Business context and reporting period
The Hanover Insurance Group, Inc. is a property and casualty insurer with Commercial Lines, Personal Lines and Other segments. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the same period in 2019. Results include discontinued life and former Chaucer operations where applicable.
Financial and operating performance
- Revenue and earnings: Premiums earned were $1,141.4 million, up 4.2% from $1,095.1 million. Reported total revenue was $1,056.2 million, down from $1,219.5 million, chiefly reflecting investment losses. Net loss was $40.0 million, or $1.04 per diluted share, versus net income of $122.4 million, or $2.97 per diluted share.
- Operating results: Management’s non-GAAP operating income before interest and taxes rose to $117.1 million from $109.8 million. Operating income was $86.8 million versus $80.7 million. These measures exclude investment gains and losses and other items; they are not substitutes for GAAP results.
- Underwriting: The consolidated combined ratio improved to 95.2% from 95.8%. Commercial Lines’ combined ratio worsened to 98.2% from 94.2%; Personal Lines improved to 90.0% from 98.2%. Catastrophe losses were $37.9 million versus $52.9 million. Prior-year reserve development was favorable by $2.0 million, compared with favorable development of $13.2 million in 2019.
- Segments and premiums: Net premiums written increased 3.5% to $1,136.9 million. Commercial Lines operating income before interest and taxes fell to $54.6 million from $80.2 million; Personal Lines increased to $64.9 million from $26.8 million. Other reported a $2.4 million operating loss, versus $2.8 million of income.
- Investments and margins: Net realized and unrealized investment losses were $161.6 million, compared with gains of $48.2 million. The 2020 loss included a $136.2 million decline in fair value of equity securities and $28.5 million of investment impairments. Net investment income was $69.6 million, down from $70.2 million; total portfolio earned yield was 3.60%, versus 3.65%.
- Cash flow and liquidity: Operating cash flow was $36.6 million, compared with $37.2 million. Investing activities used $99.9 million and financing activities used $8.5 million. Cash and cash equivalents were $143.9 million at quarter-end, down from $215.7 million at year-end 2019. Total cash and investments were $7,971.4 million.
- Debt and capital: Debt was $707.5 million, up from $653.4 million, including $54.0 million of short-term FHLB advances scheduled for repayment in Q2 2020. Statutory capital and surplus of insurance subsidiaries was $2,420.2 million, down from $2,470.2 million. Hanover Insurance’s RBC ratio was 225% on the Industry Scale and 449% on the Regulatory Scale. Shareholders’ equity was $2,736.6 million, down from $2,916.2 million.
Material changes and management commentary
- Management attributed the GAAP loss primarily to market-driven investment declines and impairments; core operating income increased on earned-premium growth and lower expenses, partly offset by higher non-catastrophe current-year losses, particularly in Commercial Lines.
- Commercial Lines net premiums written grew 4.5%, but underwriting profit declined, including the effect of a $12.6 million large commercial property loss and an initial reserve provision for COVID-19 exposures. Personal Lines net premiums written grew 2.1%; underwriting benefited from lower catastrophe losses and improved current-year auto losses.
- Management said the Pandemic had minimal adverse effects on underwriting and operations through March 31 and believed its economic impacts on 2020 results should be manageable, while cautioning that severity, duration and longer-term effects were uncertain. Management provided no specific earnings or full-year financial guidance in the supplied filing text.
- On April 10, 2020, the Company announced refunds of 15% of eligible April and May personal auto premiums, estimated at approximately $30 million, to be recognized in Q2, subject to regulatory approvals.
- Investment risks increased amid market volatility and wider credit spreads. The Company recorded $22.2 million of fixed-maturity impairments, including $16.0 million on securities it intended to sell and $6.2 million of credit losses, plus $4.8 million of mortgage-loan impairments. Management considered other fixed-maturity unrealized losses largely recoverable, but acknowledged that further losses or a need to sell securities could result in additional impairment charges.
- Risks highlighted include a prolonged downturn affecting policy demand, premium payments and agents; lower investment income and additional impairments; possible state or federal action concerning premium refunds, rate restrictions or retroactive pandemic business-interruption coverage; and operating, workforce and cyber risks from remote work and third-party providers. The filing states that retroactive coverage proposals, if enacted and upheld, could create significant unfunded liabilities.
- Other notable items: the legacy ECRA reinsurance pool contributed $3.3 million of adverse prior-year development; the Company repurchased approximately $34.9 million of stock during the quarter and reported approximately $300 million remaining under its repurchase program. It was in compliance with debt covenants.
Key facts investors should verify
- How COVID-19-related claims, premium refunds, rate actions and any regulatory or legislative changes affect second-quarter and later underwriting results.
- Whether investment impairments, credit deterioration or forced sales develop beyond the first-quarter amounts, especially in corporate bonds and mortgage-related investments.
- Commercial Lines loss trends, including commercial multiple peril large losses and the COVID-19 reserve provision, alongside Personal Lines’ claims experience and refund costs.
- Reserve adequacy and development in the legacy ECRA pool and other long-tail lines; estimates are subject to actuarial uncertainty.
- Liquidity and capital trends, including scheduled repayment of the $54.0 million FHLB advance, statutory surplus and RBC levels, and the effects of continued dividends or share repurchases.
- Michigan auto reform implementation and its potential effect on the Company’s personal auto business; Michigan represented 47% of personal auto net premiums written.