Item 1. Financial Statements
ITEM 1 - FINANCIAL STATEMENTS
THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
Six Months Ended
June 30,
June 30,
(In millions, except per share data)
2020
2019
2020
2019
Revenues
Premiums
$
1,096.6
$
1,111.0
$
2,238.0
$
2,206.1
Net investment income
57.7
69.6
127.3
139.8
Net realized and unrealized investment gains (losses):
Net realized gains from sales and other
0.8
0.8
3.9
0.4
Net change in fair value of equity securities
61.5
11.7
( 74.7
)
60.3
Impairment recoveries (losses) on investments
1.4
( 0.4
)
( 27.1
)
( 0.4
)
Total net realized and unrealized investment gains (losses)
63.7
12.1
( 97.9
)
60.3
Fees and other income
6.3
5.9
13.1
11.9
Total revenues
1,224.3
1,198.6
2,280.5
2,418.1
Losses and expenses
Losses and loss adjustment expenses
712.0
717.7
1,440.2
1,417.3
Amortization of deferred acquisition costs
237.3
230.5
474.2
460.0
Interest expense
9.4
9.3
18.8
18.7
Other operating expenses
122.5
131.3
258.1
263.7
Total losses and expenses
1,081.2
1,088.8
2,191.3
2,159.7
Income from continuing operations before income taxes
143.1
109.8
89.2
258.4
Income tax expense (benefit):
Current
18.5
20.4
39.8
32.6
Deferred
9.3
( 1.2
)
( 27.2
)
12.6
Effect of new tax regulations on Chaucer gain on sale
—
5.6
—
5.6
Total income tax expense
27.8
24.8
12.6
50.8
Income from continuing operations
115.3
85.0
76.6
207.6
Discontinued operations (net of taxes):
Sale of Chaucer business
—
( 9.9
)
—
( 9.0
)
Loss from Chaucer business
—
( 0.2
)
—
( 0.5
)
Loss from discontinued life businesses
( 0.1
)
( 0.9
)
( 1.4
)
( 1.7
)
Net income
$
115.2
$
74.0
$
75.2
$
196.4
Earnings per common share:
Basic:
Income from continuing operations
$
3.03
$
2.09
$
2.01
$
5.10
Discontinued operations (net of taxes):
Sale of Chaucer business
—
( 0.24
)
—
( 0.22
)
Loss from Chaucer business
—
( 0.01
)
—
( 0.01
)
Loss from discontinued life businesses
—
( 0.02
)
( 0.04
)
( 0.04
)
Net income per share
$
3.03
$
1.82
$
1.97
$
4.83
Weighted average shares outstanding
38.0
40.7
38.2
40.7
Diluted:
Income from continuing operations
$
3.01
$
2.06
$
1.98
$
5.04
Discontinued operations (net of taxes):
Sale of Chaucer business
—
( 0.24
)
—
( 0.22
)
Loss from Chaucer business
—
( 0.01
)
—
( 0.01
)
Loss from discontinued life businesses
—
( 0.02
)
( 0.03
)
( 0.04
)
Net income per share
$
3.01
$
1.79
$
1.95
$
4.77
Weighted average shares outstanding
38.3
41.2
38.6
41.2
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
Six Months Ended
June 30,
June 30,
(In millions)
2020
2019
2020
2019
Net income
$
115.2
$
74.0
$
75.2
$
196.4
Other comprehensive income, net of tax:
Available-for-sale securities
Changes in net unrealized gains on investment
securities:
Having no credit losses recognized in the
Consolidated Statements of Income
241.7
101.1
170.9
216.1
Having credit losses recognized in the
Consolidated Statements of Income
10.0
0.5
( 2.4
)
1.9
Total available-for-sale securities
251.7
101.6
168.5
218.0
Pension and postretirement benefits:
Net change in net actuarial loss
1.2
2.2
2.4
4.5
Cumulative foreign currency translation adjustment:
Amount recognized as cumulative foreign currency
translation during the period
—
0.6
—
0.7
Total other comprehensive income, net of tax
252.9
104.4
170.9
223.2
Comprehensive income
$
368.1
$
178.4
$
246.1
$
419.6
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30,
December 31,
(In millions, except share data)
2020
2019
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $ 6,627.5 and $ 6,452.2 )
$
7,079.0
$
6,687.1
Equity securities, at fair value
458.9
575.7
Other investments
763.6
733.2
Total investments
8,301.5
7,996.0
Cash and cash equivalents
182.6
215.7
Accrued investment income
51.5
53.0
Premiums and accounts receivable, net
1,296.2
1,260.4
Reinsurance recoverable on paid and unpaid losses and unearned premiums
1,813.7
1,814.0
Deferred acquisition costs
461.7
467.4
Goodwill
178.8
178.8
Other assets
447.4
402.4
Assets of discontinued businesses
105.2
102.8
Total assets
$
12,838.6
$
12,490.5
Liabilities
Loss and loss adjustment expense reserves
$
5,837.3
$
5,654.4
Unearned premiums
2,408.1
2,416.7
Expenses and taxes payable
613.3
627.7
Deferred income tax liability
74.9
51.8
Reinsurance premiums payable
62.2
53.4
Debt
652.8
653.4
Liabilities of discontinued businesses
118.3
116.9
Total liabilities
9,766.9
9,574.3
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
1,866.6
1,837.3
Accumulated other comprehensive income
323.5
152.6
Retained earnings
2,435.1
2,410.9
Treasury stock at cost ( 22.6 million and 22.1 million shares)
( 1,554.1
)
( 1,485.2
)
Total shareholders’ equity
3,071.7
2,916.2
Total liabilities and shareholders’ equity
$
12,838.6
$
12,490.5
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended
Six Months Ended
June 30,
June 30,
(In millions)
2020
2019
2020
2019
Preferred Stock
Balance at beginning and end of period
$
—
$
—
$
—
$
—
Common Stock
Balance at beginning and end of period
0.6
0.6
0.6
0.6
Additional Paid-in Capital
Balance at beginning of period
1,861.6
1,821.7
1,837.3
1,871.8
Settlement and prepayment of accelerated share
repurchases and other
5.0
11.4
29.3
( 38.7
)
Balance at end of period
1,866.6
1,833.1
1,866.6
1,833.1
Accumulated Other Comprehensive Income, net of tax
Net Unrealized Appreciation (Depreciation) on Investments:
Balance at beginning of period
132.8
90.7
216.0
( 27.2
)
Net appreciation on available-for-sale securities
251.7
101.6
168.5
218.0
Adoption of Accounting Standards Updates (No. 2017-08
in 2019)
—
—
—
1.5
Balance at end of period
384.5
192.3
384.5
192.3
Defined Benefit Pension and Postretirement Plans:
Balance at beginning of period
( 62.2
)
( 86.3
)
( 63.4
)
( 88.6
)
Net amount recognized as net periodic benefit
1.2
2.2
2.4
4.5
Balance at end of period
( 61.0
)
( 84.1
)
( 61.0
)
( 84.1
)
Cumulative Foreign Currency Translation Adjustment:
Balance at beginning of period
—
( 0.6
)
—
( 0.7
)
Amount recognized as cumulative foreign currency
translation during the period
—
0.6
—
0.7
Balance at end of period
—
—
—
—
Total accumulated other comprehensive income
323.5
108.2
323.5
108.2
Retained Earnings
Balance at beginning of period
2,344.9
2,278.7
2,410.9
2,182.3
Cumulative effect of accounting change, net of taxes
—
—
( 0.9
)
( 1.5
)
Balance at beginning of period, as adjusted
2,344.9
2,278.7
2,410.0
2,180.8
Net income
115.2
74.0
75.2
196.4
Dividends to shareholders
( 25.0
)
( 24.6
)
( 50.1
)
( 49.1
)
Balance at end of period
2,435.1
2,328.1
2,435.1
2,328.1
Treasury Stock
Balance at beginning of period
( 1,541.1
)
( 1,177.8
)
( 1,485.2
)
( 983.5
)
Shares purchased at cost
( 14.4
)
( 155.1
)
( 73.6
)
( 355.1
)
Net shares reissued at cost under employee stock-based
compensation plans
1.4
4.0
4.7
9.7
Balance at end of period
( 1,554.1
)
( 1,328.9
)
( 1,554.1
)
( 1,328.9
)
Total shareholders’ equity
$
3,071.7
$
2,941.1
$
3,071.7
$
2,941.1
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
(In millions)
2020
2019
Cash Flows From Operating Activities
Net income
$
75.2
$
196.4
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized investment (gains) losses
98.1
( 60.3
)
Sale of Chaucer business
—
9.0
Net amortization and depreciation
9.5
12.0
Stock-based compensation expense
9.5
8.6
Amortization of defined benefit plan costs
3.0
5.7
Deferred income tax expense (benefit)
( 26.8
)
12.6
Change in deferred acquisition costs
5.6
( 4.3
)
Change in premiums receivable, net of reinsurance premiums payable
( 27.0
)
( 47.5
)
Change in loss, loss adjustment expense and unearned premium reserves
174.6
231.8
Change in reinsurance recoverable
0.2
( 66.8
)
Change in expenses and taxes payable
( 61.3
)
( 80.8
)
Other, net
( 34.8
)
( 65.8
)
Net cash provided by operating activities
225.8
150.6
Cash Flows From Investing Activities
Proceeds from disposals and maturities of fixed maturities
643.3
490.1
Proceeds from disposals of equity securities and other investments
136.2
48.9
Purchase of fixed maturities
( 790.4
)
( 691.4
)
Purchase of equity securities and other investments
( 138.0
)
( 91.2
)
Capital expenditures
( 7.8
)
( 6.5
)
Net cash proceeds from sale of Chaucer-related Irish and Australian entities,
partially offset by cash transferred
—
34.7
Net cash used in investing activities
( 156.7
)
( 215.4
)
Cash Flows From Financing Activities
Proceeds from exercise of employee stock options
4.5
10.5
Change in cash collateral related to securities lending program
—
8.3
Dividends paid to shareholders
( 49.5
)
( 241.5
)
Repurchases of common stock
( 49.3
)
( 400.0
)
Repayment of debt
( 0.9
)
( 151.1
)
Other financing activities
( 7.0
)
( 5.6
)
Net cash used in financing activities
( 102.2
)
( 779.4
)
Net change in cash and cash equivalents
( 33.1
)
( 844.2
)
Net change in cash related to discontinued operations
—
3.3
Cash and cash equivalents, beginning of period
215.7
1,020.7
Cash and cash equivalents, end of period
$
182.6
$
179.8
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 companies; and other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 9 – “Segment Information”. The interim consolidated financial statements also include the Company’s discontinued operations, consisting of the Company’s accident and health and former life insurance businesses, as well as the Company’s former Chaucer business. 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 and 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 six months ended June 30, 2020 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 (“SEC”) on February 24, 2020.
2. New Accounting Pronouncements
Recently Implemented Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASC Update No. 2016-13, (Topic 326) Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASC Update No. 2016-13”) . This ASC update introduces new guidance for the accounting for credit losses on financial instruments within its scope. A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider both historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments. The estimated credit losses and subsequent adjustment to such loss estimates, will be recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings. ASC Update No. 2016-13 also modifies the impairment model for available-for-sale debt securities. The new model will require an estimate of expected credit losses only when the fair value is below the amortized cost of the asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer affect the determination of whether a credit loss exists. In addition, credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASC Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses , which explicitly states that receivables arising from operating leases are not within the scope of Subtopic 326-20.
In 2019 and 2020, the FASB issued several updates to ASC Update No. 2016-13, including the issuance in April 2019 of ASC Update 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments , the issuance in May 2019 of ASC Update 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, the issuance in November 2019 of ASC Update No. 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses and the issuance in February 2020 of ASC Update 2020-02, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) . The Company implemented this guidance effective January 1, 2020 and it did not have a material impact on its financial position or results of operations.
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In August 2018, the FASB issued ASC Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . This ASC update requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract consistent with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting agreement, and apply impairment guidance consistent with long-lived assets. ASC Update No. 2018-15 also provides specific guidelines related to the presentation of these capitalized implementation costs and related expenses in the financial statements. The Company implemented this guidance prospectively, effective January 1, 2020 , and it did not have a material impact on its financial position or results of operations.
In August 2018, the FASB issued ASC Update No. 2018-13 (Topic 820) Fair Value Measurement, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement . The update removes the requirement for disclosure of the following: 1) the amount and reasons for transfers between level 1 and level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for level 3 fair value measurements. This update also added a requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements, in addition to other fair value disclosure modifications. This update required both prospective and retrospective application to certain disclosures upon implementation. The Company implemented this guidance effective January 1, 2020 and it did not have an impact on the Company’s financial position or results of operations as the update is disclosure related.
In January 2017, the FASB issued ASC Update No. 2017-04, (Topic 350) Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment . This guidance eliminates step 2 from the goodwill impairment test. Instead, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, including any applicable income tax effects, and recognize an impairment for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company implemented this guidance effective January 1, 2020 and it did not have a material impact on its financial position or results of operations.
Recently Issued Standards
In January 2020, the FASB issued ASC Update No. 2020-01 Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) . This ASC update clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when using the measurement alternative under ASC 321. It also clarifies the accounting for certain forward contracts and purchased options accounted for under ASC 815. The updated guidance is effective for annual and interim periods beginning after December 15, 2020. The Company does not expect the adoption of ASC Update No. 2020-01 to have a material impact on its financial position or results of operations.
In December 2019, the FASB issued ASC Update No. 2019-12 Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes . This ASC update removes certain exceptions to the general principles in ASC 740, Income Taxes , including intraperiod tax allocation when there is a loss from continuing operations, foreign subsidiary treatment under certain conditions and for calculating interim income taxes when the year-to-date loss exceeds the anticipated loss. This update also clarifies and amends existing guidance related to changes in tax laws, business combinations and employee stock plans, among others. The updated guidance is effective for interim and annual periods beginning after December 15, 2020. Early adoption is permitted, including interim periods. The Company does not expect the adoption of ASC Update No. 2019-12 to have a material effect on its financial position or results of operations.
In August 2018, the FASB issued ASC Update No. 2018-14 (Topic 715-20) Compensation – Retirement Benefits – Defined Benefit Plans – General – Disclosure Framework – Changes to the Disclosure Requirements for the Defined Benefit Plans. This ASC update modifies disclosures related to defined benefit pension or other postretirement plans. This ASC update removes the disclosure of amounts in accumulated other comprehensive income expected to be recognized over the next fiscal year and the effects of a one percentage point change of health care cost trends on net periodic benefit costs and postretirement benefit obligations and clarifies the specific requirements of disclosures related to the projected benefit obligation and accumulated benefit obligation. This ASC update also adds disclosures related to weighted average crediting rates for cash balance plans and requires disclosure of an explanation of any significant gains and losses related to changes in benefit obligations for the period. The amendments in this ASC update are effective for fiscal years ending after December 15, 2020, and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company does not expect the adoption of ASC Update No. 2018-14 to have a material effect on its financial position or results of operations as the update is disclosure-related.
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3. Investments
A. Fixed maturities
The amortized cost and fair value of available-for-sale fixed maturities were as follows:
June 30, 2020
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
$
286.8
$
—
$
286.8
$
20.1
$
—
$
306.9
Foreign government
4.2
—
4.2
0.5
—
4.7
Municipal
918.2
—
918.2
50.4
0.3
968.3
Corporate
3,775.2
3.8
3,771.4
293.3
3.7
4,061.0
Residential mortgage-backed
922.3
—
922.3
42.2
—
964.5
Commercial mortgage-backed
659.2
—
659.2
47.2
0.3
706.1
Asset-backed
65.4
—
65.4
2.1
—
67.5
Total fixed maturities
$
6,631.3
$
3.8
$
6,627.5
$
455.8
$
4.3
$
7,079.0
December 31, 2019
Gross
Gross
OTTI
Amortized
Unrealized
Unrealized
Unrealized
(in millions)
Cost
Gains
Losses
Fair Value
Losses
U.S. Treasury and government agencies
$
342.0
$
9.1
$
1.3
$
349.8
$
—
Foreign government
15.7
0.4
—
16.1
—
Municipal
807.1
27.6
1.2
833.5
—
Corporate
3,653.5
161.6
3.9
3,811.2
3.0
Residential mortgage-backed
905.4
17.1
1.1
921.4
—
Commercial mortgage-backed
666.4
25.6
0.1
691.9
—
Asset-backed
62.1
1.1
—
63.2
—
Total fixed maturities
$
6,452.2
$
242.5
$
7.6
$
6,687.1
$
3.0
As of December 31, 2019, other-than-temporary impairments (“OTTI”) unrealized losses in the table above represents OTTI recognized in accumulated other comprehensive income (“AOCI”). This amount excludes net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date of $ 4.2 million.
The Company deposits funds with various state and governmental authorities. For a discussion of the Company’s deposits with state and governmental authorities, see also Note 3 – “Investments” of the Notes to Consolidated Financial Statements in the Company’s 2019 Annual Report on Form 10-K.
The amortized cost and fair value by maturity periods for fixed maturities are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Company may have the right to put or sell the obligations back to the issuers.
June 30, 2020
Amortized Cost, net
of Allowance for
Fair
(in millions)
Credit Losses
Value
Due in one year or less
$
345.6
$
350.2
Due after one year through five years
1,902.4
2,023.9
Due after five years through ten years
2,228.8
2,432.1
Due after ten years
503.8
534.7
4,980.6
5,340.9
Mortgage-backed and asset-backed securities
1,646.9
1,738.1
Total fixed maturities
$
6,627.5
$
7,079.0
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B. Fixed maturity securities in an unrealized loss position
The following tables provide information about the Company’s available-for-sale fixed maturity securities that were in an unrealized loss position at June 30, 2020 and December 31, 2019 including the length of time the securities have been in an unrealized loss position:
June 30, 2020
12 months or less
Greater than 12 months
Total
Gross
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Unrealized
Fair
(in millions)
Losses
Value
Losses
Value
Losses
Value
Investment grade:
U.S. Treasury and government agencies
$
—
$
0.5
$
—
$
—
$
—
$
0.5
Municipal
0.3
17.0
—
—
0.3
17.0
Corporate
0.6
41.6
—
—
0.6
41.6
Residential mortgage-backed
—
14.1
—
0.5
—
14.6
Commercial mortgage-backed
0.3
30.3
—
—
0.3
30.3
Asset-backed
—
1.4
—
—
—
1.4
Total investment grade
1.2
104.9
—
0.5
1.2
105.4
Below investment grade:
Corporate
3.1
90.4
—
—
3.1
90.4
Total fixed maturities
$
4.3
$
195.3
$
—
$
0.5
$
4.3
$
195.8
December 31, 2019
12 months or less
Greater than 12 months
Total
Gross
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Unrealized
Fair
(in millions)
Losses
Value
Losses
Value
Losses
Value
Investment grade:
U.S. Treasury and government agencies
$
1.3
$
73.0
$
—
$
9.3
$
1.3
$
82.3
Municipal
1.1
72.5
0.1
5.6
1.2
78.1
Corporate
0.7
86.5
0.1
4.7
0.8
91.2
Residential mortgage-backed
0.7
69.2
0.4
34.4
1.1
103.6
Commercial mortgage-backed
0.1
40.6
—
0.9
0.1
41.5
Asset-backed
—
—
—
1.7
—
1.7
Total investment grade
3.9
341.8
0.6
56.6
4.5
398.4
Below investment grade:
Corporate
2.2
27.1
0.9
9.0
3.1
36.1
Total fixed maturities
$
6.1
$
368.9
$
1.5
$
65.6
$
7.6
$
434.5
The Company views gross unrealized losses on fixed maturities as non-credit related and through its assessment of unrealized losses has determined that these securities will recover, allowing the Company to realize the anticipated long-term economic value. The Company currently does not intend to sell nor does it expect to be required to sell these securities before recovery of their amortized cost. The Company employs a systematic methodology to evaluate declines in fair value below amortized cost for fixed maturity securities. In determining impairments, the Company evaluates several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the degree to which the fair value of an issuer’s securities is below the Company’s amortized cost. The Company also considers any factors that might raise doubt about the issuer’s ability to make contractual payments as they come due and whether the Company expects to recover the entire amortized cost basis of the security.
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C. Proceeds from sales
The proceeds from sales of available-for-sale fixed maturities and gross realized gains and gross realized losses on those sales were as follows:
Three Months Ended June 30,
2020
2019
Proceeds from
Gross
Gross
Proceeds from
Gross
Gross
(in millions)
Sales
Gains
Losses
Sales
Gains
Losses
Fixed maturities
$
91.5
$
2.3
$
2.3
$
162.5
$
1.6
$
1.1
Six Months Ended June 30,
2020
2019
Proceeds from
Gross
Gross
Proceeds from
Gross
Gross
(in millions)
Sales
Gains
Losses
Sales
Gains
Losses
Fixed maturities, excluding held-for-sale (Chaucer)
$
157.5
$
5.0
$
2.7
$
222.6
$
2.6
$
2.6
Fixed maturities, held-for-sale
—
—
—
0.3
—
—
Total fixed maturities
$
157.5
$
5.0
$
2.7
$
222.9
$
2.6
$
2.6
D. Impairments
For the three months ended June 30, 2020, the Company recognized in earnings a $ 1.4 million net recovery in impairment losses on fixed maturities, primarily resulting from increased market values during the quarter on credit losses recognized in the first quarter of 2020. For the six months ended June 30, 2020, the Company recognized $ 27.1 million of impairment losses, consisting primarily of $ 20.8 million on fixed maturities and $ 4.8 million on mortgage loans. Impairments on fixed maturities included $ 16.2 million categorized as intend-to-sell and $ 4.6 million of credit-related losses. For the three and six months ended June 30, 2019, total impairments on fixed maturities recognized in earnings was $ 0.4 million.
See Note 2, “New Accounting Pronouncements — Recently Implemented Standards ”, for a discussion of new guidance effective January 1, 2020, which impacts the accounting for expected credit losses on fixed maturity securities and mortgage loans. Under the new guidance, credit losses on fixed maturities continue to be measured based on the present value of expected future cash flows compared to amortized cost; however, credit losses on available-for-sale fixed maturities are now recognized through an allowance instead of a direct write down of amortized cost. The new guidance stipulates that recoveries of previously recorded credit losses are recorded immediately as a reversal of the allowance. In addition, the allowance is limited to the amount that fair value is less than amortized cost and therefore, changes in the fair value of investments due to reasons other than credit could result in increases or decreases in the allowance. Changes in the allowance for credit losses are recorded in net realized and unrealized investment gains (losses). At June 30, 2020 and December 31, 2019, the allowance for credit losses on mortgage loans was $ 6.1 million and $ 1.3 million, respectively. The allowance for credit losses on available-for-sale securities was $ 3.8 million at June 30, 2020. There was no allowance for credit losses on available-for-sale securities at December 31, 2019.
The methodology and significant inputs used to measure the amount of credit losses were as follows:
Fixed maturities, Corporate bonds – the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating, asset duration and loss-given-default factors based on security type. These factors are based on historical data provided by an independent third-party rating agency. In addition, other market data relevant to the realizability of contractual cash flows may be considered, including current conditions and reasonable and supportable forecasts.
Mortgage loans – the Company utilized a model that estimates expected losses based on mortgage risk rating and risk factors based on property type, such as office, retail, lodging, multi-family and industrial. Expected loss ratios are based on historical data provided by an independent third-party rating agency. The risk factors, based on property characteristics and metrics including the geographic market, are predominantly driven by loan-to-value and debt service coverage ratios. An adjustment to ratings may be made to reflect current conditions and to incorporate reasonable and supportable forecasts, such as volatility of cash flows and valuation.
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E. Equity securities
Equity securities are carried at fair value and all increases or decreases in fair value are reported in net realized and unrealized investment gains (losses) on the Consolidated Statements of Income. The following table provides pre-tax net realized and unrealized gains (losses) on equity securities:
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2020
2019
2020
2019
Net gains (losses) recognized during the period
$
61.5
$
11.7
$
( 74.7
)
$
60.3
Less: net (losses) gains recognized on equity securities sold
during the period
( 15.8
)
0.1
( 16.4
)
1.2
Net unrealized gains (losses) recognized during the period on equity
securities still held
$
77.3
$
11.6
$
( 58.3
)
$
59.1
4. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants. The Company emphasizes the use of observable market data whenever available in determining fair value. Fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation. A hierarchy of the three broad levels of fair value is as follows, with the highest priority given to Level 1 as these are the most observable, and the lowest priority given to Level 3:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.
Level 3 – Unobservable inputs that are supported by little or no market activity.
When more than one level of input is used to determine fair value, the financial instrument is classified as Level 2 or 3 according to the lowest level input that has a significant impact on the fair value measurement.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments and have not changed since last year.
Fixed Maturities
Level 1 securities generally include U.S. Treasury issues and other securities that are highly liquid and for which quoted market prices are available. Level 2 securities are valued using pricing for similar securities and pricing models that incorporate observable inputs including, but not limited to yield curves and issuer spreads. Level 3 securities include issues for which little observable data can be obtained, primarily due to the illiquid nature of the securities, and for which significant inputs used to determine fair value are based on the Company’s own assumptions.
The Company utilizes a third party pricing service for the valuation of the majority of its fixed maturity securities and receives one quote per security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value for those securities using pricing techniques based on a market approach. Inputs into the fair value pricing common to all asset classes include: benchmark U.S. Treasury security yield curves; reported trades of identical or similar fixed maturity securities; broker/dealer quotes of identical or similar fixed maturity securities and structural characteristics such as maturity date, coupon, mandatory principal payment dates, frequency of interest and principal payments, and optional redemption features. Inputs into the fair value applications that are unique by asset class include, but are not limited to:
•
U.S. government agencies – determination of direct versus indirect government support and whether any contingencies exist with respect to the timely payment of principal and interest.
•
Foreign government – estimates of appropriate market spread versus underlying related sovereign treasury curve(s) dependent on liquidity and direct or contingent support.
•
Municipals – overall credit quality, including assessments of the level and variability of: sources of payment such as income, sales or property taxes, levies or user fees; credit support such as insurance; state or local economic and political base; natural resource availability; and susceptibility to natural or man-made catastrophic events such as hurricanes, earthquakes or acts of terrorism.
12
Table of Contents
•
Corporate fixed maturities – overall credit quality, including assessments of the level and variability of: economic sensitivity; liquidity; corporate financial policies; management quality; regulatory environment; competitive position; ownership; restrictive covenants; and security or collateral.
•
Residential mortgage-backed securities – estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; government or monetary authority support programs; tax policies; and delinquency/default trends.
•
Commercial mortgage-backed securities – overall credit quality, including assessments of the value and supply/demand characteristics of: collateral type such as office, retail, residential, lodging, or other; geographic concentration by region, state, metropolitan statistical area and locale; vintage year; historical collateral performance including defeasance, delinquency, default and special servicer trends; and capital structure support features.
•
Asset-backed securities – overall credit quality, including assessments of the underlying collateral type such as credit card receivables, automobile loan receivables and equipment lease receivables; geographic diversification; vintage year; historical collateral performance including delinquency, default and casualty trends; economic conditions influencing use rates and resale values; and contract structural support features.
Generally, all prices provided by the pricing service, except actively traded securities with quoted market prices, are reported as Level 2.
The Company holds privately placed fixed maturity securities and certain other fixed maturity securities that do not have an active market and for which the pricing service cannot provide fair values. The Company determines fair values for these securities using either matrix pricing utilizing the market approach or broker quotes. The Company will use observable market data as inputs into the fair value techniques, as discussed in the determination of Level 2 fair values, to the extent it is available, but is also required to use a certain amount of unobservable judgment due to the illiquid nature of the securities involved. Unobservable judgment reflected in the Company’s matrix model accounts for estimates of additional spread required by market participants for factors such as issue size, credit stress, structural complexity, high bond coupon or other unique features. These matrix-priced securities are reported as Level 2 or Level 3, depending on the significance of the impact of unobservable judgment on the security’s value. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.
Equity Securities
Level 1 consists of publicly traded securities, including exchange traded funds, valued at quoted market prices. Level 2 includes securities that are valued using pricing for similar securities and pricing models that incorporate observable inputs. Level 3 consists of common or preferred stock of private companies for which observable inputs are not available.
The Company utilizes a third party pricing service for the valuation of the majority of its equity securities and receives one quote for each equity security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. The Company holds certain equity securities that have been issued by privately-held entities that do not have an active market and for which the pricing service cannot provide fair values. Generally, the Company estimates fair value for these securities based on the issuer’s book value and market multiples and reports them as Level 3. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.
Other Investments
Other investments primarily include mortgage participations and limited partnerships not subject to the equity method of accounting. The fair values of limited partnerships not subject to the equity method of accounting are based on the net asset value (“NAV”) provided by the general partner adjusted for recent financial information and are excluded from the fair value hierarchy.
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Table of Contents
The estimated fair values of the financial instruments were as follows:
June 30, 2020
December 31, 2019
Carrying
Fair
Carrying
Fair
(in millions)
Value
Value
Value
Value
Financial Assets carried at:
Fair Value through AOCI:
Fixed maturities
$
7,079.0
$
7,079.0
$
6,687.1
$
6,687.1
Fair Value through Net Income:
Equity securities
458.9
458.9
575.7
575.7
Other investments
182.5
182.5
187.1
187.1
Amortized Cost/Cost:
Other investments
461.5
482.5
443.3
463.7
Cash and cash equivalents
182.6
182.6
215.7
215.7
Total financial instruments
$
8,364.5
$
8,385.5
$
8,108.9
$
8,129.3
Financial Liabilities carried at:
Amortized Cost:
Debt
$
652.8
$
721.8
$
653.4
$
722.1
The Company has processes designed to ensure that the values received from its third party pricing services are accurately recorded, that the data inputs and valuation approaches and techniques utilized are appropriate and consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. The Company reviews the pricing services’ policies describing its methodology, processes, practices and inputs, including various financial models used to value securities. For assets carried at fair value, the Company performs a review of the fair value hierarchy classifications and of prices received from its pricing service on a quarterly basis. Also, the Company reviews the portfolio pricing, including a process for which securities with changes in prices that exceed a defined threshold are verified to independent sources, if available. If upon review, the Company is not satisfied with the validity of a given price, a pricing challenge would be submitted to the pricing service along with supporting documentation for its review. The Company does not adjust quotes or prices obtained from the pricing service unless the pricing service agrees with the Company’s challenge. During the first six months of 2020 and 2019, the Company did not adjust any prices received from its pricing service.
Changes in the observability of valuation inputs may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. As previously discussed, the Company utilizes a third-party pricing service for the valuation of the majority of its fixed maturities and equity securities. The pricing service has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company will use observable market data to the extent it is available, but may also be required to make assumptions for market based inputs that are unavailable due to market conditions.
The following tables provide, for each hierarchy level, the Company’s investment assets that were measured at fair value on a recurring basis.
June 30, 2020
(in millions)
Total
Level 1
Level 2
Level 3
Fixed maturities:
U.S. Treasury and government agencies
$
306.9
$
161.6
$
145.3
$
—
Foreign government
4.7
—
4.7
—
Municipal
968.3
—
960.9
7.4
Corporate
4,061.0
—
4,060.5
0.5
Residential mortgage-backed
964.5
—
964.5
—
Commercial mortgage-backed
706.1
—
694.3
11.8
Asset-backed
67.5
—
67.5
—
Total fixed maturities
7,079.0
161.6
6,897.7
19.7
Equity securities
458.9
456.6
—
2.3
Other investments
3.5
—
—
3.5
Total investment assets at fair value
$
7,541.4
$
618.2
$
6,897.7
$
25.5
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Table of Contents
December 31, 2019
(in millions)
Total
Level 1
Level 2
Level 3
Fixed maturities:
U.S. Treasury and government agencies
$
349.8
$
157.9
$
191.9
$
—
Foreign government
16.1
—
16.1
—
Municipal
833.5
—
821.4
12.1
Corporate
3,811.2
—
3,810.6
0.6
Residential mortgage-backed
921.4
—
921.4
—
Commercial mortgage-backed
691.9
—
679.2
12.7
Asset-backed
63.2
—
63.2
—
Total fixed maturities
6,687.1
157.9
6,503.8
25.4
Equity securities
575.7
573.6
—
2.1
Other investments
3.5
—
—
3.5
Total investment assets at fair value
$
7,266.3
$
731.5
$
6,503.8
$
31.0
Limited partnerships measured at fair value using NAV based on an ownership interest in partners’ capital have not been included in the hierarchy tables. At June 30, 2020 and December 31, 2019, the fair values of these investments were $ 179.0 million and $ 183.6 million, respectively, approximately 2 % of total investment assets.
The following tables provide, for each hierarchy level, the Company’s estimated fair values of financial instruments that were not carried at fair value:
June 30, 2020
(in millions)
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
182.6
$
182.6
$
—
$
—
Other investments
482.5
—
2.6
479.9
Total financial instruments
$
665.1
$
182.6
$
2.6
$
479.9
Liabilities:
Debt
$
721.8
$
—
$
721.8
$
—
December 31, 2019
(in millions)
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
215.7
$
215.7
$
—
$
—
Other investments
463.7
—
2.1
461.6
Total financial instruments
$
679.4
$
215.7
$
2.1
$
461.6
Liabilities:
Debt
$
722.1
$
—
$
722.1
$
—
15
Table of Contents
The tables below provide reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Fixed Maturities
(in millions)
Municipal
Corporate
Commercial
mortgage-
backed
Total
Equity and
Other
Total
Assets
Three Months Ended
June 30, 2020
Balance April 1, 2020
$
11.4
$
0.5
$
11.8
$
23.7
$
5.6
$
29.3
Transfers out of Level 3
( 3.5
)
—
—
( 3.5
)
—
( 3.5
)
Total gains:
Included in total net realized and
unrealized investment gains
—
—
—
—
0.2
0.2
Included in other comprehensive income-
net appreciation on available-for-sale
securities
—
—
0.2
0.2
—
0.2
Sales
( 0.5
)
—
( 0.2
)
( 0.7
)
—
( 0.7
)
Balance June 30, 2020
$
7.4
$
0.5
$
11.8
$
19.7
$
5.8
$
25.5
Change in unrealized gains for the period
included in other comprehensive income for
assets held at the end of the period
$
—
$
—
$
0.2
$
0.2
$
—
$
0.2
Three Months Ended
June 30, 2019
Balance April 1, 2019
$
20.5
$
0.7
$
12.8
$
34.0
$
4.6
$
38.6
Total (losses) gains:
Included in total net realized and
unrealized investment losses
( 0.1
)
—
—
( 0.1
)
—
( 0.1
)
Included in other comprehensive income-
net appreciation on available-for-sale
securities
0.6
—
0.3
0.9
—
0.9
Purchases and Sales:
Purchases
—
—
—
—
1.0
1.0
Sales
( 8.1
)
—
( 0.1
)
( 8.2
)
—
( 8.2
)
Balance June 30, 2019
$
12.9
$
0.7
$
13.0
$
26.6
$
5.6
$
32.2
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Table of Contents
Fixed Maturities
(in millions)
Municipal
Corporate
Commercial
mortgage-
backed
Total
Equity and
Other
Total
Assets
Six Months Ended
June 30, 2020
Balance January 1, 2020
$
12.1
$
0.6
$
12.7
$
25.4
$
5.6
$
31.0
Transfers out of Level 3
( 3.5
)
—
—
( 3.5
)
—
( 3.5
)
Total gains (losses):
Included in total net realized and unrealized
investment gains
—
—
—
—
0.2
0.2
Included in other comprehensive income-net
appreciation (depreciation) on
available-for-sale securities
0.1
—
( 0.2
)
( 0.1
)
—
( 0.1
)
Sales
( 1.3
)
( 0.1
)
( 0.7
)
( 2.1
)
—
( 2.1
)
Balance June 30, 2020
$
7.4
$
0.5
$
11.8
$
19.7
$
5.8
$
25.5
Change in unrealized gains (losses) for the period
included in other comprehensive income for
assets held at the end of the period
$
0.2
$
—
$
( 0.2
)
$
—
$
—
$
—
Six Months Ended
June 30, 2019
Balance January 1, 2019
$
21.1
$
0.8
$
13.1
$
35.0
$
4.6
$
39.6
Total gains:
Included in other comprehensive income-net
appreciation on available-for-sale securities
0.8
—
0.5
1.3
—
1.3
Purchases and sales:
Purchases
—
—
—
—
1.0
1.0
Sales
( 9.0
)
( 0.1
)
( 0.6
)
( 9.7
)
—
( 9.7
)
Balance June 30, 2019
$
12.9
$
0.7
$
13.0
$
26.6
$
5.6
$
32.2
During the three and six months ended June 30, 2020, a fixed maturity security was transferred from Level 3 to Level 2, primarily as a result of assessing the significance of unobservable inputs on the fair value measurement. There were no transfers between Level 2 and Level 3 for the three and six months ended June 30, 2019. There were no Level 3 liabilities held by the Company for the three and six months ended June 30, 2020 and 2019.
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Table of Contents
The following table provides quantitative information about the significant unobservable inputs used by the Company in the fair value measurements of Level 3 assets. Where discounted cash flows were used in the valuation of fixed maturities, the internally-developed discount rate was adjusted by the significant unobservable inputs shown in the table.
June 30, 2020
December 31, 2019
Valuation
Significant
Fair
Range
Fair
Range
(in millions)
Technique
Unobservable Inputs
Value
(Wtd Average)
Value
(Wtd Average)
Fixed maturities:
Municipal
Discounted
cash flow
Discount for:
Small issue size
Credit stress
Above-market coupon
$
7.4
0.7 - 6.8% (5.1%)
0.6% (0.6%)
—
$
12.1
0.7 - 6.8% (4.3%)
—
0.5% (0.5%)
Corporate
Discounted
cash flow
Discount for:
Small issue size
Credit stress
Above-market coupon
0.5
2.5% (2.5%)
2.5% (2.5%)
0.3% (0.3%)
0.6
2.5% (2.5%)
—
0.3% (0.3%)
Commercial
mortgage-backed
Discounted
cash flow
Discount for:
Small issue size
Credit stress
Above-market coupon
Lease structure
11.8
1.9 - 3.1% (2.7%)
1.5 - 3.5% (2.0%)
0.5% (0.5%)
0.3% (0.3%)
12.7
1.9 - 3.1% (2.7%)
—
0.5% (0.5%)
0.3% (0.3%)
Equity securities
Market
comparables
Net tangible asset
market multiples
2.3
1.0X (1.0X)
2.1
1.0X (1.0X)
Other
Discounted
cash flow
Discount rate
3.5
18.0% (18.0%)
3.5
18.0% (18.0%)
The weighted average of the unobservable inputs was weighted by the relative fair value of the fixed maturity securities to which the inputs were applied. Each unobservable input is based on the Company’s subjective opinion and therefore inherently contains a degree of uncertainty. Significant increases (decreases) in any of the above inputs in isolation would result in a significantly lower (higher) fair value measurement. There were no interrelationships between these inputs which might magnify or mitigate the effect of changes in unobservable inputs on the fair value measurement.
5. Debt and Credit Arrangements
Debt consists of the following:
(in millions)
June 30, 2020
December 31, 2019
Senior debentures maturing April 15, 2026
$
375.0
$
375.0
Senior debentures maturing October 15, 2025
61.8
62.6
Subordinated debentures maturing March 30, 2053
175.0
175.0
Subordinated debentures maturing February 3, 2027
50.1
50.1
Total principal debt
661.9
662.7
Unamortized debt issuance costs
( 9.1
)
( 9.3
)
Total
$
652.8
$
653.4
At June 30, 2020, the Company was in compliance with the covenants associated with its debt indentures and credit arrangements.
6. Income Taxes
Income tax expense for the six months ended June 30, 2020 and 2019 has been computed using estimated annual effective tax rates. These rates are revised, if necessary, at the end of each successive interim period to reflect current estimates of the annual effective tax rates.
The tax provision was comprised of a U.S. federal income tax expense of $ 12.6 million and $ 50.8 million for the six months ended June 30, 2020 and 2019, respectively.
The Company or its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions, and have previously filed in foreign jurisdictions. The Company and its subsidiaries are subject to U.S. federal and state income tax examinations and foreign examinations for years after 2015.
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7. Pension Plans
The components of net periodic pension cost for the defined benefit pension plans included in the Company’s results of operations are as follows:
Three Months Ended June 30,
2020
2019
(in millions)
Pension Plans
Interest cost
$
4.6
$
5.3
Expected return on plan assets
( 5.5
)
( 5.9
)
Recognized net actuarial loss
1.4
2.9
Net periodic pension cost
$
0.5
$
2.3
Six Months Ended June 30,
2020
2019
(in millions)
Pension Plans
Interest cost
$
9.2
$
10.6
Expected return on plan assets
( 11.1
)
( 11.7
)
Recognized net actuarial loss
2.9
5.7
Net periodic pension cost
$
1.0
$
4.6
8. Other Comprehensive Income
The following tables provide changes in other comprehensive income.
Three Months Ended June 30,
2020
2019
Tax
Tax
Benefit
Net of
Benefit
Net of
(in millions)
Pre-Tax
(Expense)
Tax
Pre-Tax
(Expense)
Tax
Changes in net unrealized gains on investment
securities:
Net unrealized gains arising during period for
those having no credit losses in Consolidated
Statement of Income
$
309.7
$
( 65.0
)
$
244.7
$
133.0
$
( 27.9
)
$
105.1
Net unrealized gains arising during period for
those having credit losses in Consolidated
Statement of Income
14.2
( 2.9
)
11.3
0.2
—
0.2
Amount of gains realized from sales and other
recognized in Consolidated Statement of
Income
( 0.9
)
( 2.4
)
( 3.3
)
( 0.8
)
( 3.2
)
( 4.0
)
Amount of credit (recoveries) losses
recognized in the Consolidated
Statement of Income
( 1.4
)
0.3
( 1.1
)
0.4
( 0.1
)
0.3
Amount of additional impairment losses
recognized in the Consolidated Statement
of Income
0.1
—
0.1
—
—
—
Net unrealized gains
321.7
( 70.0
)
251.7
132.8
( 31.2
)
101.6
Pension and postretirement benefits:
Amortization of net actuarial losses
recognized as net periodic benefit cost
1.5
( 0.3
)
1.2
2.8
( 0.6
)
2.2
Cumulative foreign currency translation adjustment:
Foreign currency translation recognized
during the period
—
—
—
0.8
( 0.2
)
0.6
Other comprehensive income
$
323.2
$
( 70.3
)
$
252.9
$
136.4
$
( 32.0
)
$
104.4
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Six Months Ended June 30,
2020
2019
Tax
Tax
Benefit
Net of
Benefit
Net of
(in millions)
Pre-Tax
(Expense)
Tax
Pre-Tax
(Expense)
Tax
Changes in net unrealized gains (losses) on
investment securities:
Net unrealized gains arising during period for
those having no credit losses in Consolidated
Statement of Income
$
209.4
$
( 44.1
)
$
165.3
$
283.2
$
( 59.5
)
$
223.7
Net unrealized gains (losses) arising during period for
those having credit losses in Consolidated
Statement of Income
( 7.9
)
1.8
( 6.1
)
2.0
( 0.4
)
1.6
Amount of gains realized from sales and other
recognized in Consolidated Statement of
Income
( 4.0
)
( 3.6
)
( 7.6
)
( 0.5
)
( 7.1
)
( 7.6
)
Amount of credit losses recognized in the
Consolidated Statement of Income
5.0
( 1.1
)
3.9
0.4
( 0.1
)
0.3
Amount of additional impairment losses
recognized in the Consolidated Statement
of Income
16.4
( 3.4
)
13.0
—
—
—
Net unrealized gains
218.9
( 50.4
)
168.5
285.1
( 67.1
)
218.0
Pension and postretirement benefits:
Amortization of net actuarial losses
recognized as net periodic benefit cost
3.0
( 0.6
)
2.4
5.7
( 1.2
)
4.5
Cumulative foreign currency translation adjustment:
Foreign currency translation recognized
during the period
—
—
—
0.9
( 0.2
)
0.7
Other comprehensive income
$
221.9
$
( 51.0
)
$
170.9
$
291.7
$
( 68.5
)
$
223.2
Reclassifications out of accumulated other comprehensive income were as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
(in millions)
2020
2019
2020
2019
Amount Reclassified from
Details about Accumulated Other
Accumulated Other
Affected Line Item in the Statement
Comprehensive Income Components
Comprehensive Income
Where Net Income (Loss) is Presented
Net unrealized gains on investment
securities
$
0.8
$
0.8
$
3.9
$
0.5
Net realized gains from sales and
other
1.4
( 0.4
)
( 20.8
)
( 0.4
)
Impairment (recoveries) losses on
investments
2.2
0.4
( 16.9
)
0.1
Total before tax
2.1
3.3
8.0
7.2
Tax benefit
4.3
3.7
( 8.9
)
7.3
Continuing operations; net of tax
—
—
( 0.4
)
—
Discontinued operations - life
businesses
4.3
3.7
( 9.3
)
7.3
Net of tax
Amortization of defined benefit pension
and postretirement actuarial losses
( 1.5
)
( 2.8
)
( 3.0
)
( 5.7
)
Loss adjustment expenses and other
operating expenses (1)
0.3
0.6
0.6
1.2
Tax benefit
( 1.2
)
( 2.2
)
( 2.4
)
( 4.5
)
Continuing operations; net of tax
Total reclassifications for the period
$
3.1
$
1.5
$
( 11.7
)
$
2.8
Benefit (expense) reflected in
income, net of tax
(1)
The amount reclassified from accumulated other comprehensive income for the pension and postretirement benefits was allocated approximately 40 % to loss adjustment expenses and 60 % to other operating expenses for the three and six months ended June 30, 2020 and 2019.
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9. Segment Information
The Company’s primary business operations include insurance products and services provided through three operating segments: Commercial Lines, Personal Lines and Other. Commercial Lines includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial coverages, such as management and professional liability, marine, Hanover Programs, specialty industrial and commercial property, monoline general liability and surety. Personal Lines includes personal automobile, homeowners and other personal coverages. Included in the Other segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to the Company’s former life insurance employees and agents; and, a run-off voluntary property and casualty pools business. The separate financial information is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company reports interest expense related to debt separately from the earnings of its operating segments. This consists primarily of interest on the Company’s senior and subordinated debentures.
Management evaluates the results of the aforementioned segments based on operating income before taxes, excluding interest expense on debt. Operating income before taxes excludes certain items which are included in net income, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before taxes may be important components in understanding and assessing the Company’s overall financial performance, management believes that the presentation of operating income before taxes enhances an investor’s understanding of the Company’s results of operations by highlighting net income attributable to the core operations of the business. However, operating income before taxes should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.
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Summarized below is financial information with respect to the Company’s business segments.
Three Months Ended
Six Months Ended
June 30,
June 30,
(in millions)
2020
2019
2020
2019
Operating revenues:
Commercial Lines
$
698.9
$
705.2
$
1,423.6
$
1,403.9
Personal Lines
456.3
474.6
944.8
939.8
Other
5.4
6.7
10.0
14.1
Total
1,160.6
1,186.5
2,378.4
2,357.8
Net realized and unrealized investment gains (losses)
63.7
12.1
( 97.9
)
60.3
Total revenues
$
1,224.3
$
1,198.6
$
2,280.5
$
2,418.1
Operating income (loss) before interest expense and income taxes:
Commercial Lines:
Underwriting income
$
21.3
$
29.1
$
31.7
$
65.8
Net investment income
37.9
44.4
84.3
88.7
Other expense
( 3.9
)
( 0.7
)
( 6.1
)
( 1.5
)
Commercial Lines operating income
55.3
72.8
109.9
153.0
Personal Lines:
Underwriting income
17.4
10.9
61.5
16.6
Net investment income
16.5
19.7
36.8
39.4
Other income (expense)
( 1.3
)
1.1
( 0.8
)
2.5
Personal Lines operating income
32.6
31.7
97.5
58.5
Other:
Underwriting loss
( 0.4
)
( 0.3
)
( 3.7
)
( 0.6
)
Net investment income
3.3
5.5
6.2
11.7
Other expense
( 1.9
)
( 2.7
)
( 3.9
)
( 5.8
)
Other operating income (loss)
1.0
2.5
( 1.4
)
5.3
Operating income before interest expense and income taxes
88.9
107.0
206.0
216.8
Interest on debt
( 9.4
)
( 9.3
)
( 18.8
)
( 18.7
)
Operating income before income taxes
79.5
97.7
187.2
198.1
Non-operating items:
Net realized and unrealized investment gains (losses)
63.7
12.1
( 97.9
)
60.3
Other non-operating
( 0.1
)
—
( 0.1
)
—
Income from continuing operations before income taxes
$
143.1
$
109.8
$
89.2
$
258.4
The following table provides identifiable assets for the Company’s business segments and discontinued operations:
(in millions)
June 30, 2020
December 31, 2019
Property and Casualty Companies
$
12,733.4
$
12,387.7
Assets of discontinued businesses
105.2
102.8
Total
$
12,838.6
$
12,490.5
The Company reviews the assets of its Property and Casualty Companies collectively and does not allocate them between the Commercial Lines, Personal Lines and Other segments.
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10. Stock-based Compensation
As of June 30, 2020, there were 2,794,893 shares and 2,341,331 shares available for grant under The Hanover Insurance Group 2014 Long-Term Incentive Plan and The Hanover Insurance Group 2014 Employee Stock Purchase Plan, respectively.
Compensation cost for the Company’s stock-based awards and the related tax benefits were as follows:
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2020
2019
2020
2019
Stock-based compensation expense
$
4.5
$
4.4
$
9.5
$
8.6
Tax benefit
( 0.9
)
( 0.9
)
( 2.0
)
( 1.8
)
Stock-based compensation expense, net of taxes
$
3.6
$
3.5
$
7.5
$
6.8
Stock Options
Information on the Company’s stock option activity for the six months ended June 30, 2020 and 2019 is summarized below.
Six Months Ended June 30,
2020
2019
(in whole shares and dollars)
Shares
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
Outstanding, beginning of period
1,121,559
$
87.88
1,099,076
$
85.75
Granted
242,598
118.34
232,568
95.05
Exercised
( 40,889
)
77.86
( 127,830
)
72.79
Forfeited or cancelled
( 21,862
)
111.65
( 19,203
)
101.20
Outstanding, end of period
1,301,406
93.47
1,184,611
88.72
Restricted Stock Units
The Company currently issues time-based, market-based and performance-based restricted stock units to eligible employees, all of which generally vest after 3 years of continued employment.
The following tables summarize activity information about employee restricted stock units:
Six Months Ended June 30,
2020
2019
(in whole shares and dollars)
Shares
Weighted Average
Grant Date
Fair Value
Shares
Weighted Average
Grant Date
Fair Value
Time-based restricted stock units:
Outstanding, beginning of period
335,166
$
109.55
332,481
$
97.28
Granted
142,412
117.72
145,040
117.55
Vested
( 85,880
)
91.98
( 106,864
)
83.87
Forfeited
( 17,004
)
116.00
( 20,404
)
101.71
Outstanding, end of period
374,694
116.39
350,253
109.51
Performance-based and market-based restricted stock units:
Outstanding, beginning of period
86,252
$
110.70
69,838
$
95.58
Granted
54,415
105.10
42,119
117.09
Vested
( 40,601
)
80.92
( 14,118
)
84.39
Forfeited
( 3,023
)
124.78
—
—
Outstanding, end of period
97,043
119.59
97,839
106.45
In the first six months of 2020 and 2019, the Company granted market-based awards totaling 34,911 and 23,924 , respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity. The vesting of these stock units is based on the relative total shareholder return (“TSR”) of the Company. This metric is generally based on relative TSR for a three-year period as compared to a pre-selected group of property and casualty companies. The fair value of market-based awards was estimated at the date of grant using a valuation model. These units have the potential to range from 0 % to 150 % of the shares disclosed. Included in the amount granted above in 2020 and 2019 are 13,532 shares and 5,820 shares, respectively, related to market-based awards that achieved a payout in excess of 100 %. These awards vested in the first quarters of 2020 and 2019, respectively.
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Table of Contents
The Company also granted performance-based restricted stock units in 2020 and 2019, totaling 19,504 and 18,195 , respectively, which are based upon the Company’s achievement of return on equity objectives. These units have the potential to range from 0 % to 150 % of the shares disclosed, which varies based on grant year and individual participation level. Increases above the 100% target level are reflected as granted in the period in which performance-based stock unit goals are achieved. Decreases below the 100% target level are reflected as forfeited. There were no performance-based awards that vested in 2020 or 2019.
11. Earnings Per Share and Shareholders’ Equity Transactions
The following table provides weighted average share information used in the calculation of the Company’s basic and diluted earnings per share:
Three Months Ended
Six Months Ended
June 30,
June 30,
(in millions, except per share data)
2020
2019
2020
2019
Basic shares used in the calculation of earnings per share
38.0
40.7
38.2
40.7
Dilutive effect of securities:
Employee stock options
0.1
0.3
0.2
0.3
Non-vested stock grants
0.2
0.2
0.2
0.2
Diluted shares used in the calculation of earnings per share
38.3
41.2
38.6
41.2
Per share effect of dilutive securities on income from
continuing operations
$
( 0.02
)
$
( 0.03
)
$
( 0.03
)
$
( 0.06
)
Per share effect of dilutive securities on net income
$
( 0.02
)
$
( 0.03
)
$
( 0.02
)
$
( 0.06
)
Diluted earnings per share for the three months ended June 30, 2020 excludes 0.9 million shares issuable under the Company’s stock compensation plans because their effect would be antidilutive. Diluted earnings per share for the six months ended June 30, 2020 and 2019 excludes 0.6 million and 0.2 million, respectively, of common shares issuable under the Company’s stock compensation plans because their effect would be antidilutive.
T he Board of Directors authorized a stock repurchase program which provides for aggregate repurchases of up to $ 900 million, including a $ 300 million increase to the program that was authorized on December 5, 2019. Under the repurchase authorization, the Company may repurchase, from time to time, common stock in amounts, at prices and at such times as the Company deems appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. The Company is not required to purchase any specific number of shares or to make purchases by any certain date under this program. On December 9, 2019, pursuant to the terms of an accelerated share repurchase (“ASR”) agreement (the “December 2019 ASR”) the Company paid $ 150.0 million in exchange for an initial delivery of approximately 0.9 million shares of common stock. On February 26, 2020, the Company received approximately 0.2 million of its common stock shares as final settlement of shares repurchased under the December 2019 ASR.
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Table of Contents
12. Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses
Reserve Rollforward and Prior Year Development
The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in results of operations as adjustments to losses and loss adjustment expenses (“LAE”). Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and loss event occurred. These types of subsequent adjustments are described as “prior years’ loss reserves”. Such development can be either favorable or unfavorable to the Company’s financial results and may vary by line of business. In this section, all amounts presented include catastrophe losses and LAE, unless otherwise indicated.
The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.
Six Months Ended
June 30,
(in millions)
2020
2019
Gross loss and LAE reserves, beginning of period
$
5,654.4
$
5,304.1
Reinsurance recoverable on unpaid losses
1,574.8
1,472.6
Net loss and LAE reserves, beginning of period
4,079.6
3,831.5
Net incurred losses and LAE in respect of losses occurring in:
Current year
1,454.1
1,437.9
Prior years
( 13.9
)
( 20.6
)
Total incurred losses and LAE
1,440.2
1,417.3
Net payments of losses and LAE in respect of losses occurring in:
Current year
468.6
497.0
Prior years
788.5
778.4
Total payments
1,257.1
1,275.4
Net reserve for losses and LAE, end of period
4,262.7
3,973.4
Reinsurance recoverable on unpaid losses
1,574.6
1,505.1
Gross reserve for losses and LAE, end of period
$
5,837.3
$
5,478.5
As a result of continuing trends in the Company’s business, reserves including catastrophes have been re-estimated for all prior accident years and were decreased by $ 13.9 million and $ 20.6 million in 2020 and 2019, respectively.
2020
For the six months ended June 30, 2020, net favorable loss and LAE development was $ 13.9 million primarily as a result of net favorable Commercial Lines development of $ 18.1 million, partially offset by unfavorable development in the Other Segment. Commercial Lines favorable development was primarily due to lower than expected losses of $ 15.8 million within the workers’ compensation line in accident years 2016 through 2019 and, within other commercial lines, $ 12.8 million within the marine line primarily in accident years 2017 through 2019, partially offset by higher than expected losses in the commercial automobile line driven by higher bodily injury and personal injury protection losses primarily in accident years 2017 through 2019. In addition, Other Segment unfavorable development was due to the Company’s run-off voluntary assumed property and casualty reinsurance pools business primarily based on an updated third-party actuarial study received in the first quarter of 2020 for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool that primarily consists of asbestos and environmental exposures.
2019
For the six months ended June 30, 2019, net favorable loss and LAE development was $ 20.6 million, primarily as a result of favorable catastrophe development due to the sale of subrogation rights on certain 2017 and 2018 California wildfires and lower than expected losses related to the 2018 hurricanes. In addition, lower than expected losses in the Company’s workers’ compensation and commercial multiple peril lines were substantially offset by higher than expected losses in the Company’s personal and commercial automobile lines.
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Table of Contents
1 3 . Commitments and Contingencies
Legal Proceedings
The Company has been named a defendant in various legal proceedings arising in the normal course of business. In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry or investigation, and its ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. The ultimate resolutions of such proceedings are not expected to have a material effect on its financial position, although they could have a material effect on the results of operations for a particular quarterly or annual period.
Residual Markets
The Company is required to participate in residual markets in various states, which generally pertain to high risk insureds, disrupted markets or lines of business or geographic areas where rates are regarded as excessive. The results of the residual markets are not subject to the predictability associated with the Company’s own managed business, and are significant to both the personal and commercial automobile lines of business .
14. Subsequent Events
There were no subsequent events requiring adjustment to the financial statements and no additional disclosures required in the notes to the interim consolidated financial statements.
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PART I
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.