Business context and reporting period
The Hanover Insurance Group, Inc. (NYSE: THG) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company principally writes property and casualty insurance through Core Commercial, Specialty and Personal Lines, with an additional Other segment. Its strategy emphasizes independent agents and profitable growth while managing volatility.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $1,516.6 million | $1,366.3 million | $4,464.7 million | $3,989.9 million |
| Net premiums earned | $1,431.1 million | $1,331.2 million | $4,222.8 million | $3,888.8 million |
| Net premiums written | $1,596.4 million | $1,505.4 million | $4,464.7 million | $4,150.5 million |
| Net investment income | $84.2 million | $73.0 million | $250.5 million | $220.4 million |
| Net income (loss) | $8.6 million | $0.5 million | $(72.6) million | $128.1 million |
| Diluted EPS | $0.24 | $0.01 | $(2.03) | $3.54 |
| Operating income (loss) before interest and taxes, non-GAAP | $13.7 million | $53.9 million | $(52.5) million | $323.3 million |
| Combined ratio | 104.4% | 101.0% | 106.7% | 97.0% |
Net premiums written grew about 6% in Q3 and 8% in the first nine months, mainly from rate increases and, in some businesses, new business. Q3 net income improved year over year, largely because investment losses were lower; operating income declined. For the nine months, the company swung to a net loss as substantially higher catastrophe claims and weaker Personal Lines results more than offset premium growth and higher investment income.
Underwriting by segment: For the first nine months, Personal Lines recorded a $422.4 million underwriting loss and a 123.7% combined ratio, versus a $50.3 million loss and 102.6% ratio in 2022. Core Commercial underwriting income was $1.0 million with a 99.7% combined ratio, compared with $58.8 million and 95.8%. Specialty underwriting income rose to $119.5 million from $96.2 million; its combined ratio improved to 87.2% from 88.8%. Q3 combined ratios were 120.8% for Personal Lines, 98.7% for Core Commercial and 83.4% for Specialty.
Claims and reserves: Catastrophe losses were $632.4 million in the first nine months, versus $213.0 million in 2022, principally from widespread convective storms, hail and wind. Prior-year reserves developed favorably by $6.8 million overall, compared with $31.2 million favorable development in 2022. Specialty favorable development was offset in part by unfavorable development in Personal Lines and Core Commercial.
Financial position, cash flow and capital
- At September 30, 2023, total assets were $14.315 billion, total liabilities $12.199 billion and shareholders’ equity $2.116 billion. Equity declined from $2.334 billion at December 31, 2022.
- Cash and cash equivalents were $294.5 million; debt was $783.0 million. Total investments were $8.560 billion. Fixed maturities had $921.0 million of gross unrealized losses, primarily related to higher interest rates; accumulated other comprehensive loss was $780.3 million.
- Operating cash flow for the first nine months was $269.0 million, down from $523.8 million. Investing activities used $186.4 million and financing activities used $93.1 million. Cash ended the period at $294.5 million.
- Insurance-subsidiary statutory surplus was $2.502 billion, down $188.5 million, mainly due to a $100 million dividend to the parent and weaker underwriting results. Hanover Insurance’s RBC ratio was 189% on the industry scale and 379% on the regulatory scale.
- The holding company had approximately $344.3 million in fixed maturities and cash. A new five-year unsecured revolving credit facility provides up to $150 million, with an option to increase to $300 million; there were no borrowings under it at quarter-end. The company reported compliance with debt covenants.
- Three quarterly dividends of $0.81 per share were paid during the first nine months, totaling $86.9 million. Approximately $330 million remained available under the $1.3 billion share repurchase authorization; no shares were repurchased under the program during the period.
Management commentary, outlook and risks
Management attributed the deterioration in results chiefly to catastrophe losses, especially in Personal Lines, and to claim severity pressures from inflation and supply-chain disruption. Personal Lines obtained Q3 price increases of approximately 23% in homeowners and 14% in automobile. The company tightened new-business underwriting, and management expected sequential Personal Lines policies in force to continue shrinking in Q4 2023. No specific earnings or revenue guidance was provided.
Management stated that it did not expect to need to sell fixed maturities in unrealized-loss positions to meet insurance-subsidiary cash needs, but acknowledged that unforeseen needs could force sales and trigger realized losses. Other key risks include further severe weather and catastrophe losses, reserve-estimate changes, inflation and claim severity, regulatory limits on rates or underwriting, reinsurance availability and collectability, interest-rate and credit-market volatility, and competition. The company reported that ordinary-course litigation and regulatory matters were not expected to materially affect financial position, though they could materially affect results in a particular period.
Two catastrophe-bond-backed reinsurance agreements provide up to $300 million of specified regional storm coverage, subject to attachment and exhaustion terms. Reinsurance recoverables totaled $1.992 billion at September 30, 2023. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether catastrophe frequency and severity, especially in Personal Lines, remain elevated and how that affects combined ratios and rate adequacy.
- Whether continued Personal Lines pricing and underwriting restrictions can offset loss inflation without excessive policy attrition or reduced new business.
- The development and adequacy of loss reserves, including adverse trends in Personal Lines and commercial automobile and the extent to which Specialty favorable development persists.
- How the $921.0 million of gross unrealized fixed-maturity losses, higher interest rates and potential credit defaults affect equity, liquidity and investment income.
- Changes in statutory surplus, RBC ratios, reinsurance recoverables and the company’s ability to fund dividends and other holding-company needs.