Hanover Insurance Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Comparisons are with the corresponding 2019 periods unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Hanover’s principal businesses are Commercial Lines and Personal Lines, distributed primarily through independent agents.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $1,249.8 | $1,214.7 | $3,530.3 | $3,632.8 |
| Net income | $118.9 | $118.9 | $194.1 | $315.3 |
| Continuing-operations income | $119.5 | $111.2 | $196.1 | $318.8 |
| Diluted net income per share | $3.13 | $2.96 | $5.05 | $7.71 |
| Net premiums written | $1,268.5 | $1,242.9 | $3,486.4 | $3,478.7 |
| Net investment income | $67.6 | $68.8 | $194.9 | $208.6 |
| Operating income before interest and taxes (non-GAAP) | $128.4 | $126.3 | $334.4 | $343.1 |
- Q3 net income was unchanged, while total revenue rose about 2.9%. The company attributed the quarter’s result to broadly consistent operating income and offsetting changes in investment results, debt repayment costs, and discontinued items.
- For the first nine months, net income fell about 38% and total revenue declined about 2.8%. Management attributed most of the earnings decrease to equity-security fair-value changes and, to a lesser extent, investment impairments; operating income also eased.
- Q3 underwriting combined ratio was 94.2% (Commercial Lines 96.9%; Personal Lines 90.4%). For the first nine months, it was 95.2% (Commercial 97.2%; Personal 92.0%). A ratio below 100% indicates underwriting profit before investment income and other items.
- Q3 operating income before interest and taxes increased $2.1 million year over year: Personal Lines rose to $64.2 million from $50.2 million, while Commercial Lines declined to $62.3 million from $74.1 million. Year-to-date segment results were $172.2 million for Commercial Lines and $161.7 million for Personal Lines.
Financial position, cash flow and capital
- At September 30, 2020, total assets were $13,393.8 million, total liabilities $10,238.8 million, and shareholders’ equity $3,155.0 million, compared with $12,490.5 million, $9,574.3 million, and $2,916.2 million, respectively, at December 31, 2019.
- Cash and cash equivalents were $231.5 million; total investments were $8,727.4 million. Fixed maturities had a fair value of $7,473.0 million, including $488.3 million of net unrealized gains. About 96% of the fixed-maturity portfolio was investment grade.
- Nine-month operating cash flow was $546.6 million, versus $423.9 million in 2019. Investing used $480.3 million and financing used $50.5 million; cash increased $15.8 million to $231.5 million.
- Debt carrying value was $780.4 million, up from $653.4 million at year-end 2019. The company issued $300 million of 2.50% senior debentures due 2030 and redeemed $175 million of 6.35% subordinated debentures due 2053, recording a $6.1 million repayment loss. It reported compliance with debt covenants.
- Insurance subsidiaries’ statutory capital and surplus was $2,422.3 million, down $47.9 million since year-end; the filing cites a $245 million dividend to the holding company and investment losses, partly offset by underwriting profits. Hanover Insurance’s reported RBC ratios were 220% on the industry scale and 441% on the regulatory scale.
- The company paid approximately $74 million in common dividends in the first nine months ($0.65 per share for each of three quarters) and repurchased about $94.3 million of shares during the period. On October 27, 2020, it entered a further $100 million accelerated share repurchase agreement. It reported approximately $242 million remaining under its $900 million repurchase authorization at September 30.
Material changes and management commentary
- COVID-19 reduced economic and insured business activity. Lower driving and claims activity supported auto underwriting results, but commercial premium growth and future profitability were uncertain. Hanover returned approximately $30 million of eligible Personal Lines premiums in Q2; excluding the refund, year-to-date Personal Lines written premiums would have increased 1.6%.
- Pre-tax catastrophe losses were $251.6 million year to date, versus $134.2 million in 2019. The increase included $38.2 million of losses from riots and civil unrest, as well as wind and hail events and Hurricane Isaias. Management said the pandemic’s 2020 economic impact appeared manageable, while emphasizing substantial uncertainty over duration and longer-term effects.
- Year-to-date prior-year reserve development was favorable by $26.1 million in total: $9.5 million excluding catastrophe development and $16.6 million from catastrophe reserves. Commercial Lines development was favorable; the Other segment included adverse development tied primarily to a legacy asbestos and environmental reinsurance pool. Reserve estimates remain subject to uncertainty.
- Investment results were volatile: net realized and unrealized investment results were a $60.2 million loss year to date, compared with a $75.1 million gain in 2019, primarily reflecting equity-security fair-value changes. Investment impairments were $27.9 million, including $16.5 million on fixed maturities categorized as intended to sell and $2.6 million of credit-related fixed-maturity losses. Net investment income declined, and management expects new-money yields to remain below embedded book yields.
- Management cited risks from further pandemic-related economic weakness, market volatility and defaults, catastrophe and civil-unrest losses, reserve revisions, reinsurance availability and recoverability, and regulatory or legislative actions. Proposed retroactive business-interruption coverage mandates could create significant unfunded liabilities if enacted and upheld; their impact was not estimable.
- No earnings guidance was provided in the supplied filing text. Management said it expected operating cash generation to meet current short- and long-term needs and did not expect additional subsidiary dividends to be necessary for 2020 holding-company obligations, while noting that pandemic and market developments could alter liquidity needs.
Most important facts for investors to verify
- Whether lower pandemic-era auto claim frequency persists and whether commercial activity, premium growth, and underwriting margins recover.
- How catastrophe losses, including civil unrest and severe weather, and reserve development evolve; distinguish the $9.5 million favorable non-catastrophe development from the additional $16.6 million favorable catastrophe development.
- Whether investment impairments, equity-market changes, credit defaults, and lower reinvestment yields materially affect earnings, book value, or capital.
- Progress and final share count for the October 2020 $100 million ASR, and the effect of ongoing buybacks, dividends, and debt refinancing on leverage and capital flexibility.
- Any developments in pandemic-related insurance regulation or legislation, including business-interruption mandates, premium adjustments, and Michigan auto insurance reforms.