The Hanover Reports Fourth Quarter and Full Year Results
The Hanover Insurance Group reported a net loss of $11.6 million in Q4 2022, compared to a profit of $163.5 million in Q4 2021. Full-year net income fell to $116 million from $418.7 million, while operating income also declined to $199.9 million from $318.3 million. The company experienced a 9.7% increase in net premiums written, totaling $5.5 billion, and a combined ratio of 99.8% for 2022. Catastrophe losses were significant, reaching $402.6 million for the year. Despite challenges, including the impact of Winter Storm Elliott, the board approved an 8% dividend increase to $0.81 per share. Book value per share stands at $65.38, reflecting a 1.2% increase from Q3 2022.
- Net premiums written increased by 9.7% to $5.5 billion in 2022.
- Board approved an 8% increase in quarterly dividend to $0.81.
- Book value per share rose to $65.38, a 1.2% increase from the previous quarter.
- Net loss of $11.6 million in Q4 2022 compared to net income of $163.5 million in Q4 2021.
- Full-year net income dropped to $116 million, down from $418.7 million in 2021.
- Operating income fell to $199.9 million in 2022, down from $318.3 million in 2021.
- Combined ratio increased to 99.8% from 97.0% in the prior year.
Full Year Highlights
- Combined ratio of
99.8% ; Combined ratio, excluding catastrophes(1), of92.1% - Net premiums written of
$5.5 billion 9.7% * from the prior year - Current accident year loss and loss adjustment expense ("LAE") ratio, excluding catastrophes(2), increased from the prior year reflecting the impact of inflation on property coverages in Personal Lines and Core Commercial, partially offset by the benefit of rate increases earning in within Specialty and Core Commercial
- Net investment income of
$296.3 million $25 million
Fourth Quarter Highlights
- Combined ratio of
108.0% , and94.1% excluding catastrophes - Catastrophe losses of
$189.6 million $165 million - Net premiums written increase of
9.1% , with strong contributions from each segment - Renewal price change(3) of
10.2% in Core Commercial,13.2% in Specialty and10.1% in Personal Lines, driven by homeowners renewal price change of15.5% - Rate increases(3) of
7.2% in Core Commercial,8.2% in Specialty and5.4% in Personal Lines - Current accident year loss and LAE ratio, excluding catastrophes, was in line with the outlook provided on the third quarter 2022 earnings call, but higher than the prior-year quarter driven by the impact of inflation, primarily on personal lines property
- Net investment income of
$75.9 million - On
December 5, 2022 , the Board of Directors approved an increase of8% to the regular quarterly dividend - Book value per share of
$65.38 1.2% fromSeptember 30, 2022 , primarily driven by an increase in the fair value of investments
Net income was
"Despite the disappointing impact of Winter Storm Elliott, we are pleased with the progress we made in the fourth quarter toward recapturing margins in property lines and we are proud of the advancements we made in 2022 on our long-term strategic and business priorities," said
"Considering the magnitude of recent catastrophe activity and the current economic environment, we delivered solid results, with operating income per share of
Fourth Quarter and Full Year 2022 Financial Highlights
Three months ended | Year ended | |||||||
($ in millions, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||
Net premiums written | ||||||||
Growth | ||||||||
Net premiums earned | ||||||||
Current accident year loss and LAE ratio, | 63.3 % | 59.6 % | 61.7 % | 58.5 % | ||||
Prior year development ratio | (0.1)% | (1.2)% | (0.4)% | (1.2)% | ||||
Catastrophe ratio | 13.9 % | 3.1 % | 7.7 % | 8.4 % | ||||
Loss and LAE ratio | ||||||||
Expense ratio | 30.9 % | 31.4 % | 30.8 % | 31.3 % | ||||
Combined ratio | 108.0 % | 92.9 % | 99.8 % | 97.0 % | ||||
Combined ratio, excluding catastrophes(1) | 94.1 % | 89.8 % | 92.1 % | 88.6 % | ||||
Current accident year combined ratio, | 94.2 % | 91.0 % | 92.5 % | 89.8 % | ||||
Net income (loss) | ||||||||
per diluted/(basic) share | (0.33) | 4.53 | 3.21 | 11.49 | ||||
Operating income (loss) | (37.4) | 122.1 | 199.9 | 318.3 | ||||
per diluted/(basic) share | (1.05) | 3.38 | 5.53 | 8.73 | ||||
Book value per share | ||||||||
Ending shares outstanding (in millions) | 35.6 | 35.5 | 35.6 | 35.5 | ||||
* Unless otherwise stated, net premiums written growth and other growth comparisons are to the same period of the prior year |
** Operating loss before and after income taxes, non-operating items, loss from continuing operations, net of taxes and net loss metrics are calculated using basic shares outstanding due to antidilution |
(1) See information about this and other non-GAAP measures and definitions used throughout this press release on the final pages of this document. |
Core Commercial
Core Commercial operating loss before taxes was
Catastrophe losses in the fourth quarter of 2022 were
Net favorable prior-year reserve development, excluding catastrophes, was
Core Commercial current accident year combined ratio, excluding catastrophes, increased 1.5 points to
The expense ratio decreased by 0.7 points to
Net premiums written were
The following table summarizes premiums and the components of the combined ratio for Core Commercial:
Three months ended | Year ended | ||||||||
($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||
Net premiums written | |||||||||
Growth | |||||||||
Net premiums earned | 503.0 | 468.4 | 1,950.5 | 1,810.9 | |||||
Operating income (loss) before taxes | (52.7) | 71.9 | 106.9 | 138.0 | |||||
Loss and LAE ratio | |||||||||
Expense ratio | |||||||||
Combined ratio | |||||||||
Prior-year development ratio | (0.5)% | (1.5)% | (0.5)% | (1.0)% | |||||
Catastrophe ratio | 24.6 % | 2.3 % | 9.9 % | 9.7 % | |||||
Combined ratio, excluding catastrophes | 92.6 % | 90.1 % | 91.3 % | 90.6 % | |||||
Current accident year combined ratio, | 93.1 % | 91.6 % | 91.8 % | 91.6 % | |||||
Specialty
Specialty operating income before taxes was
Prior-year reserve development, excluding catastrophes, was immaterial in the fourth quarter of 2022. This compared to net favorable prior-year reserve development, excluding catastrophes, of
Specialty current accident year combined ratio, excluding catastrophes, was
The expense ratio increased by 0.7 points to
Net premiums written were
The following table summarizes premiums and the components of the combined ratio for Specialty:
Three months ended | Year ended | |||||||
($ in millions) | 2022 | 2021 | 2022 | 2021 | ||||
Net premiums written | ||||||||
Growth | ||||||||
Net premiums earned | 308.4 | 277.5 | 1,189.0 | 1,029.9 | ||||
Operating income before taxes | 43.9 | 49.0 | 186.0 | 131.9 | ||||
Loss and LAE ratio | ||||||||
Expense ratio | ||||||||
Combined ratio | ||||||||
Prior-year development ratio | - | (1.5)% | (1.6)% | (1.6)% | ||||
Catastrophe ratio | 3.2 % | 1.7 % | 2.8 % | 5.0 % | ||||
Combined ratio, excluding catastrophes | 87.3 % | 86.0 % | 86.5 % | 87.9 % | ||||
Current accident year combined ratio, | 87.3 % | 87.5 % | 88.1 % | 89.5 % | ||||
Personal Lines
Personal Lines operating loss before taxes was
Prior-year reserve development, excluding catastrophes, was immaterial in the fourth quarter of 2022. This compared to net favorable prior-year reserve development, excluding catastrophes, of
Personal Lines current accident year combined ratio, excluding catastrophe losses, increased 6.8 points to
The expense ratio decreased by 1.0 point to
Net premiums written were
The following table summarizes premiums and components of the combined ratio for Personal Lines:
Three months ended | Year ended | ||||||||
($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||
Net premiums written | |||||||||
Growth | |||||||||
Net premiums earned | 552.1 | 496.7 | 2,112.8 | 1,929.4 | |||||
Operating income (loss) before taxes | (29.1) | 40.9 | (8.8) | 158.5 | |||||
Loss and LAE ratio | |||||||||
Expense ratio | |||||||||
Combined ratio | |||||||||
Prior-year development ratio | - | (0.6)% | 0.4 % | (1.2)% | |||||
Catastrophe ratio | 10.2 % | 4.7 % | 8.3 % | 9.1 % | |||||
Combined ratio, excluding catastrophes | 98.9 % | 91.5 % | 96.0 % | 87.1 % | |||||
Current accident year combined ratio, | 98.9 % | 92.1 % | 95.6 % | 88.3 % | |||||
Full Year Operating Highlights
Net income was
Catastrophe losses were
The combined ratio was
Total net premiums written were
Core Commercial operating income before taxes was
Specialty operating income before taxes was
Personal Lines operating loss before taxes was
Investments
Net investment income was
Net realized and unrealized investment gains recognized in earnings were
The company held
Shareholders' Equity
On
On
Additionally, in the fourth quarter, the Board of Directors approved an increase to the quarterly dividend of
Earnings Conference Call
The company will host a conference call to discuss its fourth quarter and full year results on
About The Hanover
Contact Information
Investors: | Media: |
|
Definition of Reported Segments
Continuing operations include four operating segments: Core Commercial, Specialty, Personal Lines and Other. The Core Commercial segment includes commercial multiple peril, commercial automobile, workers' compensation and other commercial lines coverages provided to small and mid-sized businesses. The Specialty segment includes four divisions of business: professional and executive lines, 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, excess and surplus lines, and specialty general liability coverage. The Personal Lines segment markets automobile, homeowners and ancillary coverages to individuals and families. The "Other" segment includes
Financial Supplement
The Hanover's fourth quarter and full year news release and financial supplement are available in the "Investors" section of the company's website at hanover.com.
Condensed Financial Statements and Reconciliations
Condensed Consolidated Income Statements | Three months ended | Year ended | |||||
($ in millions) | 2022 | 2021 | 2022 | 2021 | |||
Revenues | |||||||
Premiums earned | |||||||
Net investment income | 75.9 | 79.5 | 296.3 | 310.7 | |||
Net realized and unrealized investment gains (losses): | |||||||
Net realized gains (losses) from sales and other | (10.2) | (2.2) | (26.5) | 4.6 | |||
Net change in fair value of equity securities | 42.8 | 53.2 | (63.3) | 119.1 | |||
Recoveries (impairments) on investments: | |||||||
Credit-related recoveries (impairments) | (0.4) | (0.3) | (1.9) | 0.3 | |||
Losses on intent to sell securities | - | (0.3) | (14.8) | (1.0) | |||
(0.4) | (0.6) | (16.7) | (0.7) | ||||
Total net realized and unrealized investment gains (losses) | 32.2 | 50.4 | (106.5) | 123.0 | |||
Fees and other income | 7.1 | 6.0 | 26.5 | 23.9 | |||
Total revenues | 1,478.7 | 1,378.5 | 5,468.6 | 5,227.8 | |||
Losses and expenses | |||||||
Losses and loss adjustment expenses | 1,050.8 | 763.8 | 3,623.4 | 3,134.2 | |||
Amortization of deferred acquisition costs | 283.9 | 254.2 | 1,093.2 | 982.7 | |||
Interest expense | 8.6 | 8.5 | 34.1 | 34.0 | |||
Other operating expenses | 150.1 | 147.2 | 573.9 | 555.6 | |||
Total losses and expenses | 1,493.4 | 1,173.7 | 5,324.6 | 4,706.5 | |||
Income (loss) from continuing operations before income taxes | (14.7) | 204.8 | 144.0 | 521.3 | |||
Income tax expense (benefit) | (2.8) | 42.0 | 27.2 | 101.3 | |||
Income (loss) from continuing operations | (11.9) | 162.8 | 116.8 | 420.0 | |||
Discontinued operations (net of taxes): | |||||||
Income from | - | 1.2 | - | 1.2 | |||
Income (loss) from discontinued life businesses | 0.3 | (0.5) | (0.8) | (2.5) | |||
Net income (loss) | |||||||
Condensed Consolidated Balance Sheets | |||||
($ in millions) | 2022 | 2021 | |||
Assets | |||||
Total investments | |||||
Cash and cash equivalents | 305.0 | 230.9 | |||
Premiums and accounts receivable, net | 1,601.4 | 1,469.5 | |||
Reinsurance recoverable on paid and unpaid losses and unearned premiums | 1,964.5 | 1,907.3 | |||
Other assets | 1,530.3 | 1,386.9 | |||
Assets of discontinued businesses | 86.2 | 107.1 | |||
Total assets | |||||
Liabilities | |||||
Loss and loss adjustment expense reserves | |||||
Unearned premiums | 2,954.2 | 2,734.9 | |||
Debt | 782.4 | 781.6 | |||
Other liabilities | 802.0 | 1,023.6 | |||
Liabilities of discontinued businesses | 120.4 | 121.7 | |||
Total liabilities | 11,671.6 | 11,109.4 | |||
Total shareholders' equity | 2,325.6 | 3,144.9 | |||
Total liabilities and shareholders' equity |
The following is a reconciliation from operating income (loss) to net income (loss)(7):
Three months ended | Year ended | ||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
($ in millions, except per share data) | $ Amount | Per Share* | $ Amount | Per Share | $ Amount | Per Share | $ Amount | Per Share | |||||||||||||||||
Operating income (loss) | |||||||||||||||||||||||||
Core Commercial | $ | (52.7) | $ | 71.9 | $ | 106.9 | $ | 138.0 | |||||||||||||||||
Specialty | 43.9 | 49.0 | 186.0 | 131.9 | |||||||||||||||||||||
Personal Lines | (29.1) | 40.9 | (8.8) | 158.5 | |||||||||||||||||||||
Other | (0.3) | 1.1 | 1.0 | 3.9 | |||||||||||||||||||||
Total | (38.2) | 162.9 | 285.1 | 432.3 | |||||||||||||||||||||
Interest expense | (8.6) | (8.5) | (34.1) | (34.0) | |||||||||||||||||||||
Operating income (loss) before income taxes | (46.8) | $ | (1.31) | 154.4 | $ | 4.27 | 251.0 | $ | 6.95 | 398.3 | $ | 10.93 | |||||||||||||
Income tax benefit (expense) on operating income | 9.4 | 0.26 | (32.3) | (0.89) | (51.1) | (1.42) | (80.0) | (2.20) | |||||||||||||||||
Operating income (loss) after income taxes | (37.4) | (1.05) | 122.1 | 3.38 | 199.9 | 5.53 | 318.3 | 8.73 | |||||||||||||||||
Non-operating items: | |||||||||||||||||||||||||
Net realized gains (losses) from sales and other | (10.2) | (0.29) | (2.2) | (0.06) | (26.5) | (0.73) | 4.6 | 0.13 | |||||||||||||||||
Net change in fair value of equity securities | 42.8 | 1.20 | 53.2 | 1.47 | (63.3) | (1.75) | 119.1 | 3.27 | |||||||||||||||||
Recoveries (impairments) on investments: | |||||||||||||||||||||||||
Credit-related recoveries (impairments) | (0.4) | (0.01) | (0.3) | (0.01) | (1.9) | (0.05) | 0.3 | 0.01 | |||||||||||||||||
Losses on intent to sell securities | - | - | (0.3) | (0.01) | (14.8) | (0.41) | (1.0) | (0.03) | |||||||||||||||||
(0.4) | (0.01) | (0.6) | (0.02) | (16.7) | (0.46) | (0.7) | (0.02) | ||||||||||||||||||
Other non-operating items | (0.1) | - | - | - | (0.5) | (0.02) | - | - | |||||||||||||||||
Income tax benefit (expense) on non-operating | (6.6) | (0.18) | (9.7) | (0.26) | 23.9 | 0.66 | (21.3) | (0.59) | |||||||||||||||||
Income (loss) from continuing operations, net of | (11.9) | (0.33) | 162.8 | 4.51 | 116.8 | 3.23 | 420.0 | 11.52 | |||||||||||||||||
Discontinued operations (net of taxes): | |||||||||||||||||||||||||
Income from | - | - | 1.2 | 0.03 | - | - | 1.2 | 0.03 | |||||||||||||||||
Income (loss) from discontinued life businesses | 0.3 | - | (0.5) | (0.01) | (0.8) | (0.02) | (2.5) | (0.06) | |||||||||||||||||
Net income (loss) | $ | (11.6) | $ | (0.33) | $ | 163.5 | $ | 4.53 | $ | 116.0 | $ | 3.21 | $ | 418.7 | $ | 11.49 | |||||||||
Dilutive weighted average shares outstanding | 36.1 | 36.1 | 36.1 | 36.4 | |||||||||||||||||||||
Basic weighted average shares outstanding | 35.6 | 35.5 | 35.6 | 35.9 | |||||||||||||||||||||
*Operating loss before and after income taxes, non-operating items, loss from continuing operations, net of taxes, and net loss metrics are calculated using basic shares outstanding due to antidilution. |
Forward-Looking Statements and Non-GAAP Financial Measures
Forward-Looking Statements
Certain statements in this document and comments made by management may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as, but not limited to, "believes," "anticipates," "expects," "may," "projects," "projections," "plan," "likely," "potential," "targeted," "forecasts," "should," "could," "continue," "outlook," "guidance," "modeling," "target profitability", "target margins", "moving forward", "confident", and other similar expressions are intended to identify forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. The company cautions investors that any such forward-looking statements are estimates, beliefs, expectations and/or projections that involve significant judgment, and that historical results, trends and forward-looking statements are not guarantees and are not necessarily indicative of future performance. Actual results could differ materially from those anticipated.
These statements include, but are not limited to, the company's statements regarding:
- The company's outlook and its ability to achieve components or the sum of the respective period guidance on its future results of operations including: the combined ratio, excluding catastrophe losses; catastrophe losses; net investment income; growth of net premiums written and/or net premiums earned in total or by line of business; expense ratio; operating return on equity; interest rate assumptions, renewal price change, rate, and/or the effective tax rate;
- The company's ability to deliver on expectations set forth related to target margins, target returns and/or return to target profitability in total or by line of business;
- The company's ability to deliver on its long-term targets, including but not limited to, return on equity;
- The continued and residual impacts of the global pandemic ("Pandemic") and related economic conditions on the company's operating and financial results, including, but not limited to, the impact on the company's investment portfolio, changes in claims frequency as a result of fluctuations in economic activity, severity from higher cost of repairs due to, among other things, supply chain disruptions, inflation, declines in premium as a result of, among other things, credits or returns to the company's customers, lower submissions, changes in renewals and policy endorsements, public health guidance, recession, and the impact of government orders and restrictions in the states and jurisdictions in which the company operates;
- Uses of capital for share repurchases, special or ordinary cash dividends, business investments or growth, or otherwise, and outstanding shares in future periods as a result of various share repurchase mechanisms, capital management framework, especially in the current environment, and overall comfort with liquidity and capital levels;
- Variability of catastrophe losses due to risk concentrations, changes in weather patterns including climate change, and severe weather including wildfires, hurricanes, terrorism, civil unrest, winter storms, riots or other events, as well as the complexity in estimating losses from large catastrophe events due to delayed reporting of the existence, nature or extent of losses or where "demand surge," regulatory assessments, litigation, coverage and technical complexities or other factors may significantly impact the ultimate amount of such losses;
- Current accident year losses and loss selections ("picks"), excluding catastrophes, and prior accident year loss reserve development patterns, particularly in complex "longer-tail" liability lines, as well as the inherent variability in short-tail property and non-catastrophe weather losses;
- Changes in frequency and loss severity trends in Core Commercial, Specialty and/or Personal Lines;
- Ability to manage the impact of inflationary pressures, as a result of and following the Pandemic, global market disruptions, geopolitical events or otherwise, including, but not limited to, supply chain disruptions, labor shortages, and increases in cost of goods, services, labor, and materials;
- The confidence or concern that the current level of reserves is adequate and/or sufficient for future claim payments, whether due to losses that have been incurred but not reported, circumstances that delay the reporting of losses, business complexity, adverse judgments or developments with respect to case reserves, the difficulties and uncertainties inherent in projecting future losses from historical data, changes in replacement and medical costs, as well as complexities related to the Pandemic, including legislative, regulatory or judicial actions that expand the intended scope of coverages, or other factors;
- Characterization of some business as being "more profitable" in light of inherent uncertainty of ultimate losses incurred, especially for "longer-tail" liability businesses;
- Efforts to manage expenses, including the company's long-term expense savings targets, while allocating capital to business investment, which is at management's discretion;
- Risks and uncertainties with respect to our ability to retain profitable policies in force and attract profitable policies and to increase rates commensurate with, or in excess of, loss trends;
- Mix improvement, underwriting initiatives, coverage restrictions, non-renewals, and pricing segmentation, among others, to grow businesses believed to be more profitable or reduce premiums attributable to products or lines of business believed to be less profitable; balance rate actions and retention; offset long-term and/or short-term loss trends due to increased frequency; increased "social inflation" from a more litigious environment and higher average cost of resolution, increased property replacement costs, and/or social movements;
- The ability to generate growth in targeted segments through new agency appointments; rate increases (as a result of its market position, agency relationships or otherwise), retention improvements or new business; expansion into new geographies; new product introductions; or otherwise; and
- Investment returns and the effect of macro-economic interest rate trends and overall security yields, including the macro-economic impact of the Pandemic, inflationary pressures and corresponding governmental and/or central banking initiatives taken in response thereto, and geopolitical circumstances on new money yields and overall investment returns.
Additional Risks and Uncertainties
Investors are further cautioned and should consider the risks and uncertainties in the company's business that may affect such estimates and future performance that are discussed in the company's most recently filed reports on Form 10-K and Form 10-Q and other documents filed by
- Changes in regulatory, legislative, economic, market and political conditions, particularly with respect to rates, the use of data, technology and artificial intelligence, policy terms and conditions, payment flexibility, and regions where the company has geographical concentrations;
- Heightened volatility, fluctuations in interest rates (which have a significant impact on the market value of our investment portfolio and thus our book value), inflationary pressures, default rates and other factors that affect investment returns from the investment portfolio;
- Recessionary economic periods that may inhibit the company's ability to increase pricing or renew business, or otherwise impact the company's results, and which may be accompanied by higher claims activity in certain lines;
- Data security incidents, including, but not limited to, those resulting from a malicious cyber security attack on the company or its business partners and service providers, or intrusions into the company's systems, including cloud-based data storage, or data sources;
- Adverse claims experience, including those driven by large or increased frequency and/or severity of catastrophe events, including those related to wildfires, winter storms, hurricanes, terrorism, civil unrest, riots or other severe weather;
- The limitations and assumptions used to model non-catastrophe property and casualty losses (particularly with respect to products with longer-tail liability lines, such as casualty and bodily injury claims, or involving emerging issues related to losses incurred as the result of new lines of business, such as cyber or financial institutions coverage, or reinsurance contracts and reinsurance recoverables), leading to potential adverse development of loss and loss adjustment expense reserves;
- Changes in weather patterns and severity, whether as a result of global climate change, or otherwise, causing a higher level of losses from weather events to persist;
- Litigation and the possibility of adverse judicial decisions, including those which expand policy coverage beyond its intended scope and/or award "bad faith" or other non-contractual damages, and the impact of "social inflation" affecting judicial awards and settlements;
- The ability to increase or maintain insurance rates in line with anticipated loss costs and/or governmental action, including mandates by state departments of insurance to either raise or lower rates or provide credits or return premium to insureds;
- Investment impairments, which may be affected by, among other things, the company's ability and willingness to hold investment assets until they recover in value, as well as credit and interest rate risk, and general financial and economic conditions;
- Disruption of the independent agency channel, including the impact of competition and consolidation in the industry and among agents and brokers;
- Competition, particularly from competitors who have resource and capability advantages;
- The global macroeconomic environment, including actions taken in response to the Pandemic, inflation, recessionary effects, global trade disputes, war, energy market disruptions, equity price risk, and interest rate fluctuations, which, among other things, could result in reductions in market values of fixed maturities and other investments;
- Adverse state and federal regulation, legislative and/or regulatory actions (including recent significant revisions to
Michigan's automobile personal injury protection system and related litigation, and various regulations, orders and proposed legislation related to business interruption and workers' compensation coverages, premium grace periods and returns, and rate actions); - Financial ratings actions, in particular, downgrades to the company's ratings;
- Operational and technology risks and evolving technological and product innovation, including risks created by remote work environments, and the risk of cyber-security attacks on or breaches of the company's systems and/or impacting our outsourcing relationships and third-party operations, or resulting in claim payments (including from products not intended to provide cyber coverage);
- Uncertainties in estimating indemnification liabilities recorded in conjunction with obligations undertaken in connection with the sale of various businesses and discontinued operations;
- The ability to collect from reinsurers, reinsurance pricing, reinsurance terms and conditions, and the performance of the run-off voluntary property and casualty pools business (including those in the Other segment or in discontinued operations); and,
- Continuing risks and uncertainties associated with the impact of the Pandemic and related general economic conditions
Investors should not place undue reliance on forward-looking statements, which speak only as of the date they are made and should understand the risks and uncertainties inherent in or particular to the company's business. The company does not undertake the responsibility to update or revise such forward-looking statements, except as required by law.
Non-GAAP Financial Measures
As discussed on page 37 of the company's Annual Report on Form 10-K for the year ended
Operating income (loss) and operating income (loss) per share are non-GAAP measures. They are defined as net income (loss) excluding the after-tax impact of net realized and unrealized investment gains (losses), gains and/or losses on the repayment of debt, other non-operating items, and results from discontinued operations. Net realized and unrealized investment gains (losses), which include changes in the fair value of equity securities still held, are excluded for purposes of presenting operating income (loss), as they are, to a certain extent, determined by interest rates, financial markets and the timing of sales. Operating income (loss) also excludes net gains and losses from disposals of businesses, gains and losses related to the repayment of debt, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes, and certain other items. Operating income (loss) is the sum of the segment income (loss) from: Core Commercial, Specialty, Personal Lines, and Other, after interest expense and income taxes. In reference to one of the company's four segments, "operating income (loss)" is the segment income (loss) before both interest expense and income taxes. The company also uses "operating income (loss) per share" (which is after both interest expense and income taxes). Operating income per share is calculated by dividing operating income by the weighted average number of diluted shares of common stock. Operating loss per share is calculated by dividing operating loss by the weighted average number of basic shares of common stock due to antidilution.
The company believes that metrics of operating income (loss) and operating income (loss) in relation to its four segments provide investors with a valuable measure of the performance of the company's continuing businesses because they highlight the portion of net income (loss) attributable to the core operations of the business. Income (loss) from continuing operations is the most directly comparable GAAP measure for operating income (loss) (and operating income (loss) before income taxes) and measures of operating income (loss) that exclude the effects of catastrophe losses and/or reserve development should not be misconstrued as substitutes for income (loss) from continuing operations or net income (loss) determined in accordance with GAAP. A reconciliation of operating income (loss) to income (loss) from continuing operations and net income (loss) for the relevant periods is included on page 12 of this news release and in the Financial Supplement.
Operating return on average equity ("ROE") is a non-GAAP measure. See end note (5) for a detailed explanation of how this measure is calculated. Operating ROE is based on non-GAAP operating income (loss). In addition, the portion of shareholder equity attributed to unrealized appreciation (depreciation) on fixed maturity investments, net of tax, is excluded. The company believes this measure is helpful in that it provides insight to the capital used by, and results of, the continuing business exclusive of interest expense, income taxes, and other non-operating items. These measures should not be misconstrued as substitutes for GAAP ROE, which is based on net income (loss) and shareholders' equity of the entire company and without adjustments.
The company may also provide measures of operating income (loss) and combined ratios that exclude the impact of catastrophe losses (which in all respects include prior accident year catastrophe loss development). A catastrophe is a severe loss, resulting from natural or manmade events, including, but is not limited to, hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, freeze events, fire, explosions, civil unrest and terrorism. Due to the unique characteristics of each catastrophe loss, there is an inherent inability to reasonably estimate the timing or loss amount in advance. The company believes a separate discussion excluding the effects of catastrophe losses is meaningful to understand the underlying trends and variability of earnings, loss and combined ratio results, among others.
Prior accident year reserve development, which can either be favorable or unfavorable, represents changes in the company's estimate of costs related to claims from prior years. Calendar year loss and loss adjustment expense ("LAE") ratios determined in accordance with GAAP, excluding prior accident year reserve development, are sometimes referred to as "current accident year loss ratios." The company believes a discussion of loss and combined ratios, excluding prior accident year reserve development, is helpful since it provides insight into both estimates of current accident year results and the accuracy of prior-year estimates.
The loss and combined ratios in accordance with GAAP are the most directly comparable GAAP measures for the loss and combined ratios calculated excluding the effects of catastrophe losses and/or prior-year reserve development. The presentation of loss and combined ratios calculated excluding the effects of catastrophe losses and/or prior-year reserve development should not be misconstrued as substitutes for the loss and/or combined ratios determined in accordance with GAAP.
Endnotes
(1) | Combined ratio, excluding catastrophes, and current accident year combined ratio, excluding catastrophes, are non-GAAP measures. The combined ratio (which includes catastrophe losses and prior-year loss reserve development) is the most directly comparable GAAP measure. This and other non-GAAP measures are used throughout this document. See the disclosure on the use of this and other non-GAAP measures under the heading "Forward-Looking Statements and Non-GAAP Financial Measures." A reconciliation of the GAAP combined ratio to the combined ratio, excluding catastrophes, and to the current accident year combined ratio, excluding catastrophes, is shown below. |
Three months ended | ||||||||||
Core | Specialty | Personal | Total | |||||||
Total combined ratio (GAAP) | 117.2 % | 90.5 % | 109.1 % | 108.0 % | ||||||
Less: Catastrophe ratio | 24.6 % | 3.2 % | 10.2 % | 13.9 % | ||||||
Combined ratio, excluding catastrophe losses (non-GAAP) | 92.6 % | 87.3 % | 98.9 % | 94.1 % | ||||||
Less: Prior-year reserve development ratio | (0.5)% | - | - | (0.1)% | ||||||
Current accident year combined ratio, excluding catastrophe losses (non-GAAP) | 93.1 % | 87.3 % | 98.9 % | 94.2 % | ||||||
Total combined ratio (GAAP) | 92.4 % | 87.7 % | 96.2 % | 92.9 % | ||||||
Less: Catastrophe ratio | 2.3 % | 1.7 % | 4.7 % | 3.1 % | ||||||
Combined ratio, excluding catastrophe losses (non-GAAP) | 90.1 % | 86.0 % | 91.5 % | 89.8 % | ||||||
Less: Prior-year reserve development ratio | (1.5)% | (1.5)% | (0.6)% | (1.2)% | ||||||
Current accident year combined ratio, excluding catastrophe losses (non-GAAP) | 91.6 % | 87.5 % | 92.1 % | 91.0 % | ||||||
Year ended | ||||||||||
Total combined ratio (GAAP) | 101.2 % | 89.3 % | 104.3 % | 99.8 % | ||||||
Less: Catastrophe ratio | 9.9 % | 2.8 % | 8.3 % | 7.7 % | ||||||
Combined ratio, excluding catastrophe losses (non-GAAP) | 91.3 % | 86.5 % | 96.0 % | 92.1 % | ||||||
Less: Prior-year reserve development ratio | (0.5)% | (1.6)% | 0.4 % | (0.4)% | ||||||
Current accident year combined ratio, excluding catastrophe losses (non-GAAP) | 91.8 % | 88.1 % | 95.6 % | 92.5 % | ||||||
Total combined ratio (GAAP) | 100.3 % | 92.9 % | 96.2 % | 97.0 % | ||||||
Less: Catastrophe ratio | 9.7 % | 5.0 % | 9.1 % | 8.4 % | ||||||
Combined ratio, excluding catastrophe losses (non-GAAP) | 90.6 % | 87.9 % | 87.1 % | 88.6 % | ||||||
Less: Prior-year reserve development ratio | (1.0)% | (1.6)% | (1.2)% | (1.2)% | ||||||
Current accident year combined ratio, excluding catastrophe losses (non-GAAP) | 91.6 % | 89.5 % | 88.3 % | 89.8 % | ||||||
(2) | Current accident year loss and LAE ratio, excluding catastrophe losses, is a non-GAAP measure, which is equal to the loss and LAE ratio ("loss ratio"), excluding prior-year reserve development and catastrophe losses. The loss ratio (which includes losses, LAE, catastrophe losses and prior-year loss reserve development) is the most directly comparable GAAP measure. A reconciliation of the GAAP loss ratio to the current accident year loss ratio, excluding catastrophe losses, is shown below. |
Three months ended | |||||||||||||
Core | Specialty | Personal Auto | Home & | Personal | Total | ||||||||
Total loss and LAE ratio (GAAP) | 84.3 % | 54.7 % | 85.1 % | 79.5 % | 82.8 % | 77.1 % | |||||||
Less: | |||||||||||||
Prior-year reserve development ratio | (0.5)% | - | (0.2)% | 0.2 % | - | (0.1)% | |||||||
Catastrophe ratio | 24.6 % | 3.2 % | (0.3)% | 25.4 % | 10.2 % | 13.9 % | |||||||
Current accident year loss and LAE ratio, excluding | 60.2 % | 51.5 % | 85.6 % | 53.9 % | 72.6 % | 63.3 % | |||||||
Total loss and LAE ratio (GAAP) | 58.8 % | 52.6 % | 73.4 % | 61.7 % | 68.9 % | 61.5 % | |||||||
Less: | |||||||||||||
Prior-year reserve development ratio | (1.5)% | (1.5)% | (1.4)% | 0.7 % | (0.6)% | (1.2)% | |||||||
Catastrophe ratio | 2.3 % | 1.7 % | 0.7 % | 11.2 % | 4.7 % | 3.1 % | |||||||
Current accident year loss and LAE ratio, excluding | 58.0 % | 52.4 % | 74.1 % | 49.8 % | 64.8 % | 59.6 % | |||||||
Year ended | |||||||||||||
Core | Specialty | Personal Auto | Home & | Personal | Total | ||||||||
Total loss and LAE ratio (GAAP) | 68.5 % | 54.0 % | 77.3 % | 78.6 % | 77.8 % | 69.0 % | |||||||
Less: | |||||||||||||
Prior-year reserve development ratio | (0.5)% | (1.6)% | (0.3)% | 1.4 % | 0.4 % | (0.4)% | |||||||
Catastrophe ratio | 9.9 % | 2.8 % | 0.7 % | 19.8 % | 8.3 % | 7.7 % | |||||||
Current accident year loss and LAE ratio, excluding | 59.1 % | 52.8 % | 76.9 % | 57.4 % | 69.1 % | 61.7 % | |||||||
Total loss and LAE ratio (GAAP) | 67.4 % | 57.4 % | 66.0 % | 72.6 % | 68.5 % | 65.7 % | |||||||
Less: | |||||||||||||
Prior-year reserve development ratio | (1.0)% | (1.6)% | (2.0)% | 0.1 % | (1.2)% | (1.2)% | |||||||
Catastrophe ratio | 9.7 % | 5.0 % | 1.6 % | 21.3 % | 9.1 % | 8.4 % | |||||||
Current accident year loss and LAE ratio, excluding | 58.7 % | 54.0 % | 66.4 % | 51.2 % | 60.6 % | 58.5 % | |||||||
(3) | Renewal price changes in Core Commercial and Specialty represent the average change in premium on renewed policies caused by the estimated net effect of base rate changes, discretionary pricing, inflation or changes in policy level exposure or insured risks. Rate increases in Core Commercial and Specialty represent the average change in premium on renewed policies caused by the base rate changes, discretionary pricing, and inflation, excluding the impact of changes in policy level exposure or insured risks. Renewal price change in Personal Lines represents the average change in premium on policies available to renew caused by the net effects of filed rate, inflation adjustments or other changes in policy level exposure or insured risks, regardless of whether or not the policies are retained for the duration of their contractual terms. Rate change in Personal Lines is the estimated cumulative premium effect of approved rate actions applied to policies available for renewal, regardless of whether or not policies are actually renewed. Accordingly, rate changes do not represent actual increases or decreases realized by the company. Personal Lines rate changes do not include inflation or changes in policy level exposure or insured risks. |
(4) | Operating income (loss) and operating income (loss) per diluted (basic) share are non-GAAP measures. Operating income (loss) before income taxes, as referenced in the results of the business segments, is defined as, with respect to such segment, operating income (loss) before interest expense and income taxes. The reconciliation of operating income (loss) and operating income (loss) per diluted (basic) share to the closest GAAP measures, income (loss) from continuing operations and income (loss) from continuing operations per diluted (basic) share, respectively, is provided on the preceding pages of this news release. |
(5) | Operating return on average equity ("operating ROE") is a non-GAAP measure. Operating ROE is calculated by dividing annualized operating income (loss) after tax for the applicable period (see under the heading in this news release "Non-GAAP Financial Measures" and end note (4)), by average shareholders' equity, excluding unrealized appreciation (depreciation) on fixed maturity investments, net of tax, for the period presented. Total shareholders' equity, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax, is also a non-GAAP measure. Total shareholders' equity is the most directly comparable GAAP measure and is reconciled below. For the calculation of operating ROE, the average of beginning and ending shareholders' equity, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax, is used for the period as shown and reconciled in the table on the following page. |
Period Ended | ||||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
2021 | 2022 | 2022 | 2022 | 2022 | ||||||||||||||||||||
Total shareholders' equity (GAAP) | $ | 3,144.9 | $ | 2,832.8 | $ | 2,571.8 | $ | 2,295.9 | $ | 2,325.6 | ||||||||||||||
Less: net unrealized appreciation (depreciation) on | 184.9 | (195.0) | (459.4) | (706.7) | (641.4) | |||||||||||||||||||
Total shareholders' equity, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax | $ | 2,960.0 | $ | 3,027.8 | $ | 3,031.2 | $ | 3,002.6 | $ | 2,967.0 | ||||||||||||||
Quarter Averages | ||||||||||||||||||||||||
Average shareholders' equity (GAAP) | $ | 2,310.8 | ||||||||||||||||||||||
Average shareholders' equity, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax | $ | 2,984.8 | ||||||||||||||||||||||
Year-to-date Averages | ||||||||||||||||||||||||
Average shareholders' equity (GAAP) | $ | 2,634.2 | ||||||||||||||||||||||
Average shareholders' equity, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax | $ | 2,997.7 | ||||||||||||||||||||||
($ in millions) | Three months ended | Year ended | ||||||
Net Income (Loss) ROE | 2022 | 2022 | ||||||
Net income (loss) (GAAP) | (11.6) | |||||||
Annualized net loss* | (46.4) | |||||||
Average shareholders' equity (GAAP) | ||||||||
Return on equity | (2.0)% | |||||||
Operating Income (Loss) ROE (non-GAAP) | ||||||||
Operating income (loss) after taxes | (37.4) | |||||||
Annualized operating loss, net of tax* | (149.6) | |||||||
Average shareholders' equity, excluding net unrealized | ||||||||
Operating return on equity | (5.0)% | |||||||
*For three months ended |
(6) | Here, and later in this document, the expense ratio is reduced by installment and other fee revenues for purposes of the ratio calculation. |
(7) | The separate financial information of each operating segment 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. Management evaluates the results of the aforementioned operating segments without consideration of interest expense on debt and on a pre-tax basis. |
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