Hanover Insurance Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; comparisons are to the corresponding 2021 periods. Hanover is primarily a property-and-casualty insurer operating through Core Commercial, Specialty, Personal Lines and Other, with a strategy focused on independent agents.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net premiums earned | $1,293.8 million | $1,179.8 million | $2,557.6 million | $2,341.6 million |
| Total revenues | $1,292.9 million | $1,292.3 million | $2,623.6 million | $2,574.4 million |
| Net income | $22.6 million | $128.5 million | $127.4 million | $221.2 million |
| Diluted EPS | $0.63 | $3.52 | $3.52 | $6.03 |
| Operating income before interest and taxes (non-GAAP) | $115.0 million | $137.3 million | $269.4 million | $222.4 million |
| Combined ratio | 96.2% | 94.4% | 94.8% | 96.6% |
Premium growth was strong: net premiums written rose 10.4% in Q2 and 10.1% for the first half. Reported net income fell sharply as investment results swung to losses, primarily from lower fair values of equity securities. Investment gains and losses are excluded from management’s non-GAAP operating income measure.
- Underwriting: First-half operating income before interest and taxes increased $47.0 million, supported by premium growth and lower catastrophe losses. Pre-tax catastrophe losses were $122.9 million, versus $210.1 million in the first half of 2021. First-half prior-year reserve development was $27.2 million favorable, compared with $35.8 million favorable a year earlier.
- Segment trends: First-half operating income rose in Core Commercial ($134.4 million versus $55.1 million) and Specialty ($95.2 million versus $51.5 million), but declined in Personal Lines ($39.1 million versus $114.0 million). Personal Lines’ first-half combined ratio was 100.2%; Q2 was 103.2%, indicating underwriting losses for those periods.
- Investment income and markets: First-half net investment income declined to $147.4 million from $152.4 million, mainly due to lower limited-partnership income. The portfolio’s total earned yield was 3.35%, versus 3.70%. Fixed-maturity fair value was $7.245 billion, compared with $7.724 billion at year-end; management attributed the decline mainly to rising interest rates and, to a lesser extent, wider credit spreads.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $208.7 million, down from $309.0 million. Investing cash use was $217.6 million and financing cash use was $76.1 million. Cash and cash equivalents ended at $145.9 million, down from $230.9 million at year-end.
- At June 30, total assets were $13.601 billion, total liabilities $11.029 billion and shareholders’ equity $2.572 billion, down from $3.145 billion at December 31, 2021. Accumulated other comprehensive loss was $519.9 million, versus income of $122.2 million at year-end, reflecting investment-market depreciation.
- Debt was $782.0 million, broadly unchanged from year-end. The company reported $377.7 million of fixed maturities and cash at the holding company, $113.5 million of Federal Home Loan Bank borrowing capacity, and no borrowings under its $200 million revolving credit facility. It reported compliance with debt and credit agreement covenants.
- Insurance-subsidiary statutory capital and surplus was $2.694 billion, down $26.5 million in the first half. Hanover Insurance’s risk-based capital ratio was 223% on the industry scale. The company paid a $100 million dividend from Hanover Insurance to the parent in Q2.
- Common shareholders received two quarterly dividends of $0.75 per share in the first half, totaling $53.4 million. The company repurchased $20.4 million of shares; approximately $341 million remained under its repurchase authorization.
Changes, outlook and risks
Management cited inflation and supply-chain disruption as drivers of higher claim severity, particularly in personal auto and homeowners. Personal Lines also experienced higher auto claim frequency as driving patterns normalized from unusually low 2021 levels, and higher homeowners severity from large losses, weather and repair costs. The company is pursuing rate increases, but regulatory constraints and competition may limit pricing and growth.
Management said near-term effects of pandemic-related uncertainty were expected to be manageable, while acknowledging possible intermediate- and long-term effects. Other cited uncertainties include severe weather, recession risk, rising interest rates, investment-market volatility, credit defaults, geopolitical disruptions, reinsurance collection and pricing, and regulatory or legal changes. The filing provides no specific earnings or revenue guidance.
Management stated that fixed-maturity unrealized losses were assessed as non-credit-related and that it did not intend, nor expect to be required, to sell the affected securities before recovery. It cautioned that unforeseen liquidity needs or adverse credit changes could require sales or impairment recognition. Effective July 1, 2022, Hanover added up to $150 million of collateralized catastrophe reinsurance for specified named storms and geographies, attaching at $1.3 billion of covered losses; coverage runs through June 30, 2025.
Legal proceedings and regulatory inquiries arise in the ordinary course. Management does not expect their ultimate resolution to materially affect financial position, though quarterly or annual operating results could be affected. Proposed pandemic-related insurance legislation and regulatory limits on rates, underwriting and policy actions remain potential risks. Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Personal Lines’ elevated claims severity and combined ratio improve as rate actions earn through, and how inflation and repair-cost trends develop.
- Whether first-half underwriting improvement in Core Commercial and Specialty persists after lower catastrophe losses and favorable reserve development.
- The evolution of investment valuations, interest rates and credit spreads, and whether unrealized fixed-maturity losses remain recoverable without forced sales.
- Reserve adequacy, especially homeowners claims and the effect of longer repair cycles, along with reinsurance recoverability and catastrophe protection terms.
- Holding-company liquidity, statutory capital and regulatory limits on future subsidiary dividends, share repurchases and shareholder distributions.