Item 1. Financial Statements
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)
2021
2020
Revenues
Premiums
$
1,161.8
$
1,141.4
Net investment income
76.8
69.6
Net realized and unrealized investment gains (losses):
Net realized gains (losses) from sales and other
( 1.6
)
3.1
Net change in fair value of equity securities
39.1
( 136.2
)
Impairment losses on investments
—
( 28.5
)
Total net realized and unrealized investment gains (losses)
37.5
( 161.6
)
Fees and other income
7.2
6.8
Total revenues
1,283.3
1,056.2
Losses and expenses
Losses and loss adjustment expenses
781.3
728.2
Amortization of deferred acquisition costs
240.3
236.9
Interest expense
8.5
9.4
Other operating expenses
139.1
135.6
Total losses and expenses
1,169.2
1,110.1
Income (loss) from continuing operations before income taxes
114.1
( 53.9
)
Income tax expense (benefit):
Current
8.9
21.3
Deferred
12.4
( 36.5
)
Total income tax expense (benefit)
21.3
( 15.2
)
Income (loss) from continuing operations
92.8
( 38.7
)
Discontinued operations (net of taxes):
Loss from discontinued life businesses
( 0.1
)
( 1.3
)
Net income (loss)
$
92.7
$
( 40.0
)
Earnings per common share:
Basic:
Income (loss) from continuing operations
$
2.55
$
( 1.01
)
Discontinued operations (net of taxes):
Loss from discontinued life businesses
—
( 0.03
)
Net income (loss) per share
$
2.55
$
( 1.04
)
Weighted average shares outstanding
36.4
38.3
Diluted:
Income (loss) from continuing operations
$
2.52
$
( 1.01
)
Discontinued operations (net of taxes):
Loss from discontinued life businesses
( 0.01
)
( 0.03
)
Net income (loss) per share
$
2.51
$
( 1.04
)
Weighted average shares outstanding
36.9
38.3
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
March 31,
(In millions)
2021
2020
Net income (loss)
$
92.7
$
( 40.0
)
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
( 185.5
)
( 70.8
)
Having credit losses recognized in the
Consolidated Statements of Income
—
( 12.4
)
Total available-for-sale securities
( 185.5
)
( 83.2
)
Pension and postretirement benefits:
Net change in net actuarial loss
0.7
1.2
Total other comprehensive loss, net of tax
( 184.8
)
( 82.0
)
Comprehensive loss
$
( 92.1
)
$
( 122.0
)
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)
March 31,
December 31,
(In millions, except share data)
2021
2020
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $ 7,089.1 and $ 6,945.6 )
$
7,370.3
$
7,454.4
Equity securities, at fair value
641.0
598.5
Other investments
793.2
793.2
Total investments
8,804.5
8,846.1
Cash and cash equivalents
112.1
120.6
Accrued investment income
48.0
51.2
Premiums and accounts receivable, net
1,369.6
1,339.3
Reinsurance recoverable on paid and unpaid losses and unearned premiums
1,882.9
1,874.3
Deferred acquisition costs
491.0
477.5
Goodwill
178.8
178.8
Other assets
461.5
445.7
Assets of discontinued businesses
99.6
110.2
Total assets
$
13,448.0
$
13,443.7
Liabilities
Loss and loss adjustment expense reserves
$
6,223.7
$
6,024.0
Unearned premiums
2,553.1
2,482.7
Expenses and taxes payable
601.8
687.5
Deferred income tax liability
64.0
97.3
Reinsurance premiums payable
57.3
48.4
Debt
781.0
780.8
Liabilities of discontinued businesses
120.3
120.8
Total liabilities
10,401.2
10,241.5
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
1,864.0
1,857.4
Accumulated other comprehensive income
187.7
372.5
Retained earnings
2,734.9
2,668.0
Treasury stock at cost ( 24.3 million and 24.1 million shares)
( 1,740.4
)
( 1,696.3
)
Total shareholders’ equity
3,046.8
3,202.2
Total liabilities and shareholders’ equity
$
13,448.0
$
13,443.7
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
March 31,
(In millions)
2021
2020
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
1,857.4
1,837.3
Settlement and prepayment of accelerated share
repurchases and other
6.6
24.3
Balance at end of period
1,864.0
1,861.6
Accumulated Other Comprehensive Income, net of tax
Net Unrealized Appreciation (Depreciation) on Investments:
Balance at beginning of period
428.1
216.0
Net depreciation on available-for-sale securities
( 185.5
)
( 83.2
)
Balance at end of period
242.6
132.8
Defined Benefit Pension and Postretirement Plans:
Balance at beginning of period
( 55.6
)
( 63.4
)
Net amount recognized as net periodic benefit cost
0.7
1.2
Balance at end of period
( 54.9
)
( 62.2
)
Total accumulated other comprehensive income
187.7
70.6
Retained Earnings
Balance at beginning of period
2,668.0
2,410.9
Cumulative effect of accounting change, net of taxes
—
( 0.9
)
Balance at beginning of period, as adjusted
2,668.0
2,410.0
Net income (loss)
92.7
( 40.0
)
Dividends to shareholders
( 25.8
)
( 25.1
)
Balance at end of period
2,734.9
2,344.9
Treasury Stock
Balance at beginning of period
( 1,696.3
)
( 1,485.2
)
Shares purchased at cost
( 50.3
)
( 59.2
)
Net shares reissued at cost under employee stock-based
compensation plans
6.2
3.3
Balance at end of period
( 1,740.4
)
( 1,541.1
)
Total shareholders’ equity
$
3,046.8
$
2,736.6
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 STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
(In millions)
2021
2020
Cash Flows From Operating Activities
Net income (loss)
$
92.7
$
( 40.0
)
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized investment (gains) losses
( 38.3
)
162.4
Net amortization and depreciation
3.8
5.1
Stock-based compensation expense
5.6
5.0
Amortization of defined benefit plan costs
0.8
1.5
Deferred income tax expense (benefit)
12.6
( 36.7
)
Change in deferred acquisition costs
( 13.5
)
1.7
Change in premiums receivable, net of reinsurance premiums payable
( 21.3
)
( 5.5
)
Change in loss, loss adjustment expense and unearned premium reserves
270.5
75.0
Change in reinsurance recoverable
( 8.5
)
( 6.4
)
Change in expenses and taxes payable
( 143.6
)
( 112.7
)
Other, net
( 19.0
)
( 12.8
)
Net cash provided by operating activities
141.8
36.6
Cash Flows From Investing Activities
Proceeds from disposals and maturities of fixed maturities
528.0
316.3
Proceeds from disposals of equity securities and other investments
66.5
73.2
Purchase of fixed maturities
( 617.2
)
( 376.5
)
Purchase of equity securities and other investments
( 53.6
)
( 109.7
)
Capital expenditures
( 2.3
)
( 3.2
)
Net cash used in investing activities
( 78.6
)
( 99.9
)
Cash Flows From Financing Activities
Proceeds from exercise of employee stock options
5.8
3.0
Proceeds from short-term borrowings
—
54.0
Dividends paid to shareholders
( 25.5
)
( 24.8
)
Repurchases of common stock
( 45.3
)
( 34.9
)
Other financing activities
( 6.7
)
( 5.8
)
Net cash used in financing activities
( 71.7
)
( 8.5
)
Net change in cash and cash equivalents
( 8.5
)
( 71.8
)
Cash and cash equivalents, beginning of period
120.6
215.7
Cash and cash equivalents, end of period
$
112.1
$
143.9
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 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, 2021 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 24, 2021.
2. New Accounting Pronouncements
Recently Implemented Standards
In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Update No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs . This guidance clarifies, for each reporting period, that an entity should reevaluate whether a callable debt security with multiple call dates is required to amortize any premium to the next call date. The updated guidance is effective for annual and interim periods beginning after December 15, 2020 and should be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company implemented this guidance effective January 1, 2021 , and it did not have a material impact on its financial position or results of operations.
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. This update 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 implemented this guidance effective January 1, 2021 , and it did not 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. The Company implemented this guidance effective January 1, 2021 , and it did not have a material impact on its financial position or results of operations.
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3. Investments
A. Fixed maturities
The amortized cost and fair value of available-for-sale fixed maturities were as follows:
March 31, 2021
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
$
360.7
$
—
$
360.7
$
11.1
$
12.1
$
359.7
Foreign government
2.2
—
2.2
0.4
—
2.6
Municipal
1,046.3
—
1,046.3
38.5
11.7
1,073.1
Corporate
3,908.6
—
3,908.6
227.5
20.9
4,115.2
Residential mortgage-backed
981.5
—
981.5
23.1
10.4
994.2
Commercial mortgage-backed
722.8
—
722.8
36.7
3.0
756.5
Asset-backed
67.0
—
67.0
2.0
—
69.0
Total fixed maturities
$
7,089.1
$
—
$
7,089.1
$
339.3
$
58.1
$
7,370.3
December 31, 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
$
376.4
$
—
$
376.4
$
17.6
$
2.0
$
392.0
Foreign government
2.2
—
2.2
0.5
—
2.7
Municipal
1,042.1
—
1,042.1
61.7
0.1
1,103.7
Corporate
3,770.0
( 0.1
)
3,769.9
341.8
0.4
4,111.3
Residential mortgage-backed
978.2
—
978.2
33.1
0.6
1,010.7
Commercial mortgage-backed
705.4
—
705.4
54.8
0.2
760.0
Asset-backed
71.4
—
71.4
2.6
—
74.0
Total fixed maturities
$
6,945.7
$
( 0.1
)
$
6,945.6
$
512.1
$
3.3
$
7,454.4
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” in the Notes to Consolidated Financial Statements in the Company’s 2020 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.
March 31, 2021
Amortized Cost, Net
of Allowance for
Fair
(in millions)
Credit Losses
Value
Due in one year or less
$
273.7
$
277.3
Due after one year through five years
1,820.5
1,945.4
Due after five years through ten years
2,461.1
2,575.1
Due after ten years
762.5
752.8
5,317.8
5,550.6
Mortgage-backed and asset-backed securities
1,771.3
1,819.7
Total fixed maturities
$
7,089.1
$
7,370.3
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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 March 31, 2021 and December 31, 2020, including the length of time the securities have been in an unrealized loss position:
March 31, 2021
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
$
12.1
$
171.5
$
—
$
—
$
12.1
$
171.5
Municipal
11.7
372.9
—
0.5
11.7
373.4
Corporate
19.5
515.1
—
—
19.5
515.1
Residential mortgage-backed
10.4
405.2
—
0.1
10.4
405.3
Commercial mortgage-backed
3.0
84.1
—
1.0
3.0
85.1
Asset-backed
—
4.6
—
—
—
4.6
Total investment grade
56.7
1,553.4
—
1.6
56.7
1,555.0
Below investment grade:
Corporate
1.4
64.6
—
—
1.4
64.6
Total fixed maturities
$
58.1
$
1,618.0
$
—
$
1.6
$
58.1
$
1,619.6
December 31, 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
$
2.0
$
140.7
$
—
$
—
$
2.0
$
140.7
Municipal
0.1
19.3
—
0.7
0.1
20.0
Corporate
0.4
53.4
—
—
0.4
53.4
Residential mortgage-backed
0.6
94.4
—
—
0.6
94.4
Commercial mortgage-backed
0.2
33.2
—
—
0.2
33.2
Total investment grade
3.3
341.0
—
0.7
3.3
341.7
Below investment grade:
Corporate
—
4.6
—
—
—
4.6
Total fixed maturities
$
3.3
$
345.6
$
—
$
0.7
$
3.3
$
346.3
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 March 31,
2021
2020
(in millions)
Proceeds from sales
$
217.4
$
66.0
Gross gains
2.9
2.7
Gross losses
7.2
0.4
D. Impairments
For the three months ended March 31, 2021, the Company did no t recognize any impairments. For the three months ended March 31, 2020, the Company recognized $ 28.5 million of impairment losses, consisting primarily of $ 22.2 million on fixed maturities and $ 4.8 million on mortgage loans. Impairments on fixed maturities included $ 16.0 million categorized as intend-to-sell and $ 6.2 million of credit-related losses.
At March 31, 2021 and December 31, 2020, the allowance for credit losses on mortgage loans was $ 7.9 million. At March 31, 2021, there was no allowance for credit losses on available-for-sale securities and at December 31, 2020, the allowance for credit losses on available-for-sale securities was $ 0.1 million.
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 and 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 qualitative 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 estimated losses by applying expected loss rates, which are based on historical data. Embedded in expected loss rates are mortgage risk ratings and risk factors associated with property type such as office, retail, lodging, multi-family and industrial. Risk ratings, based on property characteristics and metrics including the geographic market, are predominantly driven by estimates of loan-to-value and debt service coverage ratios. Ratings may be adjusted to reflect current conditions and to incorporate reasonable and supportable forecasts, such as volatility of cash flows and valuation.
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 March 31,
(in millions)
2021
2020
Net gains (losses) recognized during the period
$
39.1
$
( 136.2
)
Less: net gains (losses) recognized on equity securities sold
during the period
0.6
( 0.6
)
Net unrealized gains (losses) recognized during the period on equity
securities still held
$
38.5
$
( 135.6
)
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.
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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.
•
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.
11
Table of Contents
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.
The estimated fair values of the financial instruments were as follows:
March 31, 2021
December 31, 2020
Carrying
Fair
Carrying
Fair
(in millions)
Value
Value
Value
Value
Financial Assets carried at:
Fair Value through AOCI:
Fixed maturities
$
7,370.3
$
7,370.3
$
7,454.4
$
7,454.4
Fair Value through Net Income:
Equity securities
641.0
641.0
598.5
598.5
Other investments
176.9
176.9
176.8
176.8
Amortized Cost/Cost:
Other investments
459.7
489.9
470.3
504.8
Cash and cash equivalents
112.1
112.1
120.6
120.6
Total financial instruments
$
8,760.0
$
8,790.2
$
8,820.6
$
8,855.1
Financial Liabilities carried at:
Amortized Cost:
Debt
$
781.0
$
858.7
$
780.8
$
887.7
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 three months of 2021 and 2020, the Company did not adjust any prices received from its pricing service.
12
Table of Contents
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.
March 31, 2021
(in millions)
Total
Level 1
Level 2
Level 3
Fixed maturities:
U.S. Treasury and government agencies
$
359.7
$
155.3
$
204.4
$
—
Foreign government
2.6
—
2.6
—
Municipal
1,073.1
—
1,066.9
6.2
Corporate
4,115.2
—
4,114.8
0.4
Residential mortgage-backed
994.2
—
994.2
—
Commercial mortgage-backed
756.5
—
744.7
11.8
Asset-backed
69.0
—
69.0
—
Total fixed maturities
7,370.3
155.3
7,196.6
18.4
Equity securities
641.0
635.4
—
5.6
Other investments
4.0
—
—
4.0
Total investment assets at fair value
$
8,015.3
$
790.7
$
7,196.6
$
28.0
December 31, 2020
(in millions)
Total
Level 1
Level 2
Level 3
Fixed maturities:
U.S. Treasury and government agencies
$
392.0
$
155.8
$
236.2
$
—
Foreign government
2.7
—
2.7
—
Municipal
1,103.7
—
1,096.7
7.0
Corporate
4,111.3
—
4,110.8
0.5
Residential mortgage-backed
1,010.7
—
1,010.7
—
Commercial mortgage-backed
760.0
—
747.6
12.4
Asset-backed
74.0
—
74.0
—
Total fixed maturities
7,454.4
155.8
7,278.7
19.9
Equity securities
598.5
593.0
—
5.5
Other investments
4.0
—
—
4.0
Total investment assets at fair value
$
8,056.9
$
748.8
$
7,278.7
$
29.4
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 March 31, 2021 and December 31, 2020, the fair values of these investments were $ 172.9 million and $ 172.8 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:
March 31, 2021
(in millions)
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
112.1
$
112.1
$
—
$
—
Other investments
489.9
—
2.7
487.2
Total financial instruments
$
602.0
$
112.1
$
2.7
$
487.2
Liabilities:
Debt
$
858.7
$
—
$
858.7
$
—
13
Table of Contents
December 31, 2020
(in millions)
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
120.6
$
120.6
$
—
$
—
Other investments
504.8
—
2.7
502.1
Total financial instruments
$
625.4
$
120.6
$
2.7
$
502.1
Liabilities:
Debt
$
887.7
$
—
$
887.7
$
—
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 March 31, 2021
Balance January 1, 2021
$
7.0
$
0.5
$
12.4
$
19.9
$
9.5
$
29.4
Total gains (losses):
Included in total net realized and
unrealized investment gains
—
—
—
—
0.1
0.1
Included in other comprehensive loss-net depreciation on available-for-sale securities
—
—
( 0.4
)
( 0.4
)
—
( 0.4
)
Sales
( 0.8
)
( 0.1
)
( 0.2
)
( 1.1
)
—
( 1.1
)
Balance March 31, 2021
$
6.2
$
0.4
$
11.8
$
18.4
$
9.6
$
28.0
Change in unrealized losses for the period
included in other comprehensive loss for
assets held at the end of the period
$
—
$
—
$
( 0.4
)
$
( 0.4
)
$
—
$
( 0.4
)
Three Months Ended March 31, 2020
Balance January 1, 2020
$
12.1
$
0.6
$
12.7
$
25.4
$
5.6
$
31.0
Total gains (losses):
Included in other comprehensive loss-net appreciation (depreciation) on available-for-sale securities
0.1
—
( 0.4
)
( 0.3
)
—
( 0.3
)
Sales
( 0.8
)
( 0.1
)
( 0.5
)
( 1.4
)
—
( 1.4
)
Balance March 31, 2020
$
11.4
$
0.5
$
11.8
$
23.7
$
5.6
$
29.3
Change in unrealized gains (losses) for the period
included in other comprehensive loss for
assets held at the end of the period
$
0.1
$
—
$
( 0.4
)
$
( 0.3
)
$
—
$
( 0.3
)
There were no transfers between Level 2 and Level 3, and there were no Level 3 liabilities held by the Company for the three months ended March 31, 2021 and 2020.
14
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.
March 31, 2021
December 31, 2020
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
$
6.2
0.7 - 6.8% (5.0%)
0.2% (0.2%)
$
7.0
0.7 - 6.8% (5.0%)
0.2% (0.2%)
Corporate
Discounted
cash flow
Discount for:
Small issue size
Above-market coupon
0.4
2.5% (2.5%)
0.3% (0.3%)
0.5
2.5% (2.5%)
0.3% (0.3%)
Commercial
mortgage-backed
Discounted
cash flow
Discount for:
Small issue size
Above-market coupon
Lease structure
Credit stress
11.8
1.9 - 3.1% (2.7%)
0.5% (0.5%)
0.3% (0.3%)
—
12.4
1.9 - 3.1% (2.7%)
0.5% (0.5%)
0.3% (0.3%)
0.2% (0.2%)
Equity securities
Market
comparables
Net tangible asset
market multiples
1.2
1.0X (1.0X)
1.1
1.0X (1.0X)
Internal price
Unadjusted price from
financing round
4.4
5.60 (5.60)
4.4
5.60 (5.60)
Other
Discounted
cash flow
Discount rate
4.0
16.2% (16.2%)
4.0
16.2% (16.2%)
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. Income Taxes
Income tax expense for the three months ended March 31, 2021 and 2020 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 $ 21.3 million and a benefit of $ 15.2 million for the three months ended March 31, 2021 and 2020, respectively.
The Company and its subsidiaries file 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 2016.
6. Pension Plans
The components of net periodic pension (benefit) cost for the defined benefit pension plans included in the Company’s results of operations are as follows:
Three Months Ended March 31,
2021
2020
(in millions)
Pension Plans
Interest cost
$
3.7
$
4.6
Expected return on plan assets
( 4.6
)
( 5.6
)
Recognized net actuarial loss
0.8
1.5
Net periodic pension (benefit) cost
$
( 0.1
)
$
0.5
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Table of Contents
7. Other Comprehensive Income (Loss)
The following tables provide changes in other comprehensive loss.
Three Months Ended March 31,
2021
2020
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 losses arising during period for
those having no credit losses in Consolidated
Statement of Income
$
( 234.1
)
$
49.2
$
( 184.9
)
$
( 100.3
)
$
20.9
$
( 79.4
)
Net unrealized losses arising during period for
those having credit losses in Consolidated
Statement of Income
—
—
—
( 22.1
)
4.7
( 17.4
)
Amount of (gains) losses realized from sales and
other recognized in Consolidated Statement
of Income
1.6
( 2.2
)
( 0.6
)
( 3.1
)
( 1.2
)
( 4.3
)
Amount of credit losses recognized in the
Consolidated Statement of Income
—
—
—
6.4
( 1.4
)
5.0
Amount of additional impairment losses
recognized in the Consolidated Statement
of Income
—
—
—
16.3
( 3.4
)
12.9
Net unrealized losses
( 232.5
)
47.0
( 185.5
)
( 102.8
)
19.6
( 83.2
)
Pension and postretirement benefits:
Amortization of net actuarial losses
recognized as net periodic benefit cost
0.8
( 0.1
)
0.7
1.5
( 0.3
)
1.2
Other comprehensive loss
$
( 231.7
)
$
46.9
$
( 184.8
)
$
( 101.3
)
$
19.3
$
( 82.0
)
Reclassifications out of accumulated other comprehensive income were as follows:
Three Months Ended
March 31,
(in millions)
2021
2020
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 (losses) on investment
securities
$
( 1.6
)
$
3.1
Net realized gains (losses) from sales and
other
—
( 22.2
)
Impairment losses on investments
( 1.6
)
( 19.1
)
Total before tax
2.2
5.9
Tax benefit
0.6
( 13.2
)
Continuing operations; net of tax
—
( 0.4
)
Discontinued operations - life businesses
0.6
( 13.6
)
Net of tax
Amortization of defined benefit pension
and postretirement actuarial losses
( 0.8
)
( 1.5
)
Loss adjustment expenses and other
operating expenses (1)
0.1
0.3
Tax benefit
( 0.7
)
( 1.2
)
Continuing operations; net of tax
Total reclassifications for the period
$
( 0.1
)
$
( 14.8
)
Expense reflected in income (loss),
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 months ended March 31, 2021 and 2020.
16
Table of Contents
8. 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 income taxes, excluding interest expense on debt. Operating income before income 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 income 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 income taxes may be important components in understanding and assessing the Company’s overall financial performance, management believes that the presentation of operating income before income 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 income 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.
17
Table of Contents
Summarized below is financial information with respect to the Company’s business segments.
Three Months Ended
March 31,
(in millions)
2021
2020
Operating revenues:
Commercial Lines
$
748.3
$
724.7
Personal Lines
493.3
488.5
Other
4.2
4.6
Total
1,245.8
1,217.8
Net realized and unrealized investment gains (losses)
37.5
( 161.6
)
Total revenues
$
1,283.3
$
1,056.2
Operating income (loss) before interest expense and income taxes:
Commercial Lines:
Underwriting income (loss)
$
( 49.3
)
$
10.4
Net investment income
51.8
46.4
Other expense
( 0.3
)
( 2.2
)
Commercial Lines operating income
2.2
54.6
Personal Lines:
Underwriting income
58.9
44.1
Net investment income
22.1
20.3
Other income
0.8
0.5
Personal Lines operating income
81.8
64.9
Other:
Underwriting loss
( 0.3
)
( 3.3
)
Net investment income
2.9
2.9
Other expense
( 1.5
)
( 2.0
)
Other operating income (loss)
1.1
( 2.4
)
Operating income before interest expense and income taxes
85.1
117.1
Interest on debt
( 8.5
)
( 9.4
)
Operating income before income taxes
76.6
107.7
Non-operating items:
Net realized and unrealized investment gains (losses)
37.5
( 161.6
)
Income (loss) from continuing operations before income taxes
$
114.1
$
( 53.9
)
The following table provides identifiable assets for the Company’s business segments and discontinued operations:
(in millions)
March 31, 2021
December 31, 2020
Property and Casualty Insurance Companies
$
13,348.4
$
13,333.5
Assets of discontinued businesses
99.6
110.2
Total
$
13,448.0
$
13,443.7
The Company reviews the assets of its Property and Casualty Insurance Companies collectively and does not allocate them between the Commercial Lines, Personal Lines and Other segments.
9. Stock-based Compensation
As of March 31, 2021, there were 1,980,405 shares and 2,329,534 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 March 31,
(in millions)
2021
2020
Stock-based compensation expense
$
5.6
$
5.0
Tax benefit
( 1.2
)
( 1.1
)
Stock-based compensation expense, net of taxes
$
4.4
$
3.9
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Table of Contents
Stock Options
Information on the Company’s stock option activity for the three months ended March 31, 2021 and 2020 is summarized below.
Three Months Ended March 31,
2021
2020
(in whole shares and dollars)
Shares
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
Outstanding, beginning of period
1,282,278
$
93.64
1,121,559
$
87.88
Granted
178,040
115.35
240,705
118.54
Exercised
( 67,954
)
80.96
( 35,918
)
79.40
Forfeited or cancelled
—
—
—
—
Outstanding, end of period
1,392,364
97.03
1,326,346
93.67
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:
Three Months Ended March 31,
2021
2020
(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
350,480
$
116.37
335,166
$
109.55
Granted
168,092
115.04
136,634
118.60
Vested
( 109,667
)
110.68
( 78,773
)
85.44
Forfeited
( 7,388
)
116.82
( 2,861
)
112.24
Outstanding, end of period
401,517
117.37
390,166
117.56
Performance-based and market-based restricted stock units:
Outstanding, beginning of period
97,043
$
119.59
86,252
$
110.70
Granted
62,143
114.66
54,415
105.10
Vested
( 43,506
)
122.27
( 36,499
)
80.26
Forfeited
—
—
—
—
Outstanding, end of period
115,680
115.93
104,168
118.45
In the first three months of 2021 and 2020, the Company granted market-based awards totaling 37,348 and 34,911 , 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 2021 and 2020 are 14,501 shares and 13,532 shares, respectively, related to market-based awards that achieved a payout in excess of 100 %. These awards vested in the first quarters of 2021 and 2020, respectively.
The Company also granted performance-based restricted stock units in 2021 and 2020, totaling 21,401 and 19,504 , 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 2021 or 2020.
19
Table of Contents
10. 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
March 31,
(in millions, except per share data)
2021
2020
Basic shares used in the calculation of earnings per share
36.4
38.3
Dilutive effect of securities (1) :
Employee stock options
0.3
—
Non-vested stock grants
0.2
—
Diluted shares used in the calculation of earnings per share
36.9
38.3
Per share effect of dilutive securities on income (loss) from
continuing operations
$
( 0.03
)
$
—
Per share effect of dilutive securities on net income
$
( 0.04
)
$
—
(1)
Excludes 0.6 million shares due to antidilution that resulted from the Company having losses from continuing operations and net losses for the quarter ended March 31, 2020.
Diluted earnings per share for the three months ended March 31, 2021 and 2020 excludes 0.2 million and 0.4 million shares, respectively, issuable under the Company’s stock compensation plans because their effect would be antidilutive.
T he Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of the Company’s common stock of up to $ 900 million, and under which the Company had approximately $ 78 million available at March 31, 2021. 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 October 29, 2020, pursuant to the terms of an accelerated share repurchase agreement (the “October 2020 ASR”) the Company paid $ 100.0 million and received an initial delivery of approximately 0.8 million shares of its common stock, which was approximately 80 % of the total number of shares expected to be repurchased under the October 2020 ASR. On January 29, 2021, the Company received approximately 45,000 shares of its common stock shares as final settlement of shares repurchased under the October 2020 ASR.
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11. 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.
Three Months Ended
March 31,
(in millions)
2021
2020
Gross reserve for losses and LAE, beginning of period
$
6,024.0
$
5,654.4
Reinsurance recoverable on unpaid losses
1,641.6
1,574.8
Net reserve for losses and LAE, beginning of period
4,382.4
4,079.6
Net incurred losses and LAE in respect of losses occurring in:
Current year
789.5
730.2
Prior years
( 8.2
)
( 2.0
)
Total incurred losses and LAE
781.3
728.2
Net payments of losses and LAE in respect of losses occurring in:
Current year
178.5
174.6
Prior years
435.0
484.4
Total payments
613.5
659.0
Net reserve for losses and LAE, end of period
4,550.2
4,148.8
Reinsurance recoverable on unpaid losses
1,673.5
1,576.1
Gross reserve for losses and LAE, end of period
$
6,223.7
$
5,724.9
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 $ 8.2 million and $ 2.0 million in 2021 and 2020, respectively.
2021
For the three months ended March 31, 2021, net favorable loss and LAE development was $ 8.2 million. This was primarily due to lower than expected losses in the personal automobile line, driven by lower bodily injury and personal injury protection losses primarily in accident year 2020, and in the workers’ compensation line, primarily in accident years 2015 through 2017 and 2019.
2020
For the three months ended March 31, 2020, net favorable loss and LAE development was $ 2.0 million. Lower than expected losses in the workers’ compensation line, other commercial lines and homeowners line were partially offset by higher than expected losses in the commercial and personal automobile lines, commercial multiple peril line, and in the Company’s run-off voluntary assumed property and casualty reinsurance pools business. Within other commercial lines, lower than expected losses in the Company’s marine line and specialty industrial and commercial property lines were partially offset by higher than expected losses in the general liability lines. The higher than expected losses in the Company’s run-off voluntary assumed property and casualty reinsurance pools business was based on an updated third-party actuarial study received in the first quarter of 2020 for the Excess and Casualty Reinsurance Association (“ECRA”) pool that primarily consists of asbestos and environmental exposures.
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12. 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 actions 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 .
13. Subsequent Events
There were no subsequent events requiring adjustment to the financial statements and no additional disclosure required in the notes to the 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.