Hanover Insurance Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. The company is a property and casualty insurer operating through Core Commercial, Specialty, Personal Lines and Other segments, with an independent-agent distribution strategy.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1,504.4 million | $1,292.9 million | $2,948.1 million | $2,623.6 million |
| Net income (loss) | $(69.2) million | $22.7 million | $(81.2) million | $127.6 million |
| Operating income (loss) before interest and taxes, non-GAAP | $(79.4) million | $115.0 million | $(66.2) million | $269.4 million |
| Net premiums written | $1,446.8 million | $1,332.8 million | $2,868.3 million | $2,645.1 million |
| Net investment income | $87.6 million | $70.5 million | $166.3 million | $147.4 million |
| Combined ratio | 111.3% | 96.2% | 107.9% | 94.8% |
- Premium growth reflected pricing and new business, although Personal Lines growth was primarily driven by renewal price increases. Investment income rose on higher new-money yields and continued investment of operating cash flows.
- Catastrophe losses were $436.6 million pretax for the first half, versus $122.9 million in 2022, driven by severe storms, hail, wind, tornadoes and freezes. Personal Lines was the largest contributor to the deterioration.
- Q2 underwriting results included a $222.9 million Personal Lines underwriting loss and a 138.0% combined ratio. For the first half, Personal Lines had a $295.1 million underwriting loss and a 125.3% combined ratio. Specialty’s first-half underwriting profit was $66.8 million; Core Commercial recorded a $4.3 million underwriting loss.
- First-half prior-year reserve development was net favorable by $4.7 million, but results varied materially: favorable development in Specialty was partly offset by unfavorable development in Personal Lines.
- Six-month operating cash flow was $44.3 million, down from $208.7 million. Investing cash outflow was $118.0 million and financing cash outflow was $63.7 million. Cash and cash equivalents ended at $167.6 million, versus $305.0 million at year-end 2022.
- At June 30, total assets were $14.19 billion, total liabilities $11.95 billion, and shareholders’ equity $2.24 billion. Loss and LAE reserves were $7.31 billion; debt was $782.8 million. Total cash and investments were $8.81 billion. Statutory capital and surplus was $2.51 billion, down $182.1 million from year-end, primarily due to a $100 million subsidiary dividend and weaker underwriting results.
- Fixed maturities had a $777.5 million net unrealized loss at June 30; accumulated other comprehensive loss was $670.9 million. Management said it did not intend, and did not expect to be required, to sell the securities before recovery, while acknowledging that circumstances could change.
Changes, outlook and risks
- Year-over-year deterioration: First-half net income declined by $208.8 million and operating income before interest and taxes by $335.6 million. The main drivers were higher catastrophe losses across segments and higher Personal Lines claim severity, partly offset by premium growth and higher investment income. Investment losses were lower than in 2022, but did not offset underwriting deterioration.
- Pricing and underwriting actions: Management reported second-quarter rate increases of 22% in homeowners and 12% in automobile. It tightened Personal Lines new-business appetite by geography and risk characteristics. Personal Lines policies in force were flat sequentially in Q2; management expects sequential policy counts to shrink beginning in Q3 2023. This is commentary, not earnings guidance.
- Claims-cost pressure: Inflation, supply-chain constraints, higher repair and building costs, longer repair times, and temporary-lodging expenses are affecting automobile and homeowners claims. Management also cited large-fire losses and uncertainty around driving patterns and court backlogs.
- Capital and liquidity: Hanover Insurance paid $100 million in dividends to the holding company in the first half. The holding company reported approximately $367.4 million of fixed maturities and cash. The company said it expected operating cash to meet current requirements and did not anticipate needing additional subsidiary dividends, but future claims and cash needs could vary. A five-year unsecured revolving credit facility of up to $150 million, with a conditional option to increase to $300 million, was entered into on July 21, 2023; there were no borrowings under it at June 30. The company reported compliance with debt and credit agreement covenants.
- Other exposures: Risks include catastrophe frequency and severity, reserve-estimation uncertainty, investment-market and credit volatility, reinsurance collectability and cost, residual-market participation, and regulatory limits on pricing or underwriting. Legal and regulatory proceedings arise in the ordinary course; management did not expect them to materially affect financial position, though a particular period’s results could be affected.
- The filing reported no subsequent event requiring adjustment to the financial statements. It also said disclosure controls were effective at a reasonable-assurance level and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Personal Lines rate actions keep pace with claim severity and whether the expected policy-count contraction affects premium growth.
- Catastrophe activity, reserve development by segment, and the sustainability of the favorable Specialty reserve development.
- Operating cash generation and statutory capital after catastrophe claims, dividends and other capital needs.
- Investment portfolio credit quality, unrealized losses, impairment activity and any need to sell securities before recovery.
- The terms, availability and covenant headroom of the new revolving credit facility, and the impact of regulatory or reinsurance changes.