Hanover Insurance Group, Inc. — Q2 2020 Form 10-Q
Business context and period. The filing reports the quarter and six months ended June 30, 2020, compared with the same 2019 periods. Hanover is a property-and-casualty insurer operating through Commercial Lines, Personal Lines and Other, with a strategy centered on independent agents. Results include discontinued life businesses; the former Chaucer business was discontinued.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $1,224.3 million | $1,198.6 million | $2,280.5 million | $2,418.1 million |
| Net income | $115.2 million | $74.0 million | $75.2 million | $196.4 million |
| Diluted EPS | $3.01 | $1.79 | $1.95 | $4.77 |
| Operating income before interest and taxes* | $88.9 million | $107.0 million | $206.0 million | $216.8 million |
| Net investment income | $57.7 million | $69.6 million | $127.3 million | $139.8 million |
| Combined ratio | 96.2% | 96.1% | 95.7% | 95.9% |
*Non-GAAP measure; excludes interest expense and specified non-operating items. Combined ratios below 100% indicate underwriting profit before investment income and other items.
Financial position, cash flow and capital
- First-half cash flow: Operating activities provided $225.8 million, versus $150.6 million in 2019. Investing activities used $156.7 million and financing activities used $102.2 million. Cash and cash equivalents ended June at $182.6 million, down from $215.7 million at year-end 2019.
- Balance sheet: Total assets were $12.84 billion and shareholders’ equity was $3.07 billion at June 30, 2020, versus $12.49 billion and $2.92 billion at December 31, 2019.
- Debt: Debt carrying value was $652.8 million ($661.9 million principal); estimated fair value was $721.8 million. The company reported compliance with debt and credit-facility covenants and no borrowings under its $200 million revolving credit facility.
- Liquidity and statutory capital: The holding company reported approximately $481.5 million in fixed maturities and cash. Insurance-subsidiary statutory capital and surplus was $2.31 billion, down $156.8 million in the first half, primarily following a $245 million dividend to the holding company and investment losses. Hanover Insurance’s RBC ratio was 210% on the industry scale and 419% on the regulatory scale.
- Shareholder returns: Two quarterly dividends of $0.65 per share were paid in the first half. The company repurchased about 0.5 million shares for $49.3 million, in addition to settling its prior accelerated repurchase; approximately $287 million remained under the $900 million authorization.
Changes versus prior periods
- Q2 net income increased by $41.2 million year over year, mainly because investment gains were higher, particularly from equity securities. This more than offset lower operating income, which fell to $88.9 million from $107.0 million amid catastrophe losses and lower investment income.
- First-half net income fell by $121.2 million. Net realized and unrealized investment results shifted to a $97.9 million loss from a $60.3 million gain in 2019, primarily reflecting equity-security fair-value changes and higher investment impairments. First-half operating income before interest and taxes declined by $10.8 million.
- First-half net premiums written declined to $2.22 billion from $2.24 billion. Growth in the first quarter was offset by reduced insured business activity and personal-auto premium refunds in the second quarter. Personal Lines returned approximately $30 million to eligible customers.
- First-half catastrophe losses were $185.7 million, versus $99.0 million in 2019, driven by Midwest and Southeast wind and hail storms and insured property damage from riots and civil unrest. Net favorable prior-year reserve development was $13.9 million, compared with $20.6 million in 2019.
- Investment income fell, with the company citing lower limited-partnership income, lower new-money yields, and the prior deployment of Chaucer-sale proceeds for share repurchases and special dividends. Fixed-maturity unrealized appreciation increased as interest rates declined, partly offset by wider credit spreads.
Outlook, management commentary and risks
- Management said the Pandemic’s 2020 economic impact should be manageable, but emphasized that its severity, duration and longer-term effects remain uncertain. It did not provide numerical earnings or premium guidance.
- Reduced economic activity lowered non-catastrophe auto losses, but contributed to lower commercial insured activity and premiums. The company also recorded approximately $19 million of Pandemic-related reserve provisions in Commercial Lines during the first half. Management cited continuing uncertainty around premium growth and underwriting profitability.
- The company recognized $27.1 million of investment impairments in the first half, primarily on fixed maturities and mortgage loans; fixed-maturity impairments included $16.2 million categorized as intend-to-sell and $4.6 million of credit-related losses. Management warned that further market deterioration, defaults or forced sales could produce additional losses.
- Key exposures include future Pandemic-related business interruption legislation or mandated coverage, regulatory premium refunds and rate restrictions, civil unrest losses, catastrophe volatility, reserve-estimation uncertainty, reinsurance collectability and availability, low investment yields, and Michigan auto-insurance reform. The company said retroactive business-interruption mandates could create significant unfunded liabilities.
- Legal and regulatory proceedings arise in the ordinary course; outcomes are difficult to predict. The company did not expect them to materially affect financial position, though an individual period’s results could be materially affected. No adjusting subsequent events were reported.
Most important facts for investors to verify
- Whether catastrophe frequency and severity, including civil-unrest losses, remain elevated and how they affect combined ratios.
- Whether Pandemic-related reductions in claims activity persist, and whether premiums, renewals or coverage mix weaken as the economy evolves.
- Further development of investment impairments, equity-market gains or losses, credit quality and portfolio income as yields remain low.
- Reserve adequacy, particularly commercial-auto and legacy asbestos/environmental exposures, and the durability of favorable prior-year development.
- Regulatory or legislative actions affecting business-interruption coverage, premium refunds, rate-setting, and Michigan auto reform.
- Subsidiary statutory capital and surplus, RBC levels, holding-company liquidity, and the pace of dividends and share repurchases.