What changed in this filing

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Item 1. Financial Statements

2021-10-28 compared with 2021-07-28 · 117 added, 91 removed, 693 unchanged (23% of the section changed)

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions, except per share data)

11 unchanged sentences

Interest expense

Loss from repayment of debt

Other operating expenses

20 unchanged sentences

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

10 unchanged sentences

Total other comprehensive income (loss), net of tax

Comprehensive income

Comprehensive income (loss)

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

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,

(In millions, except share data)

34 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

34 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended

Nine Months Ended

September 30,

(In millions)

2 unchanged sentences

Net realized and unrealized investment (gains) losses

Loss from repayment of debt

Net amortization and depreciation

17 unchanged sentences

Proceeds from exercise of employee stock options

Proceeds from debt borrowings, net

Dividends paid to shareholders

23 unchanged sentences

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, 2021 are not necessarily indicative of the results to be expected for the full year.

The results of operations for the nine months ended September 30, 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.

20 unchanged sentences

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

June 30, 2021

September 30, 2021

Amortized Cost,

19 unchanged sentences

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, 2021

September 30, 2021

Amortized Cost, Net

9 unchanged sentences

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, 2021 and December 31, 2020, including the length of time the securities have been in an unrealized loss position:

June 30, 2021

The following tables provide information about the Company’s available-for-sale fixed maturity securities that were in an unrealized loss position at September 30, 2021 and December 31, 2020, including the length of time the securities have been in an unrealized loss position:

September 30, 2021

12 months or less

31 unchanged sentences

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,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions)

Proceeds from sales

For the three and six months ended June 30, 2021, the Company recognized impairments of $ 0.2 million on fixed maturities.

For the three months ended June 30, 2020, the Company recognized 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.

For the three months ended September 30, 2021, we recognized net recoveries of $ 0.1 million, consisting of recoveries on mortgage loans of $ 0.7 million, partially offset by impairments on fixed maturities of $ 0.6 million.

For the nine months ended September 30, 2021, we recognized net impairments of $ 0.1 million, consisting of impairments on fixed maturities of $ 0.8 million, partially offset by recoveries on mortgage loans of $ 0.7 million.

For the three months ended September 30, 2020, the Company recognized $ 0.8 million of impairments, consisting primarily of additional credit losses on mortgage loans, partially offset by recoveries of credit losses on fixed maturities.

For the nine months ended September 30, 2020, we recognized $ 27.9 million of impairment losses, consisting primarily of $ 19.1 million on fixed maturities and $ 6.6 million on mortgage loans.

Impairments on fixed maturities included $ 16.5 million categorized as intend-to-sell and $ 2.6 million of credit-related losses.

At June 30, 2021 and December 31, 2020, the allowance for credit losses on mortgage loans was $ 7.9 million and the allowance for credit losses on available-for-sale debt securities was $ 0.1 million.

At September 30, 2021 and December 31, 2020, the allowance for credit losses on mortgage loans was $ 7.1 and $ 7.9 million, respectively, and the allowance for credit losses on available-for-sale debt securities was $ 0.2 million and $ 0.1 million, respectively.

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.

Fixed maturities, Corporate – 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.

7 unchanged sentences

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,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions)

Net gains (losses) recognized during the period

net (losses) gains recognized on equity securities sold

net gains (losses) recognized on equity securities sold

during the period

Net unrealized gains (losses) recognized during the period on equity

Net unrealized (losses) gains recognized during the period on equity

securities still held

1 unchanged sentence

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.

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:

77 unchanged sentences

The estimated fair values of the financial instruments were as follows:

June 30, 2021

September 30, 2021

December 31, 2020

18 unchanged sentences

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 2021 and 2020, the Company did not adjust any prices received from its pricing service.

During the first nine months of 2021 and 2020, 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.

3 unchanged sentences

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, 2021

September 30, 2021

(in millions)

20 unchanged sentences

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, 2021 and December 31, 2020, the fair values of these investments were $ 161.1 million and $ 172.8 million, respectively, approximately 2 % of total investment assets.

At September 30, 2021 and December 31, 2020, the fair values of these investments were $ 154.1 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:

June 30, 2021

September 30, 2021

(in millions)

10 unchanged sentences

(in millions)

Three Months Ended June 30, 2021

Balance April 1, 2021

Balance June 30, 2021

Three Months Ended June 30, 2020

Balance April 1, 2020

Transfers out of Level 3

Three Months Ended

September 30, 2021

Balance July 1, 2021

Included in total net realized and

unrealized investment gains

Balance September 30, 2021

Change in unrealized losses for the period

included in other comprehensive loss for

assets held at the end of the period

Three Months Ended

September 30, 2020

Balance July 1, 2020

Included in total net realized and unrealized

investment gains

Included in other comprehensive income-net appreciation on available-for-sale securities

Balance June 30, 2020

Included in other comprehensive income-net

appreciation on available-for-sale securities

Balance September 30, 2020

Change in unrealized gains for the period

3 unchanged sentences

(in millions)

Six Months Ended

June 30, 2021

Nine Months Ended

September 30, 2021

Balance January 1, 2021

4 unchanged sentences

depreciation on available-for-sale securities

Balance June 30, 2021

Balance September 30, 2021

Change in unrealized losses for the period

1 unchanged sentence

assets held at the end of the period

Six Months Ended

June 30, 2020

Nine Months Ended

September 30, 2020

Balance January 1, 2020

Transfers out of Level 3

Total gains (losses):

Included in total net realized and unrealized

1 unchanged sentence

Included in other comprehensive income-net

appreciation (depreciation) on available-for-sale securities

Balance June 30, 2020

Change in unrealized gains (losses) for the period

appreciation on available-for-sale securities

Balance September 30, 2020

Change in unrealized gains for the period

included in other comprehensive income for

assets held at the end of the period

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 level transfers between Level 2 and Level 3 for the three and six months ended June 30, 2021.

There were no Level 3 liabilities held by the Company for the three and six months ended June 30, 2021 and 2020.

There were no transfers between Level 2 and Level 3 for the three months ended September 30, 2021 and 2020, or for the nine months ended September 30, 2021.

During the nine months ended September 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 Level 3 liabilities held by the Company for the three and nine months ended September 30, 2021 and 2020.

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, 2021

September 30, 2021

December 31, 2020

26 unchanged sentences

financing round

11.18 (11.18)

Discount rate

1 unchanged sentence

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.

The weighted average of the unobservable inputs was weighted by the relative fair value of the 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.

1 unchanged sentence

There were no interrelationships between these inputs which might magnify or mitigate the effect of changes in unobservable inputs on the fair value measurement.

Income tax expense for the six months ended June 30, 2021 and 2020 has been computed using estimated annual effective tax rates.

Income tax expense for the nine months ended September 30, 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 $ 51.6 million and $ 12.6 million for the six months ended June 30, 2021 and 2020, respectively.

federal income tax expense of $ 59.3 million and $ 41.7 million for the nine months ended September 30, 2021 and 2020, respectively.

The Company and its subsidiaries file income tax returns in the U.S.

4 unchanged sentences

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 June 30,

The components of net periodic pension cost (benefit) for the defined benefit pension plans included in the Company’s results of operations are as follows:

Three Months Ended September 30,

(in millions)

3 unchanged sentences

Recognized net actuarial loss

Net periodic pension (benefit) cost

Six Months Ended June 30,

Net periodic pension cost

Nine Months Ended September 30,

(in millions)

6 unchanged sentences

The following tables provide changes in other comprehensive income (loss).

Three Months Ended June 30,

Three Months Ended September 30,

(in millions)

Changes in net unrealized gains (losses) on investment

Net unrealized gains arising during period for

Net unrealized gains (losses) arising during period for

those having no credit losses in Consolidated

Statement of Income

Net unrealized gains arising during period for

Net unrealized gains (losses) arising during period for

those having credit losses in Consolidated

4 unchanged sentences

Consolidated Statement of Income

Amount of additional impairment losses

Amount of additional impairment (recoveries) losses

recognized in the Consolidated Statement

Net unrealized gains

Net unrealized gains (losses)

Pension and postretirement benefits:

1 unchanged sentence

recognized as net periodic benefit cost

Other comprehensive income

Six Months Ended June 30,

Other comprehensive income (loss)

Nine Months Ended September 30,

(in millions)

20 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

6 unchanged sentences

Where Net Income is Presented

Net unrealized gains on investment

Net unrealized gains (losses) on investment securities

Net realized gains from sales and

1 unchanged sentence

Total before tax

Tax benefit (expense)

Continuing operations;

6 unchanged sentences

Total reclassifications for the period

Benefit (expense) reflected in income,

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, 2021 and 2020.

Benefit (expense) reflected in income, net of tax

Segment Information

18 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

6 unchanged sentences

Commercial Lines:

Underwriting income

Underwriting (loss) income

Net investment income

2 unchanged sentences

Personal Lines:

Underwriting income

Underwriting (loss) income

Net investment income

Other income (expense)

Personal Lines operating income

2 unchanged sentences

Other expense

Other operating income (loss)

Other operating income

Operating income before interest expense and income taxes

3 unchanged sentences

Net realized and unrealized investment gains (losses)

Loss from repayment of debt

Other non-operating

2 unchanged sentences

(in millions)

June 30, 2021

September 30, 2021

December 31, 2020

3 unchanged sentences

Stock-based Compensation

As of June 30, 2021, there were 1,974,651 shares and 2,321,916 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.

As of September 30, 2021, there were 1,982,890 shares and 2,321,916 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,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions)

2 unchanged sentences

Stock Options

Information on the Company’s stock option activity for the six months ended June 30, 2021 and 2020 is summarized below.

Six Months Ended June 30,

Information on the Company’s stock option activity for the nine months ended September 30, 2021 and 2020 is summarized below.

Nine Months Ended September 30,

(in whole shares and dollars)

9 unchanged sentences

The following tables summarize activity information about employee restricted stock units:

Six Months Ended June 30,

Nine Months Ended September 30,

(in whole shares and dollars)

7 unchanged sentences

Outstanding, end of period

In the first six 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.

In the first nine 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.

8 unchanged sentences

Decreases below the 100% target level are reflected as forfeited.

There were no performance-based awards that vested in 2021 or 2020.

There were no performance-based awards that vested in 2021.

Earnings Per Share and Shareholders’ Equity Transactions

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions, except per share data)

7 unchanged sentences

Per share effect of dilutive securities on net income

Diluted earnings per share for the three and six months ended June 30, 2020 excludes 0.9 million and 0.6 million shares, respectively, issuable under the Company’s stock compensation plans because their effect would be antidilutive.

Diluted earnings per share for the three months ended September 30, 2020 excludes 0.8 million issuable under the Company’s stock compensation plans because their effect would be antidilutive.

Diluted earnings per share for the nine months ended September 30, 2021 and 2020, respectively, excludes 0.2 and 0.6 million 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 $ 1.3 billion, including a $ 400 million increase to the program on May 11, 2021.

Under this program the Company had approximately $ 405 million available at June 30, 2021.

Under this program the Company had approximately $ 381 million available at September 30, 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.

11 unchanged sentences

The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.

Six Months Ended

Nine Months Ended

September 30,

(in millions)

10 unchanged sentences

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 $ 56.7 million and $ 26.1 million in 2021 and 2020, respectively.

For the six months ended June 30, 2021, net favorable loss and LAE development was $ 35.8 million, primarily as a result of net favorable Commercial Lines development of $ 23.2 million and favorable Personal Lines development of $ 13.2 million.

Commercial Lines favorable development was primarily due to lower than expected catastrophe losses of $ 12.0 million for hurricanes, tornadoes, and other storms in accident years 2018 through 2020, and lower than expected losses of $ 10.7 million within the workers’ compensation line in accident years 2014 through 2019.

Personal Lines favorable development was primarily due to lower than expected losses of $ 9.8 million in the personal automobile line, driven by lower bodily injury and personal injury protection losses primarily in accident year 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.

For the nine months ended September 30, 2021, net favorable loss and LAE development was $ 56.7 million, primarily as a result of net favorable Commercial Lines development of $ 34.6 million and favorable Personal Lines development of $ 23.1 million.

Commercial Lines favorable development was primarily due to lower than expected losses of $ 13.1 million within the workers’ compensation line, primarily in accident years 2014 through 2019, and to lower than expected catastrophe losses of $ 12.0 million for hurricanes, tornadoes, and other storms in accident years 2018 through 2020.

Personal Lines favorable development was primarily due to lower than expected losses of $ 20.1 million in the personal automobile line, driven by lower personal injury protection and bodily injury losses primarily in accident year 2020.

For the nine months ended September 30, 2020, net favorable loss and LAE development was $ 26.1 million primarily as a result of net favorable Commercial Lines development of $ 30.9 million, partially offset by unfavorable development in the Other Segment.

Commercial Lines favorable development was primarily due to lower than expected losses of $ 25.6 million within the workers’ compensation line in accident years 2016 through 2019 and, within other commercial lines, $ 15.3 million within the marine line primarily in accident years 2017 through 2019, partially offset by higher than expected losses of $ 10.6 million in the commercial automobile line driven by higher personal injury protection and bodily injury 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.

11 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements