Hanover Insurance Group, Inc. — 2023 Form 10-K
Business context and period: Annual report for the fiscal year ended December 31, 2023; comparisons are primarily with 2022. Hanover is a U.S. property-and-casualty insurer distributing mainly through independent agents. Its segments are Core Commercial, Specialty, Personal Lines and Other.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Net premiums written | $5.81 billion | $5.48 billion |
| Net premiums earned | $5.66 billion | $5.25 billion |
| Net investment income | $332.1 million | $296.3 million |
| Net income | $35.3 million | $116.0 million |
| Diluted earnings per share | $0.98 | $3.21 |
| Operating income before interest and taxes (non-GAAP) | $105.6 million | $285.1 million |
| Net cash from operating activities | $361.7 million | $722.3 million |
Net premiums written rose 6.1%, while net income fell $80.7 million. Management attributed the decline in operating income mainly to higher catastrophe losses, partly offset by improved current-year underwriting in Core Commercial and Specialty, higher investment income and premium growth. Lower investment losses also partly offset the net-income decline.
The consolidated combined ratio increased to 103.5% from 99.8% (above 100% generally indicates an underwriting loss before investment income). Catastrophe losses were $690.1 million, versus $402.6 million. The 2023 ratio reflects a sharp deterioration in Personal Lines: its combined ratio was 117.1%, compared with 104.3%. Core Commercial improved to 99.0% from 101.2%, and Specialty was 86.2% versus 89.3%.
- Segment operating income before interest and taxes: Core Commercial $167.2 million (up from $106.9 million); Specialty $243.5 million (up from $186.0 million); Personal Lines a $304.3 million loss (versus an $8.8 million loss); Other a $0.8 million loss.
- Underwriting drivers: Personal Lines catastrophe losses rose to $475.7 million from $176.2 million, primarily due to Midwest and other convective storms, hail and wind. Current-year underwriting profit excluding catastrophes improved in Core Commercial, Specialty and Personal Lines.
- Reserves: Gross loss and LAE reserves were $7.31 billion, up from $7.01 billion; net reserves were $5.51 billion. Prior-year non-catastrophe reserve development was favorable by $15.9 million, compared with $20.6 million favorable in 2022. Management cautions actual ultimate losses may differ materially from estimates.
Total assets were $14.61 billion and shareholders’ equity was $2.47 billion at year-end. Cash and investments totaled $9.23 billion, including $7.99 billion of fixed maturities; approximately 95% of fixed maturities were investment grade. Fixed maturities had $624.7 million of gross unrealized losses, down from $817.7 million in 2022; management considered these losses non-credit-related and did not expect to need to sell the securities before recovery.
Debt was $783.2 million carrying value ($786.9 million principal), with $34.1 million of interest expense. Debt maturities include $61.8 million in 2025, $375.0 million in 2026, $50.1 million of subordinated debt in 2027 and $300.0 million in 2030. No borrowings were outstanding under the revolving credit facility or FHLB facility at year-end. Operating cash flow declined by $360.6 million, mainly because of higher claim payments, particularly catastrophe-related. The holding company held approximately $321.9 million in fixed maturities and cash; insurance subsidiaries paid $100 million in dividends to the parent in 2023.
Material changes versus 2022
- Written premiums increased across all main segments: Core Commercial 5.4%, Specialty 4.0% and Personal Lines 7.9%, largely from renewal pricing.
- Personal Lines’ premium growth coincided with lower new business and fewer policies in force: personal auto policies declined 2.2% and homeowners policies 1.4%.
- Net investment income increased to $332.1 million, primarily from higher new-money yields and reinvested operating cash, partly offset by lower partnership income.
- Net realized and unrealized investment losses narrowed to $32.5 million from $106.5 million. Other comprehensive income improved by $184.3 million, principally reflecting fixed-maturity valuation changes.
- Insurance subsidiaries’ statutory capital and surplus decreased $47.7 million to $2.64 billion, mainly after a $100 million dividend to the parent, partly offset by underwriting profits. Hanover Insurance’s RBC ratio was 197% on the industry scale, down from 207%.
Outlook, risks and unusual items
- No specific company-wide earnings or premium guidance is provided in the filing. Management expects Personal Lines policy counts to continue shrinking into the following year as pricing and underwriting actions limit new business.
- Management reported 2023 renewal pricing increases of approximately 24% in homeowners and 13% in personal auto, and said it expects pricing increases to continue, subject to regulatory and competitive conditions.
- Key risks include catastrophe frequency and severity, inflation in repair, construction and medical costs, social inflation and litigation, reserve-estimation uncertainty, investment-market and interest-rate changes, regulatory limits on pricing and underwriting, and competition and dependence on independent agents.
- Michigan PIP reform remains uncertain. MCCA reinsurance recoverables were $911.7 million; the filing notes litigation and uncertainty about the effect of reform cost controls. Total reinsurance recoverables were $2.06 billion, including $918.8 million associated with residual markets, facilities and pools.
- The 2024 reinsurance program was described as broadly similar to 2023, but the company cautioned that coverage, pricing and terms may change and that catastrophe protection may prove inadequate. Reinsurance does not release Hanover from obligations to policyholders.
- Legal proceedings arise in the ordinary course. The company does not expect their ultimate resolution to materially affect financial position, but results for a particular quarter or year could be materially affected. The independent auditor identified valuation of loss and LAE reserves as a critical audit matter; the audit opinion on the financial statements and internal controls was unqualified.
- The company paid $117.2 million of common dividends in 2023. It said it currently expects quarterly dividends comparable to the $0.85 per share paid in fourth-quarter 2023, subject to board approval and financial and regulatory considerations. No shares were repurchased under the program in 2023.
Important facts for investors to verify
- Whether Personal Lines rate increases and underwriting actions improve the segment’s combined ratio and stabilize policy counts despite catastrophe exposure.
- Whether claims inflation, litigation trends and subsequent reserve development—especially in Personal Lines auto and umbrella and commercial auto—remain consistent with reserve assumptions.
- The recoverability and timing of MCCA and other reinsurance balances, and whether catastrophe reinsurance renewals maintain adequate limits and terms.
- Operating cash generation, statutory surplus and RBC levels, and the insurance subsidiaries’ capacity to continue supporting parent-company dividends and debt obligations.
- How investment income, unrealized fixed-maturity losses, mortgage-loan credit allowances and any realized investment losses evolve as markets and interest rates change.