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)
2022
2021
Revenues
Premiums
$
1,263.8
$
1,161.8
Net investment income
76.9
76.8
Net realized and unrealized investment gains (losses):
Net realized gains (losses) from sales and other
3.0
( 1.6
)
Net change in fair value of equity securities
( 18.0
)
39.1
Impairment losses on investments
( 0.9
)
—
Total net realized and unrealized investment gains (losses)
( 15.9
)
37.5
Fees and other income
5.9
6.0
Total revenues
1,330.7
1,282.1
Losses and expenses
Losses and loss adjustment expenses
787.5
781.3
Amortization of deferred acquisition costs
262.9
240.3
Interest expense
8.5
8.5
Other operating expenses
141.8
137.9
Total losses and expenses
1,200.7
1,168.0
Income from continuing operations before income taxes
130.0
114.1
Income tax expense (benefit):
Current
30.2
8.9
Deferred
( 5.5
)
12.4
Total income tax expense
24.7
21.3
Income from continuing operations
105.3
92.8
Discontinued operations (net of taxes):
Loss from discontinued life businesses
( 0.5
)
( 0.1
)
Net income
$
104.8
$
92.7
Earnings per common share:
Basic:
Income from continuing operations
$
2.96
$
2.55
Discontinued operations (net of taxes):
Loss from discontinued life businesses
( 0.01
)
—
Net income per share
$
2.95
$
2.55
Weighted average shares outstanding
35.5
36.4
Diluted:
Income from continuing operations
$
2.91
$
2.52
Discontinued operations (net of taxes):
Loss from discontinued life businesses
( 0.01
)
( 0.01
)
Net income per share
$
2.90
$
2.51
Weighted average shares outstanding
36.1
36.9
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended
March 31,
(In millions)
2022
2021
Net income
$
104.8
$
92.7
Other comprehensive income (loss), net of tax:
Available-for-sale securities:
Changes in net unrealized losses on investment securities:
Having no credit losses recognized in the
Consolidated Statements of Income
( 379.4
)
( 185.5
)
Having credit losses recognized in the
Consolidated Statements of Income
( 0.5
)
—
Total available-for-sale securities
( 379.9
)
( 185.5
)
Pension and postretirement benefits:
Net change in net actuarial loss
1.1
0.7
Total other comprehensive loss, net of tax
( 378.8
)
( 184.8
)
Comprehensive loss
$
( 274.0
)
$
( 92.1
)
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31,
December 31,
(In millions, except share data)
2022
2021
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $ 7,644.8 and $ 7,514.8 )
$
7,382.2
$
7,723.9
Equity securities, at fair value
607.0
661.3
Other investments
786.1
767.4
Total investments
8,775.3
9,152.6
Cash and cash equivalents
272.0
230.9
Accrued investment income
47.9
49.8
Premiums and accounts receivable, net
1,483.1
1,469.5
Reinsurance recoverable on paid and unpaid losses and unearned premiums
1,940.3
1,907.3
Deferred acquisition costs
552.8
552.0
Deferred income tax asset
43.4
—
Goodwill
178.8
178.8
Other assets
449.0
606.3
Assets of discontinued businesses
104.6
107.1
Total assets
$
13,847.2
$
14,254.3
Liabilities
Loss and loss adjustment expense reserves
$
6,512.2
$
6,447.6
Unearned premiums
2,760.4
2,734.9
Expenses and taxes payable
769.7
907.7
Deferred income tax liability
—
60.8
Reinsurance premiums payable
70.1
55.1
Debt
781.8
781.6
Liabilities of discontinued businesses
120.2
121.7
Total liabilities
11,014.4
11,109.4
Commitments and contingencies
Shareholders’ Equity
Preferred stock, par value $ 0.01 per share; 20.0 million shares authorized; none issued
—
—
Common stock, par value $ 0.01 per share; 300.0 million shares authorized;
60.5 million shares issued
0.6
0.6
Additional paid-in capital
1,887.8
1,887.2
Accumulated other comprehensive income (loss)
( 256.6
)
122.2
Retained earnings
3,061.0
2,983.2
Treasury stock at cost ( 24.9 million and 25.0 million shares)
( 1,860.0
)
( 1,848.3
)
Total shareholders’ equity
2,832.8
3,144.9
Total liabilities and shareholders’ equity
$
13,847.2
$
14,254.3
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended
March 31,
(In millions)
2022
2021
Preferred Stock
Balance at beginning and end of period
$
—
$
—
Common Stock
Balance at beginning and end of period
0.6
0.6
Additional Paid-in Capital
Balance at beginning of period
1,887.2
1,857.4
Settlement of accelerated share repurchases and other
0.6
6.6
Balance at end of period
1,887.8
1,864.0
Accumulated Other Comprehensive Income, net of tax
Net Unrealized Appreciation (Depreciation) on Investments:
Balance at beginning of period
184.9
428.1
Net depreciation on available-for-sale securities
( 379.9
)
( 185.5
)
Balance at end of period
( 195.0
)
242.6
Defined Benefit Pension and Postretirement Plans:
Balance at beginning of period
( 62.7
)
( 55.6
)
Net amount recognized as net periodic benefit cost
1.1
0.7
Balance at end of period
( 61.6
)
( 54.9
)
Total accumulated other comprehensive income (loss)
( 256.6
)
187.7
Retained Earnings
Balance at beginning of period
2,983.2
2,668.0
Net income
104.8
92.7
Dividends to shareholders
( 27.0
)
( 25.8
)
Balance at end of period
3,061.0
2,734.9
Treasury Stock
Balance at beginning of period
( 1,848.3
)
( 1,696.3
)
Shares purchased at cost
( 16.3
)
( 50.3
)
Net shares reissued at cost under employee stock-based
compensation plans
4.6
6.2
Balance at end of period
( 1,860.0
)
( 1,740.4
)
Total shareholders’ equity
$
2,832.8
$
3,046.8
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
(In millions)
2022
2021
Cash Flows From Operating Activities
Net income
$
104.8
$
92.7
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized investment (gains) losses
16.0
( 38.3
)
Net amortization and depreciation
3.3
3.8
Stock-based compensation expense
6.7
5.6
Amortization of defined benefit plan costs
1.4
0.8
Deferred income tax expense (benefit)
( 5.5
)
12.6
Change in deferred acquisition costs
( 0.9
)
( 13.5
)
Change in premiums receivable, net of reinsurance premiums payable
1.3
( 21.3
)
Change in loss, loss adjustment expense and unearned premium reserves
90.3
270.5
Change in reinsurance recoverable
( 33.0
)
( 8.5
)
Change in expenses and taxes payable
( 103.4
)
( 143.6
)
Cash received for MCCA refund, partially offset by payments made to policyholders
148.9
—
Other, net
( 29.8
)
( 19.0
)
Net cash provided by operating activities
200.1
141.8
Cash Flows From Investing Activities
Proceeds from disposals and maturities of fixed maturities
228.9
528.0
Proceeds from disposals of equity securities and other investments
75.2
66.5
Purchase of fixed maturities
( 372.8
)
( 617.2
)
Purchase of equity securities and other investments
( 38.6
)
( 53.6
)
Capital expenditures
( 4.9
)
( 2.3
)
Net cash used in investing activities
( 112.2
)
( 78.6
)
Cash Flows From Financing Activities
Proceeds from exercise of employee stock options
7.4
5.8
Dividends paid to shareholders
( 26.7
)
( 25.5
)
Repurchases of common stock
( 16.3
)
( 45.3
)
Other financing activities
( 11.2
)
( 6.7
)
Net cash used in financing activities
( 46.8
)
( 71.7
)
Net change in cash and cash equivalents
41.1
( 8.5
)
Cash and cash equivalents, beginning of period
230.9
120.6
Cash and cash equivalents, end of period
$
272.0
$
112.1
The accompanying notes are an integral part of these interim consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements of The Hanover Insurance Group, Inc. and its subsidiaries (“THG” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the requirements of Form 10-Q. Certain financial information that is provided in annual financial statements, but is not required in interim reports, has been omitted.
The interim consolidated financial statements of THG include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America, THG’s principal property and casualty insurance companies; and other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 8 – “Segment Information.” The interim consolidated financial statements also include the Company’s discontinued operations, consisting primarily of the Company’s former accident and health and life insurance businesses. All intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In the opinion of the Company’s management, the accompanying interim consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair presentation of the financial position and results of operations. The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2022.
2. New Accounting Pronouncements
Recently Issued Standards
In March 2022, the Financial Accounting Standards Board issued Accounting Standards Codification (“ASC”) Update No. 2022-02, Financial Instruments – Credit Losses (Topic 326) (“ASC Update No. 2022-02”). This guidance amends ASC Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments , (“ASC Update No. 2016-13”) which the Company implemented effective January 1, 2020. This ASC update eliminates the recognition and measurement guidance for Troubled Debt Restructurings (“TDRs”), while enhancing disclosure requirements for certain loan refinancing and restructurings. Additionally, this update requires that an entity disclose current-period write-offs by year of origination for financing receivables and net investments in leases. ASC Update No. 2022-02 should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, which has the option to be applied through a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASC Update No. 2016-13, this update is effective for fiscal years beginning after December 15, 2022, including interim periods. Early adoption is permitted for those entities that have adopted ASC Update No. 2016-13. The Company does not expect the implementation of this guidance to have a material impact on its financial position or results of operations.
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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, 2022
Amortized Cost,
Allowance
Net of Allowance
Gross
Gross
Amortized
for Credit
for Credit
Unrealized
Unrealized
(in millions)
Cost
Losses
Losses
Gains
Losses
Fair Value
U.S. Treasury and government agencies
$
404.0
$
—
$
404.0
$
2.1
$
24.4
$
381.7
Foreign government
2.2
—
2.2
0.1
—
2.3
Municipal
1,189.6
—
1,189.6
8.7
62.4
1,135.9
Corporate
4,000.3
( 0.9
)
3,999.4
35.2
123.1
3,911.5
Residential mortgage-backed
1,060.2
—
1,060.2
1.4
62.6
999.0
Commercial mortgage-backed
824.1
—
824.1
1.9
29.6
796.4
Asset-backed
165.3
—
165.3
0.2
10.1
155.4
Total fixed maturities
$
7,645.7
$
( 0.9
)
$
7,644.8
$
49.6
$
312.2
$
7,382.2
December 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
$
394.3
$
—
$
394.3
$
9.3
$
7.4
$
396.2
Foreign government
2.2
—
2.2
0.4
—
2.6
Municipal
1,176.2
—
1,176.2
32.6
8.0
1,200.8
Corporate
3,931.5
( 0.3
)
3,931.2
174.5
15.6
4,090.1
Residential mortgage-backed
1,068.2
—
1,068.2
12.4
11.0
1,069.6
Commercial mortgage-backed
802.4
—
802.4
26.6
4.6
824.4
Asset-backed
140.3
—
140.3
1.3
1.4
140.2
Total fixed maturities
$
7,515.1
$
( 0.3
)
$
7,514.8
$
257.1
$
48.0
$
7,723.9
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 2 – “Investments” in the Notes to Consolidated Financial Statements in the Company’s 2021 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, 2022
Amortized Cost, Net
of Allowance for
Fair
(in millions)
Credit Losses
Value
Due in one year or less
$
271.9
$
273.9
Due after one year through five years
2,015.1
2,028.4
Due after five years through ten years
2,775.8
2,635.1
Due after ten years
532.4
494.0
5,595.2
5,431.4
Mortgage-backed and asset-backed securities
2,049.6
1,950.8
Total fixed maturities
$
7,644.8
$
7,382.2
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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, 2022 and December 31, 2021, including the length of time the securities have been in an unrealized loss position:
March 31, 2022
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
$
7.5
$
132.1
$
16.9
$
124.6
$
24.4
$
256.7
Municipal
61.1
775.3
1.3
8.9
62.4
784.2
Corporate
91.4
1,706.1
17.0
115.5
108.4
1,821.6
Residential mortgage-backed
54.0
822.2
8.6
73.5
62.6
895.7
Commercial mortgage-backed
24.5
581.7
5.1
41.3
29.6
623.0
Asset-backed
10.1
122.6
—
—
10.1
122.6
Total investment grade
248.6
4,140.0
48.9
363.8
297.5
4,503.8
Below investment grade:
Corporate
13.5
257.1
1.2
9.4
14.7
266.5
Total fixed maturities
$
262.1
$
4,397.1
$
50.1
$
373.2
$
312.2
$
4,770.3
December 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
$
2.3
$
98.0
$
5.1
$
101.3
$
7.4
$
199.3
Municipal
7.9
480.8
0.1
2.5
8.0
483.3
Corporate
13.6
599.6
0.4
7.5
14.0
607.1
Residential mortgage-backed
11.0
653.5
—
—
11.0
653.5
Commercial mortgage-backed
4.6
204.0
—
—
4.6
204.0
Asset-backed
1.4
91.5
—
—
1.4
91.5
Total investment grade
40.8
2,127.4
5.6
111.3
46.4
2,238.7
Below investment grade:
Corporate
1.6
95.8
—
—
1.6
95.8
Total fixed maturities
$
42.4
$
2,223.2
$
5.6
$
111.3
$
48.0
$
2,334.5
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.
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,
2022
2021
(in millions)
Proceeds from sales
$
68.6
$
217.4
Gross gains
1.6
2.9
Gross losses
0.5
7.2
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D. Impairments
For the three months ended March 31, 2022, the Company recognized impairments on fixed maturities of $ 0.9 million. For the three months ended March 31, 2021, the Company did no t recognize any impairments.
At March 31, 2022 and December 31, 2021, the allowance for credit losses on mortgage loans was $ 7.1 million and the allowance for credit losses on available-for-sale debt securities was $ 0.9 million and $ 0.3 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. 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.
E. Equity securities
The following table provides pre-tax net realized and unrealized gains (losses) on equity securities:
Three Months Ended March 31,
(in millions)
2022
2021
Net gains (losses) recognized during the period
$
( 18.0
)
$
39.1
Less: net gains recognized on equity securities sold during the period
0.5
0.6
Net unrealized gains (losses) recognized during the period on equity securities still held
$
( 18.5
)
$
38.5
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 third-party pricing services 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 services prepare 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:
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•
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 services, 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 services cannot provide fair values. The Company determines fair values for these securities using either matrix pricing, which utilizes 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.
11
Table of Contents
The estimated fair values of the financial instruments were as follows:
March 31, 2022
December 31, 2021
Carrying
Fair
Carrying
Fair
(in millions)
Value
Value
Value
Value
Financial Assets carried at:
Fair Value through AOCI:
Fixed maturities
$
7,382.2
$
7,382.2
$
7,723.9
$
7,723.9
Fair Value through Net Income:
Equity securities
607.0
607.0
661.3
661.3
Other investments
146.8
146.8
143.8
143.8
Amortized Cost/Cost:
Other investments
455.0
466.8
450.8
472.9
Cash and cash equivalents
272.0
272.0
230.9
230.9
Total financial instruments
$
8,863.0
$
8,874.8
$
9,210.7
$
9,232.8
Financial Liabilities carried at:
Amortized Cost:
Debt
$
781.8
$
789.5
$
781.6
$
845.5
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 services 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 applicable pricing service along with supporting documentation for its review. The Company does not adjust quotes or prices obtained from the pricing services unless the pricing service agrees with the Company’s challenge. During the first three months of 2022 and 2021, the Company did not adjust any prices received from its pricing services.
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 third-party pricing services for the valuation of the majority of its fixed maturities and equity securities. The pricing services have indicated that they will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If a 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, 2022
(in millions)
Total
Level 1
Level 2
Level 3
Fixed maturities:
U.S. Treasury and government agencies
$
381.7
$
218.8
$
162.9
$
—
Foreign government
2.3
—
2.3
—
Municipal
1,135.9
—
1,123.6
12.3
Corporate
3,911.5
—
3,911.4
0.1
Residential mortgage-backed
999.0
—
999.0
—
Commercial mortgage-backed
796.4
—
785.8
10.6
Asset-backed
155.4
—
155.4
—
Total fixed maturities
7,382.2
218.8
7,140.4
23.0
Equity securities
607.0
602.2
—
4.8
Other investments
4.3
—
—
4.3
Total investment assets at fair value
$
7,993.5
$
821.0
$
7,140.4
$
32.1
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Table of Contents
December 31, 2021
(in millions)
Total
Level 1
Level 2
Level 3
Fixed maturities:
U.S. Treasury and government agencies
$
396.2
$
221.5
$
174.7
$
—
Foreign government
2.6
—
2.6
—
Municipal
1,200.8
—
1,186.8
14.0
Corporate
4,090.1
—
4,090.0
0.1
Residential mortgage-backed
1,069.6
—
1,069.6
—
Commercial mortgage-backed
824.4
—
813.1
11.3
Asset-backed
140.2
—
140.2
—
Total fixed maturities
7,723.9
221.5
7,477.0
25.4
Equity securities
661.3
651.2
—
10.1
Other investments
4.3
—
—
4.3
Total investment assets at fair value
$
8,389.5
$
872.7
$
7,477.0
$
39.8
Limited partnerships measured at fair value using the NAV based on an ownership interest in partners’ capital have not been included in the hierarchy tables. At March 31, 2022 and December 31, 2021, the fair values of these investments were $ 142.5 million and $ 139.5 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, 2022
(in millions)
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
272.0
$
272.0
$
—
$
—
Other investments
466.8
—
2.8
464.0
Total financial instruments
$
738.8
$
272.0
$
2.8
$
464.0
Liabilities:
Debt
$
789.5
$
—
$
789.5
$
—
December 31, 2021
(in millions)
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
230.9
$
230.9
$
—
$
—
Other investments
472.9
—
2.8
470.1
Total financial instruments
$
703.8
$
230.9
$
2.8
$
470.1
Liabilities:
Debt
$
845.5
$
—
$
845.5
$
—
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Table of Contents
The following tables provide a 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, 2022
Balance January 1, 2022
$
14.0
$
0.1
$
11.3
$
25.4
$
14.4
$
39.8
Total losses:
Included in total net realized and
unrealized investment losses
—
—
—
—
( 5.3
)
( 5.3
)
Included in other comprehensive loss-net
depreciation on available-for-sale securities
( 0.6
)
—
( 0.5
)
( 1.1
)
—
( 1.1
)
Sales
( 1.1
)
—
( 0.2
)
( 1.3
)
—
( 1.3
)
Balance March 31, 2022
$
12.3
$
0.1
$
10.6
$
23.0
$
9.1
$
32.1
Change in unrealized losses for the period
included in other comprehensive loss for
assets held at the end of the period
$
( 0.6
)
$
—
$
( 0.5
)
$
( 1.1
)
$
—
$
( 1.1
)
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
)
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, 2022 and 2021.
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, 2022
December 31, 2021
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
$
12.3
4.5 - 6.8% (6.5%)
$
14.0
4.5 - 6.8% (6.5%)
Corporate
Discounted
cash flow
Discount for:
Small issue size
Above-market coupon
0.1
2.5% (2.5%)
0.3% (0.3%)
0.1
2.5% (2.5%)
0.3% (0.3%)
Commercial
mortgage-backed
Discounted
cash flow
Discount for:
Small issue size
Above-market coupon
Lease structure
10.6
1.9 - 3.1% (2.7%)
0.5% (0.5%)
0.3% (0.3%)
11.3
1.9 - 3.1% (2.7%)
0.5% (0.5%)
0.3% (0.3%)
Equity securities
Market
comparables
Net tangible asset
1.2
N/A
1.3
N/A
Market
comparables
Revenue
market multiples
3.6
2.5 - 8.3 (5.4)
_
_
Internal price
Unadjusted price from
financing round
_
_
8.8
11.18 (11.18)
Other
Discounted
cash flow
Discount rate
4.3
16.1% (16.1%)
4.3
16.1% (16.1%)
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. Significant changes in any of the above inputs in isolation would result in a significantly lower or 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, 2022 and 2021 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 $ 24.7 million and $ 21.3 million for the three months ended March 31, 2022 and 2021, 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 2017. The audit of the Company’s Massachusetts corporate excise tax years 2017 and 2018 commenced in June 2021.
6. Pension Plans
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 March 31,
2022
2021
(in millions)
Pension Plans
Interest cost
$
3.8
$
3.7
Expected return on plan assets
( 4.3
)
( 4.6
)
Recognized net actuarial loss
1.3
0.8
Net periodic pension cost (benefit)
$
0.8
$
( 0.1
)
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Table of Contents
7. Other Comprehensive Income (Loss)
The following tables provide changes in other comprehensive income (loss).
Three Months Ended March 31,
2022
2021
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
$
( 477.5
)
$
100.3
$
( 377.2
)
$
( 234.1
)
$
49.2
$
( 184.9
)
Net unrealized losses arising during period for
those having credit losses in Consolidated
Statement of Income
( 1.2
)
0.2
( 1.0
)
—
—
—
Amount of (gains) losses realized from sales and
other recognized in Consolidated Statement
of Income
( 3.0
)
0.6
( 2.4
)
1.6
( 2.2
)
( 0.6
)
Amount of credit recoveries recognized in the
Consolidated Statement of Income
0.6
( 0.1
)
0.5
—
—
—
Amount of additional impairment losses
recognized in the Consolidated Statement
of Income
0.3
( 0.1
)
0.2
—
—
—
Net unrealized losses
( 480.8
)
100.9
( 379.9
)
( 232.5
)
47.0
( 185.5
)
Pension and postretirement benefits:
Amortization of net actuarial losses
recognized as net periodic benefit cost
1.4
( 0.3
)
1.1
0.8
( 0.1
)
0.7
Other comprehensive loss
$
( 479.4
)
$
100.6
$
( 378.8
)
$
( 231.7
)
$
46.9
$
( 184.8
)
Reclassifications out of accumulated other comprehensive income were as follows:
Three Months Ended
March 31,
(in millions)
2022
2021
Amount Reclassified from
Details about Accumulated Other
Accumulated Other
Affected Line Item in the Statement
Comprehensive Income Components
Comprehensive Income
Where Net Income is Presented
Net unrealized gains (losses) on investment securities
$
3.0
$
( 1.6
)
Net realized gains (losses) from sales and
other
( 0.9
)
—
Impairment losses on investments
2.1
( 1.6
)
Total before tax
( 0.4
)
2.2
Tax benefit (expense)
1.7
0.6
Continuing operations; net of tax
Amortization of defined benefit pension
and postretirement actuarial losses
( 1.4
)
( 0.8
)
Loss adjustment expenses and other
operating expenses (1)
0.3
0.1
Tax benefit
( 1.1
)
( 0.7
)
Continuing operations; net of tax
Total reclassifications for the period
$
0.6
$
( 0.1
)
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 months ended March 31, 2022 and 2021.
16
Table of Contents
8. Segment Information
The Company’s primary business operations include insurance products and services provided through four operating segments: Core Commercial, Specialty, Personal Lines and Other. Core Commercial includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial lines coverages provided to small and mid-sized businesses. Specialty includes four divisions of business: Professional and Executive Lines, Specialty Property and Casualty (“Specialty P&C”), Marine, and Surety and Other. Specialty P&C includes coverages such as program business (provides commercial insurance to markets with specialized coverage or risk management needs related to groups of similar businesses), specialty industrial and commercial property, and excess and surplus lines. 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 run-off voluntary assumed property and casualty pools and run-off direct asbestos and environmental businesses. During the first quarter of 2022, the Company disaggregated its former Commercial Lines segment into the aforementioned Core Commercial and Specialty segments. Prior periods reflect this new presentation. This presentation is 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)
2022
2021
Operating revenues:
Core Commercial
$
511.1
$
472.9
Specialty
301.3
274.2
Personal Lines
530.7
493.3
Other
3.5
4.2
Total
1,346.6
1,244.6
Net realized and unrealized investment gains (losses)
( 15.9
)
37.5
Total revenues
$
1,330.7
$
1,282.1
Operating income (loss) before interest expense and income taxes:
Core Commercial:
Underwriting income (loss)
$
32.2
$
( 51.3
)
Net investment income
35.4
36.9
Other expense
( 0.1
)
( 0.4
)
Core Commercial operating income (loss)
67.5
( 14.8
)
Specialty:
Underwriting income
33.9
2.0
Net investment income
16.2
14.9
Other income (expense)
( 0.1
)
0.1
Specialty operating income
50.0
17.0
Personal Lines:
Underwriting income
12.3
58.9
Net investment income
22.6
22.1
Other income
1.4
0.8
Personal Lines operating income
36.3
81.8
Other:
Underwriting loss
—
( 0.3
)
Net investment income
2.7
2.9
Other expense
( 2.1
)
( 1.5
)
Other operating income
0.6
1.1
Operating income before interest expense and income taxes
154.4
85.1
Interest on debt
( 8.5
)
( 8.5
)
Operating income before income taxes
145.9
76.6
Non-operating items:
Net realized and unrealized investment gains (losses)
( 15.9
)
37.5
Income from continuing operations before income taxes
$
130.0
$
114.1
The following table provides identifiable assets for the Company’s business segments and discontinued operations:
(in millions)
March 31, 2022
December 31, 2021
Property and Casualty
$
13,742.6
$
14,147.2
Assets of discontinued businesses
104.6
107.1
Total
$
13,847.2
$
14,254.3
The Company reviews the assets of its insurance companies collectively and does not allocate them between the Core Commercial, Specialty, Personal Lines and Other segments.
18
Table of Contents
9. Stock-based Compensation
As of March 31, 2022, there were 1,384,101 shares and 2,311,068 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)
2022
2021
Stock-based compensation expense
$
6.7
$
5.6
Tax benefit
( 1.4
)
( 1.2
)
Stock-based compensation expense, net of taxes
$
5.3
$
4.4
Stock Options
Information on the Company’s stock option activity for the three months ended March 31, 2022 and 2021 is summarized below.
Three Months Ended March 31,
2022
2021
(in whole shares and dollars)
Shares
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
Outstanding, beginning of period
1,230,211
$
99.14
1,282,278
$
93.64
Granted
140,339
139.51
178,040
115.35
Exercised
( 192,400
)
81.48
( 67,954
)
80.96
Forfeited or cancelled
( 2,939
)
116.43
—
—
Outstanding, end of period
1,175,211
106.81
1,392,364
97.03
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,
2022
2021
(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
380,100
$
117.60
350,480
$
116.37
Granted
143,208
138.20
168,092
115.04
Vested
( 114,978
)
119.35
( 109,667
)
110.68
Forfeited
( 5,609
)
119.92
( 7,388
)
116.82
Outstanding, end of period
402,721
124.40
401,517
117.37
Performance-based and market-based restricted stock units:
Outstanding, beginning of period
113,848
$
115.92
97,043
$
119.59
Granted
47,954
140.36
62,143
114.66
Vested
( 39,338
)
124.42
( 43,506
)
122.27
Forfeited
( 2,936
)
121.73
—
—
Outstanding, end of period
119,528
122.78
115,680
115.93
In the first three months of 2022 and 2021, the Company granted market-based awards totaling 19,057 and 37,348 , 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 forfeited above in 2022 are 1,282 shares related to market-based awards that achieved a payout below 100 %. These awards were forfeited in the first quarter of 2022. Included in the amount granted above in 2021 are 14,501 shares related to market-based awards that achieved a payout in excess of 100 %. These awards vested in the first quarter of 2021.
19
Table of Contents
The Company also granted performance-based restricted stock units in 2022 and 2021, totaling 28,897 and 21,401 , 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. Increases above the 100% target level are reflected as granted in the period after which performance-based stock unit goals are achieved. Decreases below the 100% target level are reflected as forfeited. Included in the amount granted above in 2022 are 7,988 shares related to performance-based awards that achieved a payout in excess of 100 %. These awards vested in the first quarter of 2022.
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)
2022
2021
Basic shares used in the calculation of earnings per share
35.5
36.4
Dilutive effect of securities:
Employee stock options
0.3
0.3
Non-vested stock grants
0.3
0.2
Diluted shares used in the calculation of earnings per share
36.1
36.9
Per share effect of dilutive securities on income from
continuing operations
$
( 0.05
)
$
( 0.03
)
Per share effect of dilutive securities on net income
$
( 0.05
)
$
( 0.04
)
Diluted earnings per share for the three months ended March 31, 2022 and 2021 excludes 0.1 million and 0.2 million shares, respectively, 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 the Company’s common stock of up to $ 1.3 billion. Under this program the Company had approximately $ 345 million available at March 31, 2022. 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.
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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)
2022
2021
Gross reserve for losses and LAE, beginning of period
$
6,447.6
$
6,024.0
Reinsurance recoverable on unpaid losses
1,693.8
1,641.6
Net reserve for losses and LAE, beginning of period
4,753.8
4,382.4
Net incurred losses and LAE in respect of losses occurring in:
Current year
793.5
789.5
Prior years
( 6.0
)
( 8.2
)
Total incurred losses and LAE
787.5
781.3
Net payments of losses and LAE in respect of losses occurring in:
Current year
191.1
178.5
Prior years
534.2
435.0
Total payments
725.3
613.5
Net reserve for losses and LAE, end of period
4,816.0
4,550.2
Reinsurance recoverable on unpaid losses
1,696.2
1,673.5
Gross reserve for losses and LAE, end of period
$
6,512.2
$
6,223.7
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 $ 6.0 million and $ 8.2 million in 2022 and 2021, respectively.
2022
For the three months ended March 31, 2022, net favorable loss and LAE development was $ 6.0 million, primarily as a result of favorable Specialty development of $ 13.2 million and favorable Core Commercial development of $ 6.4 million, partially offset by unfavorable Personal Lines development of $ 13.6 million. Specialty favorable development was primarily due to lower than expected losses within the marine, specialty industrial and commercial property, professional and executive, and surety lines. Core Commercial favorable development was primarily due to lower than expected losses in the workers’ compensation line. Personal Lines unfavorable development was due to higher than expected losses of $ 13.9 million, in the homeowners line, primarily due to higher severity and longer cycle times in repair activity, primarily related to claims incurred in the fourth quarter of 2021.
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 lower than expected losses in the workers’ compensation line.
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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, examination 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.