The Hanover Insurance Group, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The Hanover Insurance Group is a property and casualty insurer with Commercial Lines, Personal Lines and Other segments, primarily distributed through independent agents. This filing covers the three months ended March 31, 2021, compared with Q1 2020. Results include discontinued life and accident-and-health businesses.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Premiums earned | $1,161.8 million | $1,141.4 million |
| Net premiums written | $1,196.1 million | $1,136.9 million |
| Total revenues | $1,283.3 million | $1,056.2 million |
| Net income (loss) | $92.7 million | $(40.0) million |
| Diluted EPS | $2.51 | $(1.04) |
| Operating income before interest and taxes (non-GAAP) | $85.1 million | $117.1 million |
| Operating cash flow | $141.8 million | $36.6 million |
- Profit and revenue: Net income improved by $132.7 million, mainly because investment results swung from a $161.6 million loss to a $37.5 million gain. The 2021 investment gain was chiefly from equity-security fair-value changes. Operating income before interest and taxes fell $32.0 million, reflecting higher catastrophe losses, partly offset by lower non-catastrophe losses and higher investment income.
- Underwriting and margins: The consolidated combined ratio was 98.8%, versus 95.2% in Q1 2020. Commercial Lines’ combined ratio increased to 106.9% from 98.2%; Personal Lines improved to 87.0% from 90.0%. Pre-tax catastrophe losses rose to $133.3 million from $37.9 million, principally due to Texas and surrounding-state freeze events. Prior-year reserve development was favorable by $8.2 million, compared with $2.0 million favorable in 2020.
- Investment income and comprehensive income: Net investment income increased to $76.8 million from $69.6 million, including higher limited partnership income. Net unrealized depreciation on available-for-sale securities contributed to an after-tax other comprehensive loss of $184.8 million; management attributed falling fixed-maturity values primarily to higher interest rates.
- Cash flow and liquidity: Cash and cash equivalents were $112.1 million at quarter-end, down from $120.6 million at December 31, 2020. Cash from operations was $141.8 million; investing activities used $78.6 million and financing activities used $71.7 million. Total cash and investments were $8.92 billion. Management said operating cash flows and holding-company resources were expected to meet current obligations; the holding company held about $326.2 million in fixed maturities and cash.
- Balance sheet and capital: Total assets were $13.45 billion and shareholders’ equity was $3.05 billion at March 31, 2021. Debt was $781.0 million, broadly unchanged from year-end; its disclosed fair value was $858.7 million. Insurance-subsidiary statutory capital and surplus rose to $2.67 billion from $2.59 billion. The company reported no borrowings under its revolving credit facility and $130.1 million of FHLB borrowing capacity.
Material changes and management commentary
- Net premiums written increased 5.2% overall, with Commercial Lines up 7.0% and Personal Lines up 2.2%. Commercial growth was attributed mainly to rate increases and strong retention; Personal Lines growth reflected rate increases partly offset by fewer policies in force.
- Personal auto claim activity remained lower amid pandemic-related changes in driving patterns. Management cautioned that pandemic effects on claims, premium levels and business growth remain uncertain.
- The company repurchased approximately 0.4 million shares for $45.3 million during the quarter and paid $25.5 million in dividends. About $78 million remained under its $900 million repurchase authorization.
- No specific earnings or underwriting guidance was provided. Management said it expected sufficient positive operating cash flow to meet operating needs and did not expect to need additional insurance-subsidiary dividends for 2021 holding-company obligations.
Risks, contingencies and unusual items
- Key risks include catastrophe severity and frequency, reserve-estimation uncertainty, reinsurance collection and availability, interest-rate and investment-market volatility, inflation, competition, rate regulation, and pandemic-related disruption.
- Management warned that proposed legislation could require retroactive payment of certain pandemic business-interruption claims or mandate future pandemic coverage; potential effects were not estimable. State regulatory actions concerning premium refunds, payment grace periods, cancellations and rate reviews may also affect operations.
- Legal and regulatory proceedings arise in the ordinary course. The company did not expect them to materially affect financial position, but said they could materially affect results in an individual period. Residual-market participation adds less predictable exposure.
- There were no investment impairments in Q1 2021, compared with $28.5 million in Q1 2020. Management considered fixed-maturity unrealized losses non-credit-related and did not expect or intend to sell the affected securities before recovery; adverse market or credit developments could change that assessment.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It stated there were no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the unusually high Q1 catastrophe losses, especially commercial-property freeze claims, continue to pressure Commercial Lines underwriting and combined ratios.
- Whether favorable reserve development persists and whether prior accident-year estimates remain adequate as claims mature.
- How investment returns, higher rates and unrealized fixed-maturity losses affect reported equity, future income and the ability to hold securities through recovery.
- Whether pandemic-related claim patterns, premium adjustments, regulation or proposed coverage legislation materially change future underwriting results.
- Whether capital returns, dividends and repurchases remain supported by holding-company liquidity, insurance-subsidiary capital and regulatory limits.