Hanover Insurance Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Comparisons are with the three months ended March 31, 2022 unless otherwise noted. The company operates through Core Commercial, Specialty, Personal Lines and Other, with a strategy centered on independent agents.
Financial performance and condition
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenues | $1,443.7 million | $1,330.7 million |
| Net premiums written | $1,421.5 million | $1,312.3 million |
| Net income (loss) | $(12.0) million; $(0.34) per diluted share | $104.9 million; $2.90 per diluted share |
| Operating income before interest and taxes (non-GAAP) | $13.2 million | $154.4 million |
| Net investment income | $78.7 million | $76.9 million |
| Net realized and unrealized investment losses | $(23.0) million | $(15.9) million |
| Combined ratio | 104.4% | 93.4% |
| Cash from operating activities | $18.1 million | $200.1 million |
| Cash and cash equivalents | $181.5 million at March 31 | $305.0 million at December 31, 2022 |
| Total debt | $782.6 million carrying value | $782.4 million at December 31, 2022 |
Total assets were $14,091.7 million and shareholders’ equity was $2,389.0 million at March 31, 2023. The fixed-maturity portfolio had a 3.27% earned yield, versus 2.95% a year earlier; total portfolio yield was 3.34%, versus 3.52%. Fixed maturities had $707.1 million of gross unrealized losses, down from $817.7 million at year-end 2022.
Material changes and segment results
- Premium growth was broad-based: net premiums written increased 7.3% in Core Commercial, 7.1% in Specialty and 10.1% in Personal Lines, driven mainly by pricing and new business.
- Pre-tax catastrophe losses rose to $175.0 million from $45.5 million, following widespread wind, hail and tornadic activity and severe freeze events.
- Underwriting results weakened materially: the combined ratio rose to 104.4% from 93.4%. Core Commercial’s ratio was 104.7%, Specialty’s 89.9%, and Personal Lines’ 112.2%.
- Personal Lines recorded a $72.2 million underwriting loss, compared with a $12.3 million profit a year earlier. Its $89.6 million of catastrophe losses and higher current-year claim severity contributed to the decline.
- Core Commercial reported a $24.8 million underwriting loss, versus a $32.2 million profit, primarily reflecting higher catastrophe losses. Specialty remained profitable, with underwriting income of $30.7 million versus $33.9 million.
- Prior-year reserves developed favorably by $3.0 million, compared with $6.0 million of favorable development in Q1 2022. Specialty’s favorable development was partly offset by unfavorable development in Personal Lines and Core Commercial.
Cash, capital and liquidity
Operating cash flow fell to $18.1 million, partly because Q1 2022 included a $183.3 million Michigan Catastrophic Claims Association surplus refund, of which $34.4 million was remitted to policyholders. The company also cited higher claim payments, partly offset by higher premiums. Investing activities used $106.5 million and financing activities used $35.1 million; the latter primarily reflected the $28.9 million quarterly dividend payment.
Insurance-subsidiary statutory capital and surplus was $2,674.5 million, down from $2,690.4 million at year-end. Hanover Insurance’s reported RBC ratio was 204% on the Industry Scale and 409% on the Regulatory Scale. The holding company had approximately $299.2 million of fixed maturities and cash. The company reported $117.2 million of Federal Home Loan Bank borrowing capacity and no borrowings under that facility; it also reported no borrowings under its $200 million revolving credit facility and compliance with debt covenants.
Outlook, commentary and risks
- The filing provides no quantitative earnings or premium guidance. Management said it expects sufficient positive operating cash flow to meet current operating and other cash requirements, and considers holding-company assets sufficient for short-term obligations.
- Management described persistent inflation, supply-chain disruption and elevated repair, vehicle and building costs as drivers of higher claim severity, particularly in automobile and homeowners lines. It is pursuing rate increases, underwriting actions and risk selection, subject to competition and regulation.
- Management said it does not intend, and does not expect to be required, to sell fixed-maturity securities in unrealized loss positions before recovery. It cautioned that unexpected liquidity needs or adverse credit developments could prompt sales or impairments.
- Investment and credit risks include market volatility, higher interest rates, wider credit spreads, potential defaults and tighter lending conditions following regional-bank stress. Q1 included $10.3 million of losses on securities the company intended to sell and $4.1 million of estimated mortgage-loan credit losses.
- Other risks identified include catastrophe frequency and severity, reserve-estimation uncertainty, reinsurance collectability and cost, regulatory limits on rates and underwriting, residual-market participation, litigation and social inflation, and economic slowdown. Legal proceedings were not expected to materially affect financial position, though they could affect a particular period’s results.
- The company amended its revolving credit agreement in March 2023 to replace LIBOR with SOFR; other material terms were unchanged. It implemented long-duration insurance accounting guidance effective January 1, 2023, with no material financial impact.
Important facts for investors to verify
- Whether catastrophe activity and inflation-driven claim severity persist, and whether filed rate increases keep pace with loss costs.
- Subsequent Personal Lines and Core Commercial underwriting results, including the trend in combined ratios and prior-year reserve development.
- Changes in fixed-maturity unrealized losses, credit impairments, mortgage-loan allowances and the company’s ability to avoid selling securities at a loss.
- Operating cash generation, holding-company liquidity, statutory capital and RBC ratios, and the availability or use of credit facilities.
- Regulatory, litigation and reinsurance developments that could affect pricing, claims, capital or results.