Business Context and Reporting Period
The Hanover Insurance Group, Inc. (NYSE: THG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Its principal businesses are Commercial Lines and Personal Lines insurance; the Other segment includes investment management, holding-company activities and run-off operations.
Financial Performance and Key Metrics
Amounts are in millions, except per-share data and ratios.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net premiums earned | $1,179.8 | $1,096.6 | $2,341.6 | $2,238.0 |
| Net premiums written | $1,207.2 | $1,081.0 | $2,403.3 | $2,217.9 |
| Net investment income | $75.6 | $57.7 | $152.4 | $127.3 |
| Net realized and unrealized investment gains (losses) | $31.1 | $63.7 | $68.6 | $(97.9) |
| Net income | $128.5 | $115.2 | $221.2 | $75.2 |
| Diluted EPS | $3.52 | $3.01 | $6.03 | $1.95 |
| Operating income before interest and taxes (non-GAAP) | $137.3 | $88.9 | $222.4 | $206.0 |
| Combined ratio | 94.4% | 96.2% | 96.6% | 95.7% |
Q2 total revenue was $1,293.4, up 5.6% year over year. Six-month revenue was $2,576.7, up 13.0%, reflecting higher premiums and a reversal from investment losses to gains. Six-month underwriting results included $35.8 of favorable prior-year reserve development and $210.1 of pre-tax catastrophe losses. The 2021 catastrophe burden included Texas and surrounding-state freeze events; favorable development partly offset current-year losses.
For the first six months, Commercial Lines operating income before interest and taxes was $106.6 versus $109.9; Personal Lines was $114.0 versus $97.5. Commercial Lines’ six-month combined ratio increased to 99.4% from 97.4%; Personal Lines’ improved to 92.3% from 92.8%. In Q2, the total combined ratio improved to 94.4%, primarily as catastrophe losses fell year over year.
Financial Position, Cash Flow and Capital
At June 30, 2021, total assets were $13,728.1, total shareholders’ equity $3,154.0, cash and cash equivalents $106.4, investments $8,955.9, and debt $781.2. Debt’s estimated fair value was $860.9. Loss and LAE reserves were $6,343.4, compared with $6,024.0 at year-end 2020.
For the six months, operating cash flow was $309.0 versus $225.8; investing cash outflow was $160.6 and financing cash outflow was $162.6. Cash declined by $14.2 to $106.4. The company paid $50.6 in shareholder dividends and repurchased $118.6 of common stock. Its board increased the repurchase authorization to $1.3 billion in May; approximately $405 million remained available at quarter-end.
Total cash and investments were $9,062.3. Approximately 96% of fixed maturities were investment grade. Insurance-subsidiary statutory capital and surplus was $2,547.1, down $41.4 from year-end, primarily after a $255 million dividend to the holding company. Hanover Insurance’s risk-based capital ratio was 216% on the Company Action Level scale. The company reported $449.3 of holding-company fixed maturities and cash, $118.5 of FHLB borrowing capacity and no borrowings under its revolving credit facility.
Material Changes, Outlook and Risks
- Six-month net income rose $146.0 year over year, driven principally by the investment-results swing from losses in 2020 to gains in 2021, with a smaller contribution from higher operating income. Q2 operating income also benefited from lower catastrophe losses.
- Premium growth reflected rate increases, increased insured activity relative to pandemic-affected 2020, and the absence of approximately $30 million in personal-auto premium refunds made in 2020. Six-month operating income growth was partly offset by higher catastrophe losses and the absence of a $13.8 million Michigan premium-tax refund benefit recognized in 2020.
- Management said near-term pandemic impacts should be manageable, but their severity, duration and longer-term effects remain uncertain. It cited variants, vaccination rates, driving patterns, court backlogs and inflation as uncertainties. No specific earnings or financial guidance was provided in the supplied filing text.
- Management expects new-money fixed-income yields to remain below the embedded portfolio yield, putting pressure on fixed-maturity income. Higher interest rates reduced unrealized fixed-maturity gains during the first half; management said it did not intend or expect to need to sell the securities in loss positions before recovery.
- Key risks include severe weather and catastrophe losses, reserve-estimation uncertainty, claims inflation and social inflation, investment-market volatility and defaults, reinsurance availability and recoverability, competitive and regulatory limits on rates and underwriting, and continuing pandemic effects. Proposed legislation concerning retroactive pandemic business-interruption coverage could create material industry exposure if enacted; its impact was not estimable.
- Routine legal and regulatory matters were not expected to materially affect financial position, though they could materially affect a particular reporting period. The filing reported no material changes in market-risk exposures and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether premium growth and rate increases continue to offset claims-cost inflation and competitive or regulatory constraints.
- Commercial Lines catastrophe experience and the sustainability of favorable reserve development; reserve estimates may change as claims develop.
- How much reported earnings depend on equity-security fair-value changes and limited-partnership income, which management says can vary significantly.
- Whether pandemic-related legislation, Michigan auto-law developments, weather volatility or reinsurance conditions change the company’s exposure or capital needs.
- Insurance-subsidiary dividend capacity, statutory capital and RBC levels, and the pace of share repurchases relative to cash generation and liquidity.