Business context and reporting period
The Hanover Insurance Group, Inc. (NYSE: THG) filed this unaudited Form 10-Q for the quarter ended March 31, 2022. The property and casualty insurer reports Core Commercial, Specialty, Personal Lines and Other segments and emphasizes distribution through independent agents. Prior-period segment results were recast to reflect the first-quarter 2022 split of Commercial Lines into Core Commercial and Specialty.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Premiums earned | $1,263.8 million | $1,161.8 million; up 8.8% |
| Total revenues | $1,330.7 million | $1,282.1 million; up 3.8% |
| Net income | $104.8 million; diluted EPS $2.90 | $92.7 million; diluted EPS $2.51 |
| Operating income before interest and taxes (non-GAAP) | $154.4 million | $85.1 million |
| Net cash from operations | $200.1 million | $141.8 million |
| Combined ratio | 93.4% | 98.8% |
Net premiums written were $1,312.3 million, up 9.7%. The combined ratio below 100% indicates an underwriting profit overall. Segment combined ratios were 93.0% for Core Commercial (111.7% in 2021), 87.7% for Specialty (98.8%), and 97.1% for Personal Lines (87.0%).
Pre-tax catastrophe losses fell to $45.5 million from $133.3 million, with the prior-year quarter affected by Texas and surrounding-state freeze events. Prior-year reserve development was favorable by $6.0 million versus $8.2 million favorable. Personal Lines underwriting income declined to $12.3 million from $58.9 million, reflecting higher auto losses and unfavorable homeowners reserve development; Core Commercial and Specialty underwriting results improved.
Balance sheet and capital
At March 31, 2022, total assets were $13.85 billion, total shareholders’ equity $2.83 billion, and debt $781.8 million. Cash and cash equivalents were $272.0 million. Total cash and investments were $9.05 billion, down 3.6% from year-end, principally because of market-value declines. Fixed maturities were $7.38 billion, including $312.2 million of gross unrealized losses, primarily associated with 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. Accumulated other comprehensive income shifted from $122.2 million to a loss of $256.6 million, largely due to investment depreciation.
Statutory capital and surplus of insurance subsidiaries was $2.81 billion, up $89.6 million from year-end. The reported RBC ratio for Hanover Insurance was 235% on the industry scale and 470% on the regulatory scale. Operating cash flow included MCCA-related cash receipts; the filing reports $183.3 million received and $34.4 million remitted to policyholders in Q1, with $148.9 million expected to be paid in Q2. The company paid $26.7 million in dividends and repurchased $16.3 million of stock. Approximately $345 million remained under its repurchase authorization.
Changes, outlook, risks and contingencies
Revenue and operating income improved year over year, chiefly from premium growth and lower catastrophe losses. Net income growth was partly offset by a $15.9 million net investment loss, compared with $37.5 million of gains in Q1 2021, mainly reflecting equity-security fair-value changes. Net investment income was nearly flat at $76.9 million; total portfolio earned yield was 3.52%, versus 3.74%.
Management gave no specific earnings or premium guidance. It said near-term effects of continuing pandemic-related uncertainty should be manageable, while noting inflation, supply-chain constraints and repair-cost pressures are increasing auto and homeowners claims costs. The company is pursuing rate increases, subject to competition and regulation. Risks include catastrophe frequency and severity, reserve-estimate uncertainty, reinsurance collectability and pricing, market volatility and potential investment losses, regulatory limits on rates or underwriting, and legal or legislative developments. Proposed pandemic business-interruption measures could affect insurers if enacted; the filing says their potential impact is too early to estimate. Ordinary-course legal and regulatory matters are not expected to materially affect financial position, but could materially affect results in an individual period.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company said it was in compliance with debt and credit-agreement covenants and had no borrowings under its revolving credit facility.
Important facts for investors to verify
- Whether Personal Lines auto severity, homeowners repair costs and inflation continue to pressure underwriting results and reserve development.
- How much of the lower catastrophe burden and improved combined ratio is sustainable, apart from the favorable comparison with 2021 freeze losses.
- Whether the $148.9 million MCCA refund payment is completed as expected and how it affects subsequent cash flows.
- Whether interest rates, credit spreads or credit deterioration lead to realized losses or further declines in investment values and equity.
- Developments in rate approvals, Michigan no-fault-related litigation, pandemic coverage proposals, and reinsurance costs and recoverables.