ailed By Higher Core & Catastrophe Losses - What Does The Future Hold?

Keefe, Bruyette & Woods analyst Meyer Shields reiterated a Market Perform rating on Hanover Insurance Group Inc THG, lowering the price target to $119 from $124.

Shields projects higher core and catastrophe loss ratios and lower investment income ahead of the company. 

For FY23, the analyst expects investment income to fall by 11.9% Y/Y to $331.7 million.

The analyst lowered the 2023/2024 EPS to $2.40/$11.35 from $2.85/$12.40 and introduced an initial 2025 EPS of $14.05, incorporating the underperformance in the recently-reported second quarter. 

The second quarter results were hampered by hail storms in the Midwest and Southwest, with about half of the 2Q23 losses to very unusual Michigan hailstorms.

Beyond aggressive rate increases on its catastrophe-exposed business, the analyst notes that THG is taking several other underwriting steps to mitigate its exposure to catastrophe losses.

The company includes stricter building and roof condition rules, refining its aggregated exposure in catastrophe-exposed geographic regions, and raising deductibles on wind-exposed accounts, all of which should reduce its earnings volatility with only a modest expected impact on premium volumes, Shields adds.

The analyst notes that THG added a $150 million three-year catastrophe bond, raising its aggregated tower’s limit to $1.8 billion from $1.6 billion.

Considering the normalized levels of catastrophe losses, the analyst models 2023/2024/2025 catastrophe loss ratios of 10.9%/6.8%/6.7%. However, Shields cautions about still-high construction repair cost inflation, which is increasingly offset by rate increases and other underwriting steps.

The analyst raised 2023/2024 NWP to $5.88 billion/$6.17 billion from $5.83 billion/$6.08 billion and models 2025 NWP of $6.43 billion.

Price Action: THG shares are trading lower by 1.8% to $108 on the last check Tuesday.