Hanover Insurance Group, Inc. — Q3 2021 Form 10-Q
Business context and period: The company provides property and casualty insurance through Commercial Lines and Personal Lines, with an Other segment. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the same periods in 2020. Amounts are in millions except per-share data.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net premiums earned | $1,186.0 | $1,135.4 | $3,527.6 | $3,373.4 |
| Total revenues | $1,276.4 | $1,249.8 | $3,853.1 | $3,530.3 |
| Operating income before interest and taxes | $47.0 | $128.4 | $269.4 | $334.4 |
| Net income | $34.0 | $118.9 | $255.2 | $194.1 |
| Diluted net income per share | $0.94 | $3.13 | $6.98 | $5.05 |
| Combined ratio | 102.3% | 94.2% | 98.5% | 95.2% |
- Premium growth: Net premiums written rose 8.4% in both the quarter ($1,375.2 versus $1,268.5) and nine-month period ($3,778.5 versus $3,486.4). Management attributed growth mainly to rate increases and recovery from reduced insured business activity in 2020; nine-month Personal Lines growth also compares with roughly $30 million of 2020 auto premium refunds.
- Underwriting and earnings: Q3 operating income fell $81.4 million, primarily on higher catastrophe losses and Personal Lines non-catastrophe losses. Nine-month operating income declined $65.0 million for similar reasons, partly offset by earned premium growth, higher investment income, and favorable reserve development. Nine-month net income increased because investment results improved substantially: the company recorded $72.6 million of net realized and unrealized investment gains versus $60.2 million of losses in 2020.
- Claims and reserves: Nine-month pre-tax catastrophe losses were $363.6 million versus $251.6 million, with 2021 impacts including the Texas-area freeze, Hurricane Ida, and Midwest wind and hail. Prior-year reserves developed favorably by $56.7 million, compared with $26.1 million in 2020. Loss and LAE reserves totaled $6,540.1 million at September 30, up from $6,024.0 million at year-end 2020.
- Investment income and OCI: Net investment income rose to $78.8 million for Q3 and $231.2 million for nine months, from $67.6 million and $194.9 million, respectively, aided by limited partnership results. Management cautioned that 2021 partnership returns were elevated and not indicative of expected returns. Nine-month other comprehensive loss was $169.3 million, mainly reflecting lower unrealized gains on available-for-sale securities as interest rates rose.
- Cash flow and capital: Nine-month operating cash flow was $595.4 million versus $546.6 million; investing cash outflow was $337.7 million and financing cash outflow was $207.1 million. Cash and equivalents were $171.2 million. Total assets were $14,105.3 million, shareholders’ equity $3,102.3 million, and debt $781.4 million. Insurance-subsidiary statutory surplus was $2,548.4 million, down from $2,588.5 million at year-end 2020.
- Liquidity and distributions: The holding company reported approximately $371.7 million in fixed maturities and cash; management said it expected operating cash generation to meet current short- and long-term requirements. Hanover Insurance paid a $255 million dividend to the holding company in Q3. The company paid $75.6 million in shareholder dividends and repurchased $142.6 million of stock during the first nine months; approximately $381 million remained under the repurchase authorization.
Material changes and management commentary
- Q3 diluted EPS and operating income were sharply lower year over year, while nine-month net income rose despite weaker operating income, chiefly because investment gains replaced prior-year investment losses.
- Combined ratios worsened in Q3 and year to date. Q3 underwriting losses were reported in both Commercial Lines and Personal Lines; Personal Lines results were particularly affected by catastrophe claims and higher auto claim severity.
- Management cited pandemic-related uncertainty, changing driving patterns, court backlogs, inflation and supply-chain constraints. Auto repair costs and vehicle values were contributing to higher claim severity; homeowners losses were affected by weather events.
- The company seeks rate increases and disciplined underwriting, but notes that competition and regulatory limits may constrain pricing and business actions. It said near-term pandemic effects should be manageable, while acknowledging that duration and longer-term impacts remain uncertain.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects positive operating cash flow to support obligations and says average fixed-income yields may continue to decline as new-money rates remain below embedded portfolio yields.
- Key risks include severe weather and catastrophe volatility; reserve-estimation uncertainty; inflation and claims severity; pandemic effects; reinsurance collectability and pricing; interest-rate, credit and equity-market volatility; competition; and regulatory or legislative changes affecting rates, policy terms or coverage.
- Management warned that proposed legislation requiring retroactive payment of otherwise-uncovered pandemic business-interruption claims could create significant industry solvency risks; the proposals’ impact, if any, was not estimable. Ordinary-course legal and regulatory proceedings were not expected to materially affect financial position, but could affect results in a particular period.
- The company stated that it did not intend, and did not expect to be required, to sell fixed maturities in unrealized-loss positions before recovery. It reported $35.2 million of gross unrealized losses on fixed maturities at quarter-end and noted that adverse market or credit developments could lead to realized losses.
Most important facts for investors to verify
- Whether catastrophe losses, auto severity and inflation continue to pressure underwriting results and combined ratios.
- Whether premium and rate growth can offset claim-cost trends without materially affecting retention or policy growth.
- The sustainability of investment income, particularly limited partnership returns, and sensitivity of portfolio values to interest rates and credit conditions.
- The adequacy of loss reserves, the durability of favorable prior-year development, and recoverability of reinsurance balances.
- Holding-company liquidity, insurance-subsidiary dividend capacity, and the pace of share repurchases and shareholder dividends.