Hanover Insurance Group, Inc. — 2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021, compared primarily with 2020. Hanover is a U.S. property and casualty insurer distributing mainly through independent agents. Its operating segments are Commercial Lines, Personal Lines and Other. The filing is an annual report, not a standalone fourth-quarter report.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenues | $5,227.8 million | $4,824.8 million |
| Net premiums written | $4,993.4 million | $4,598.5 million |
| Net premiums earned | $4,770.2 million | $4,527.4 million |
| Net income | $418.7 million | $358.7 million |
| Diluted EPS | $11.49 | $9.42 |
| Operating income before interest and taxes (non-GAAP) | $432.3 million | $484.7 million |
| Net cash from operating activities | $823.7 million | $707.6 million |
- Underwriting: The consolidated combined ratio rose to 97.0% from 94.4%; a ratio below 100% generally indicates underwriting profit before investment income. The loss and LAE ratio was 65.7% and the expense ratio 31.3%.
- Segments: Commercial Lines operating income before interest and taxes was $269.9 million, down from $275.4 million; Personal Lines was $158.5 million, down from $212.5 million. Other contributed $3.9 million versus a $3.2 million loss.
- Cash, investments and liquidity: Cash and investments totaled $9.38 billion at year-end, including $230.9 million of cash and cash equivalents. Operating cash flow exceeded 2020; investing activities used $460.2 million and financing activities used $253.2 million.
- Debt and capital: Debt carrying value was $781.6 million ($786.9 million principal). Insurance subsidiaries’ statutory capital and surplus was $2.72 billion, up $131.5 million. Hanover Insurance’s risk-based capital ratio was 228% on the Company Action Level scale. The company reported compliance with debt covenants and no borrowings under its $200 million revolving credit facility.
Material changes versus 2020
- Net income increased $60.0 million, largely reflecting higher equity-security fair-value gains and the absence of $26.3 million in prior-year investment impairments. Core operating income before interest and taxes declined $52.4 million.
- Net premiums written rose $394.9 million, or about 8.6%, with growth in both Commercial and Personal Lines. Commercial Lines premiums increased 9.2%; Personal Lines increased 7.7% (6.0% excluding the approximately $30 million of 2020 personal-auto premium refunds).
- Pre-tax catastrophe losses increased to $402.6 million from $286.7 million, associated mainly with Hurricane Ida, Midwest wind and hail events, and the Texas-area freeze. Higher Personal Lines auto loss severity and frequency also weighed on results; frequency remained below pre-pandemic levels.
- Net favorable prior-year loss and LAE development increased to $71.1 million, including catastrophe development, from $32.6 million. Higher net investment income, at $310.7 million versus $265.1 million, partly offset underwriting pressure; limited partnership income was notably stronger and management cautioned that it is volatile.
- Net unrealized depreciation on available-for-sale securities reduced other comprehensive income by $243.2 million after tax; management attributed higher fixed-maturity unrealized losses principally to rising interest rates.
Outlook, commentary, risks and unusual items
- Management said near-term pandemic impacts should be manageable, while noting uncertainty around variants, driving patterns, court backlogs, supply-chain disruption and inflation. The filing provides no specific earnings or premium guidance.
- Management is pursuing disciplined pricing and underwriting, agency-focused growth, specialty-line development and greater geographic diversification. Michigan and Massachusetts accounted for 20.7% and 9.2% of Commercial and Personal Lines premiums written, respectively; Personal Lines exposure is particularly concentrated in Michigan.
- Inflation in repair, construction, medical and litigation costs could raise claim severity and weaken reserve adequacy. Catastrophes, climate-related weather risk, competitive and regulatory limits on pricing, and uncertainty in long-tail claims are material risks.
- Michigan auto reform remains uncertain. The MCCA reinsurance recoverable was $901.8 million at year-end, and the company reduced its estimate of MCCA recoverables by $122.9 million in 2021 for expected cost savings. A roughly $183.2 million MCCA surplus return to policyholders was expected in March 2022; it was recorded as a reduction to direct and ceded written premiums, with no effect on net written or net earned premiums.
- Reinsurance recoverables totaled $1.91 billion, including $911.8 million from residual markets and pooling arrangements. Reinsurance does not remove the company’s obligation to policyholders, and collection and adequacy risks remain. The company reported that its 2022 program was substantially consistent with 2021, but coverage, cost and placement were not assured.
- Loss and LAE reserves were $6.45 billion gross and $4.75 billion net. Management estimated that a one-point change in the aggregate loss and LAE ratio would affect operating income by about $50 million. The auditor identified reserve valuation as a critical audit matter; the financial statements received an unqualified audit opinion, and internal control over financial reporting was judged effective.
- The company repurchased approximately 1.2 million shares for $162.6 million in 2021 and paid $102.2 million in dividends. About $361 million remained under its $1.3 billion repurchase authorization at year-end. The regular quarterly dividend was $0.75 per share in the fourth quarter; future dividends remain subject to Board approval and subsidiary-dividend restrictions.
Important facts for investors to verify
- Whether rate increases and underwriting actions keep pace with claims inflation, especially in Personal Auto, homeowners and long-tail liability lines.
- Subsequent development of 2021 catastrophe losses, prior-year reserves and the assumptions underlying long-tail claim estimates.
- Actual effects of Michigan PIP reforms, including litigation, cost-control savings, MCCA recoverability and the timing and pass-through of the policyholder refund.
- Reinsurance renewal terms, catastrophe protection, counterparty collectability and residual-market exposure.
- Investment portfolio sensitivity to interest rates, credit spreads and volatile limited partnership returns, alongside statutory capital and holding-company liquidity.
- Reconciliation of non-GAAP operating income to GAAP results and the contribution of equity-security gains to reported net income.