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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    

Commission File Number 1-13754

 

THE HANOVER INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-3263626

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

440 Lincoln Street, Worcester, Massachusetts 01653

(Address of principal executive offices) (Zip Code)

(508) 855-1000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbols

 

Name of each exchange on which registered 

Common Stock, $.01 par value

 

THG

 

New York Stock Exchange

7 5/8% Senior Debentures due 2025

 

THG

 

New York Stock Exchange

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares outstanding of the registrant’s common stock was 35,590,250 as of May 2, 2022.

 

 

 

 

 

 

 

 

 


 

 

 

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

 

2

 

 

 

 

Item 1.

Financial Statements

 

2

 

Consolidated Statements of Income

 

2

 

Consolidated Statements of Comprehensive Income

 

3

 

Consolidated Balance Sheets

 

4

 

Consolidated Statements of Shareholders’ Equity

 

5

 

Consolidated Statements of Cash Flows

 

6

 

Notes to Interim Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

Item 4.

Controls and Procedures

 

39

 

 

 

 

PART II.

OTHER INFORMATION

 

40

 

 

 

 

Item 1.

Legal Proceedings

 

40

 

 

 

 

Item 1A.

Risk Factors

 

40

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

Item 6.

Exhibits

 

43

 

 

 

 

SIGNATURES

 

44

 

 

 

 


Table of Contents

 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In millions, except per share data)

 

2022

 

 

2021

 

Revenues

 

 

 

 

 

 

 

 

Premiums

 

$

1,263.8

 

 

$

1,161.8

 

Net investment income

 

 

76.9

 

 

 

76.8

 

Net realized and unrealized investment gains (losses):

 

 

 

 

 

 

 

 

Net realized gains (losses) from sales and other

 

 

3.0

 

 

 

(1.6

)

Net change in fair value of equity securities

 

 

(18.0

)

 

 

39.1

 

Impairment losses on investments

 

 

(0.9

)

 

 

 

Total net realized and unrealized investment gains (losses)

 

 

(15.9

)

 

 

37.5

 

Fees and other income

 

 

5.9

 

 

 

6.0

 

Total revenues

 

 

1,330.7

 

 

 

1,282.1

 

Losses and expenses

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

787.5

 

 

 

781.3

 

Amortization of deferred acquisition costs

 

 

262.9

 

 

 

240.3

 

Interest expense

 

 

8.5

 

 

 

8.5

 

Other operating expenses

 

 

141.8

 

 

 

137.9

 

Total losses and expenses

 

 

1,200.7

 

 

 

1,168.0

 

Income from continuing operations before income taxes

 

 

130.0

 

 

 

114.1

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

Current

 

 

30.2

 

 

 

8.9

 

Deferred

 

 

(5.5

)

 

 

12.4

 

Total income tax expense

 

 

24.7

 

 

 

21.3

 

Income from continuing operations

 

 

105.3

 

 

 

92.8

 

Discontinued operations (net of taxes):

 

 

 

 

 

 

 

 

Loss from discontinued life businesses

 

 

(0.5

)

 

 

(0.1

)

Net income

 

$

104.8

 

 

$

92.7

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2.96

 

 

$

2.55

 

Discontinued operations (net of taxes):

 

 

 

 

 

 

 

 

Loss from discontinued life businesses

 

 

(0.01

)

 

 

 

Net income per share

 

$

2.95

 

 

$

2.55

 

Weighted average shares outstanding

 

 

35.5

 

 

 

36.4

 

Diluted:

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2.91

 

 

$

2.52

 

Discontinued operations (net of taxes):

 

 

 

 

 

 

 

 

Loss from discontinued life businesses

 

 

(0.01

)

 

 

(0.01

)

Net income per share

 

$

2.90

 

 

$

2.51

 

Weighted average shares outstanding

 

 

36.1

 

 

 

36.9

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

2


Table of Contents

 

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In millions)

 

2022

 

 

2021

 

Net income

 

$

104.8

 

 

$

92.7

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

Changes in net unrealized losses on investment securities:

 

 

 

 

 

 

 

 

Having no credit losses recognized in the

   Consolidated Statements of Income

 

 

(379.4

)

 

 

(185.5

)

Having credit losses recognized in the

   Consolidated Statements of Income

 

 

(0.5

)

 

 

 

Total available-for-sale securities

 

 

(379.9

)

 

 

(185.5

)

Pension and postretirement benefits:

 

 

 

 

 

 

 

 

Net change in net actuarial loss

 

 

1.1

 

 

 

0.7

 

Total other comprehensive loss, net of tax

 

 

(378.8

)

 

 

(184.8

)

Comprehensive loss

 

$

(274.0

)

 

$

(92.1

)

 

The accompanying notes are an integral part of these interim consolidated financial statements.

3


Table of Contents

 

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

March 31,

 

 

December 31,

 

(In millions, except share data)

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost of $7,644.8 and $7,514.8)

 

$

7,382.2

 

 

$

7,723.9

 

Equity securities, at fair value

 

 

607.0

 

 

 

661.3

 

Other investments

 

 

786.1

 

 

 

767.4

 

Total investments

 

 

8,775.3

 

 

 

9,152.6

 

Cash and cash equivalents

 

 

272.0

 

 

 

230.9

 

Accrued investment income

 

 

47.9

 

 

 

49.8

 

Premiums and accounts receivable, net

 

 

1,483.1

 

 

 

1,469.5

 

Reinsurance recoverable on paid and unpaid losses and unearned premiums

 

 

1,940.3

 

 

 

1,907.3

 

Deferred acquisition costs

 

 

552.8

 

 

 

552.0

 

Deferred income tax asset

 

 

43.4

 

 

 

 

Goodwill

 

 

178.8

 

 

 

178.8

 

Other assets

 

 

449.0

 

 

 

606.3

 

Assets of discontinued businesses

 

 

104.6

 

 

 

107.1

 

Total assets

 

$

13,847.2

 

 

$

14,254.3

 

Liabilities

 

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

6,512.2

 

 

$

6,447.6

 

Unearned premiums

 

 

2,760.4

 

 

 

2,734.9

 

Expenses and taxes payable

 

 

769.7

 

 

 

907.7

 

Deferred income tax liability

 

 

 

 

 

60.8

 

Reinsurance premiums payable

 

 

70.1

 

 

 

55.1

 

Debt

 

 

781.8

 

 

 

781.6

 

Liabilities of discontinued businesses

 

 

120.2

 

 

 

121.7

 

Total liabilities

 

 

11,014.4

 

 

 

11,109.4

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share; 20.0 million shares authorized; none issued

 

 

 

 

 

 

Common stock, par value $0.01 per share; 300.0 million shares authorized;

   60.5 million shares issued

 

 

0.6

 

 

 

0.6

 

Additional paid-in capital

 

 

1,887.8

 

 

 

1,887.2

 

Accumulated other comprehensive income (loss)

 

 

(256.6

)

 

 

122.2

 

Retained earnings

 

 

3,061.0

 

 

 

2,983.2

 

Treasury stock at cost (24.9 million and 25.0 million shares)

 

 

(1,860.0

)

 

 

(1,848.3

)

Total shareholders’ equity

 

 

2,832.8

 

 

 

3,144.9

 

Total liabilities and shareholders’ equity

 

$

13,847.2

 

 

$

14,254.3

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

4


Table of Contents

 

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In millions)

 

2022

 

 

2021

 

Preferred Stock

 

 

 

 

 

 

 

 

Balance at beginning and end of period

 

$

 

 

$

 

Common Stock

 

 

 

 

 

 

 

 

Balance at beginning and end of period

 

 

0.6

 

 

 

0.6

 

Additional Paid-in Capital

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

1,887.2

 

 

 

1,857.4

 

Settlement of accelerated share repurchases and other

 

 

0.6

 

 

 

6.6

 

Balance at end of period

 

 

1,887.8

 

 

 

1,864.0

 

Accumulated Other Comprehensive Income, net of tax

 

 

 

 

 

 

 

 

Net Unrealized Appreciation (Depreciation) on Investments:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

184.9

 

 

 

428.1

 

Net depreciation on available-for-sale securities

 

 

(379.9

)

 

 

(185.5

)

Balance at end of period

 

 

(195.0

)

 

 

242.6

 

Defined Benefit Pension and Postretirement Plans:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

(62.7

)

 

 

(55.6

)

Net amount recognized as net periodic benefit cost

 

 

1.1

 

 

 

0.7

 

Balance at end of period

 

 

(61.6

)

 

 

(54.9

)

Total accumulated other comprehensive income (loss)

 

 

(256.6

)

 

 

187.7

 

Retained Earnings

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

2,983.2

 

 

 

2,668.0

 

Net income

 

 

104.8

 

 

 

92.7

 

Dividends to shareholders

 

 

(27.0

)

 

 

(25.8

)

Balance at end of period

 

 

3,061.0

 

 

 

2,734.9

 

Treasury Stock

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

(1,848.3

)

 

 

(1,696.3

)

Shares purchased at cost

 

 

(16.3

)

 

 

(50.3

)

Net shares reissued at cost under employee stock-based

   compensation plans

 

 

4.6

 

 

 

6.2

 

Balance at end of period

 

 

(1,860.0

)

 

 

(1,740.4

)

Total shareholders’ equity

 

$

2,832.8

 

 

$

3,046.8

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

5


Table of Contents

 

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In millions)

 

2022

 

 

2021

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

104.8

 

 

$

92.7

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Net realized and unrealized investment (gains) losses

 

 

16.0

 

 

 

(38.3

)

Net amortization and depreciation

 

 

3.3

 

 

 

3.8

 

Stock-based compensation expense

 

 

6.7

 

 

 

5.6

 

Amortization of defined benefit plan costs

 

 

1.4

 

 

 

0.8

 

Deferred income tax expense (benefit)

 

 

(5.5

)

 

 

12.6

 

Change in deferred acquisition costs

 

 

(0.9

)

 

 

(13.5

)

Change in premiums receivable, net of reinsurance premiums payable

 

 

1.3

 

 

 

(21.3

)

Change in loss, loss adjustment expense and unearned premium reserves

 

 

90.3

 

 

 

270.5

 

Change in reinsurance recoverable

 

 

(33.0

)

 

 

(8.5

)

Change in expenses and taxes payable

 

 

(103.4

)

 

 

(143.6

)

Cash received for MCCA refund, partially offset by payments made to policyholders

 

 

148.9

 

 

 

Other, net

 

 

(29.8

)

 

 

(19.0

)

Net cash provided by operating activities

 

 

200.1

 

 

 

141.8

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Proceeds from disposals and maturities of fixed maturities

 

 

228.9

 

 

 

528.0

 

Proceeds from disposals of equity securities and other investments

 

 

75.2

 

 

 

66.5

 

Purchase of fixed maturities

 

 

(372.8

)

 

 

(617.2

)

Purchase of equity securities and other investments

 

 

(38.6

)

 

 

(53.6

)

Capital expenditures

 

 

(4.9

)

 

 

(2.3

)

Net cash used in investing activities

 

 

(112.2

)

 

 

(78.6

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of employee stock options

 

 

7.4

 

 

 

5.8

 

Dividends paid to shareholders

 

 

(26.7

)

 

 

(25.5

)

Repurchases of common stock

 

 

(16.3

)

 

 

(45.3

)

Other financing activities

 

 

(11.2

)

 

 

(6.7

)

Net cash used in financing activities

 

 

(46.8

)

 

 

(71.7

)

Net change in cash and cash equivalents

 

 

41.1

 

 

 

(8.5

)

Cash and cash equivalents, beginning of period

 

 

230.9

 

 

 

120.6

 

Cash and cash equivalents, end of period

 

$

272.0

 

 

$

112.1

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

 

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of The Hanover Insurance Group, Inc. and its subsidiaries (“THG” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the requirements of Form 10-Q. Certain financial information that is provided in annual financial statements, but is not required in interim reports, has been omitted.

The interim consolidated financial statements of THG include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America, THG’s principal property and casualty insurance companies; and other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 8 – “Segment Information.” The interim consolidated financial statements also include the Company’s discontinued operations, consisting primarily of the Company’s former accident and health and life insurance businesses. All intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the opinion of the Company’s management, the accompanying interim consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair presentation of the financial position and results of operations. The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2022.

2. New Accounting Pronouncements

Recently Issued Standards

In March 2022, the Financial Accounting Standards Board issued Accounting Standards Codification (“ASC”) Update No. 2022-02, Financial Instruments – Credit Losses (Topic 326) (“ASC Update No. 2022-02”). This guidance amends ASC Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments, (“ASC Update No. 2016-13”) which the Company implemented effective January 1, 2020. This ASC update eliminates the recognition and measurement guidance for Troubled Debt Restructurings (“TDRs”), while enhancing disclosure requirements for certain loan refinancing and restructurings. Additionally, this update requires that an entity disclose current-period write-offs by year of origination for financing receivables and net investments in leases. ASC Update No. 2022-02 should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, which has the option to be applied through a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASC Update No. 2016-13, this update is effective for fiscal years beginning after December 15, 2022, including interim periods. Early adoption is permitted for those entities that have adopted ASC Update No. 2016-13. The Company does not expect the implementation of this guidance to have a material impact on its financial position or results of operations.

     

     

     

7


Table of Contents

 

 

3. Investments

A. Fixed maturities

The amortized cost and fair value of available-for-sale fixed maturities were as follows:

 

 

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance

 

 

Net of Allowance

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

for Credit

 

 

for Credit

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(in millions)

 

Cost

 

 

Losses

 

 

Losses

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Treasury and government agencies

 

$

404.0

 

 

$

 

 

$

404.0

 

 

$

2.1

 

 

$

24.4

 

 

$

381.7

 

Foreign government

 

 

2.2

 

 

 

 

 

 

2.2

 

 

 

0.1

 

 

 

 

 

 

2.3

 

Municipal

 

 

1,189.6

 

 

 

 

 

 

1,189.6

 

 

 

8.7

 

 

 

62.4

 

 

 

1,135.9

 

Corporate

 

 

4,000.3

 

 

 

(0.9

)

 

 

3,999.4

 

 

 

35.2

 

 

 

123.1

 

 

 

3,911.5