The Hanover Insurance Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. The company is a property and casualty insurer operating through Core Commercial, Specialty, Personal Lines and Other segments.
Financial performance
| Metric | Q3 2022 | Nine months 2022 |
|---|---|---|
| Net premiums earned | $1,331.2 million, up from $1,186.0 million | $3,888.8 million, up from $3,527.6 million |
| Total revenue | $1,366.3 million, up from $1,274.9 million | $3,989.9 million, up from $3,849.3 million |
| Net income | $0.2 million, down from $34.0 million | $127.6 million, down from $255.2 million |
| Diluted earnings per share | $0.01, versus $0.94 | $3.53, versus $6.98 |
| Operating income before interest and taxes (non-GAAP) | $53.9 million, versus $47.0 million | $323.3 million, versus $269.4 million |
| Combined ratio | 101.0%, versus 102.3% | 97.0%, versus 98.5% |
| Net cash from operating activities | Not presented separately for the quarter | $523.8 million, versus $595.4 million |
Investment losses were a major drag on reported earnings: net realized and unrealized losses were $44.9 million in Q3 and $138.7 million year to date, compared with gains of $4.0 million and $72.6 million, respectively, in 2021. Nine-month net income also included $1.1 million of losses from discontinued life businesses.
Segments and material changes
- Core Commercial: Nine-month operating income before interest and taxes increased to $159.6 million from $66.1 million, helped by lower catastrophe losses and premium growth. Q3 underwriting remained in loss at $7.7 million.
- Specialty: Nine-month operating income rose to $142.1 million from $82.9 million, reflecting premium growth, lower catastrophe losses and stronger current-year underwriting.
- Personal Lines: Nine-month operating income fell to $20.3 million from $117.6 million. The segment recorded a $50.3 million underwriting loss, versus $48.1 million of underwriting profit in 2021; higher auto and homeowners claims costs were key factors. Q3 operating loss was $18.8 million.
- Net premiums written increased 9.8% in both Q3 and the first nine months year over year, supported by pricing, exposure growth and retention. Personal Lines nine-month premiums written grew, but claims severity and frequency pressured results.
- Pre-tax catastrophe losses were $213.0 million for the first nine months, down from $363.6 million in 2021; 2022 included $28.0 million related to Hurricane Ian. Net favorable prior-year reserve development was $31.2 million, down from $56.7 million a year earlier.
Balance sheet, liquidity and capital
- At September 30, 2022, total assets were $13.75 billion and shareholders’ equity was $2.30 billion, versus $14.25 billion and $3.14 billion at year-end 2021. Accumulated other comprehensive loss widened to $766.1 million from $122.2 million, primarily reflecting declines in available-for-sale securities.
- Fixed-maturity investments had a fair value of $7.20 billion against amortized cost of $8.09 billion; gross unrealized losses were $896.0 million, mainly attributed to higher interest rates and, to a lesser extent, wider credit spreads. Management said it did not intend, and did not expect to be required, to sell these securities before recovery.
- Cash and cash equivalents were $164.8 million, down from $230.9 million at year-end. Debt was $782.2 million; its estimated fair value was $704.5 million. The company reported no borrowings under its revolving credit facility and $101.0 million of FHLB borrowing capacity.
- Nine-month operating cash flow was $523.8 million; investing cash use was $476.2 million and financing cash use was $113.7 million. The company paid $80.1 million in shareholder dividends and repurchased $30.8 million of stock during the period.
- Insurance-subsidiary statutory surplus was $2.68 billion, down $38.2 million from year-end 2021. Hanover Insurance’s reported RBC ratios were 219% on the Industry Scale and 437% on the Regulatory Scale.
Outlook, risks and other notable items
- The filing provides no specific earnings or premium guidance. Management described a strategy centered on independent-agent distribution, profitable growth and managing volatility.
- Management cited persistent inflation and supply-chain disruption as increasing claims costs, particularly in personal auto and homeowners. Auto severity, repair costs, accident frequency, homeowners repair delays and property-loss severity may continue to pressure results. Rate actions are subject to regulatory and competitive constraints.
- Management also noted uncertainty from economic conditions, interest-rate and investment-market volatility, catastrophes, reserve estimation, reinsurance availability and collection, and potential changes in insurance regulation. The Federal Reserve’s rate increases contributed to significant portfolio unrealized losses; management cautioned that forced or discretionary sales before recovery could result in realized losses.
- A $150 million catastrophe reinsurance agreement effective July 1, 2022 provides specified hurricane and named-storm protection through June 30, 2025, subject to attachment and exhaustion thresholds and defined geographic coverage.
- Legal and regulatory matters arise in the ordinary course. The company said their resolution is not expected to materially affect financial position, though a particular period’s results could be affected. No subsequent events requiring adjustment or additional note disclosure were reported.
Investor verification priorities
- Track whether Personal Lines pricing and underwriting actions keep pace with auto and homeowners claim frequency, severity, inflation and repair-cost trends.
- Review investment portfolio fair values, unrealized losses, credit quality and any securities sold or impaired, including the planned transfer of certain investment-management responsibilities.
- Assess reserve development by segment and accident year, especially the shift to less favorable development and unfavorable Personal Lines homeowners experience.
- Monitor statutory surplus, RBC ratios, dividend capacity, debt and liquidity, and the impact of further market declines or catastrophe losses.
- Check the terms and practical recovery thresholds of the catastrophe reinsurance protection, along with regulatory developments affecting rates, policy terms or pandemic-related coverage.