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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
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.
6
Table of Contents
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 |
|
|