Hanover Insurance Group Inc

Hanover Insurance Group Inc.

Financial Statement Analysis 

FIN686 International Financial Statement Analysis

Kaihan Xu

November 12, 2016

Introduction

The Company

The Hanover Insurance Group, Inc., based in Worcester, Mass., consists of several property and casualty insurance companies.  It is one of the largest and oldest insurance businesses in the United States. The main business of The Hanover includes insurance products both property and casualty, covering individuals, families, and businesses. The company distributes its products mainly through a select group of independent agents and brokers, offering specialized coverages for small and mid-sized businesses, as well as insurance protection for homes, automobiles, and other personal properties. It also underwrites business at Lloyd's of London in several major insurance and reinsurance classes through its international member company, Chaucer. (10-K, organization).

The Industry

The Hanover has operated in property and casualty insurance industry for more than 160 years. In this period, insurance industry at the United States has grown, diversified and developed significantly, and became the largest insurance industry in the world in terms of revenue. After a decline in 2009 when financial crisis occurred causing gloom in financial markets, insurance premiums at the United States have grown at a modest pace. At 2011, the annual revenue of the U.S. insurance industry, also referred as insurance premiums, exceeded the $1.2 trillion mark.

Financial Statement

Appendices A & B (shown in the Appendices section) are the Income Statement and Common-Sized Income Statement of Hanover for the years ended 2013-2015. Appendices C & D (Appendices) are the Balance Sheet and Common-Sized Balance Sheet. Appendix E is the Statement of Cash Flows for Alcoa for the years ended 2013-2015.

Forecasted Financial Statements

To forecast the year 2015’s Income Statement and Balance Sheet, the percent of sales approach is employed. Appendixes F & G show the forecasted numbers for the income statement and balance sheet for Avista in year 2015.

In forecasting the financial statements, two assumptions are made. Firstly, the forecasted sales growth rate in 2015, which is 2.95%, is the average of the past two years’ growths. Another assumption is made that all costs, assets, liabilities, and equity will continue to grow at the same rate as sales.

Financial Ratios

The following chart, Chart 1, shows the computed financial ratios for Avista. Because the forecasted ratios are based on the percent of sales approach, all ratios will be almost the same for both year 2014 and year 2015. Because of averaging in the denominator, some ratios cannot be computed for year 2012.

Chart 1

[pic 1]

Activity Ratios

Receivables turnover increases steadily from 2012 to 2015, which indicates that the number of times per year that the company collects its average accounts receivable has been increasing.

Days of sales outstanding consequently has been declining steadily during the three year period. It represents the decreasing elapsed time between a sale and cash collection, reflecting the company collects funds from its customers in a less timely manner.

Total asset turnover decreased slightly from 0.33 in 2013 to 0.32 in 2014. The company’s ability to deploy its assets in generating revenue remains almost the same from 2013 to 2015.

Liquidity Ratios

Current ratio increases steadily from 0.88 in 2012 to 1.03 in 2015. The improvement in current ratio indicates that the company’s short-term liquidity becomes better in 2015. The ratios for 2014 and 2015 are above 1.0, which indicates that the company has enough current assets to pay off its current liabilities.

The cash ratio drops from 0.13 to 0.06, which indicates that the company’s cash on hand has been decreasing over the years and its ability to pay for its current liabilities with cash is negatively affected.

Solvency Ratios

The debt-to-assets ratio increases slightly from 0.31 to 0.33. In 2014, the ratio showed that 33% of the total assets were financed by debt, which indicates that the company is solvent.

The debt-to-equity ratio averages to 1.04 over the three year span, which indicates a heavy use of debt by management in funding the firm.

Although the financial leverage ratio decreases from 3.34 to 3.18, it is still pretty high. As a measure of the value of equity in a company, the number shows that creditors own a larger amount of the assets and the company is relatively highly leveraged.

Profitability Ratios

Net profit margin increased steadily from 2012 to 2014. The increase in net profit margin indicates that the amount of profit that the company can extract from its total sales has increased.

ROE stays the same over the three years, which indicates that the profit that the company generates with the money shareholders have invested remains on the same level.

Valuation Ratios

P/E ratio (based on the year-end stock price) shows that the company’s dollar-per-share earnings decrease sharply from $18.27 to $11.33. It reveals that the company’s earnings has been decreasing.