The Hanover Reports Fourth Quarter Net Income and Operating Income of $2.98 and $3.13 per Diluted Share, Respectively; Net and Operating Return on Equity of 18.8% and 15.7%, Respectively
- Strong fourth-quarter performance with a combined ratio of 94.2%
- Net income of $107.9 million in the fourth quarter
- Renewal price increases across all business segments
- Net premiums written increased by 1.5%
- 20.6% renewal price increase in Personal Lines, 12.4% in Core Commercial, and 11.6% in Specialty
- Board of Directors approved a 5% increase to the regular quarterly dividend
- Full-year net premiums written increased by 6.1%
- Catastrophe losses of $57.7 million affected the combined ratio
- Full-year combined ratio of 103.5%, excluding catastrophes
- Catastrophe losses of $690.1 million for the full year
- Operating return on equity of 15.7% for the full year
Insights
The reported combined ratio of 94.2% is a critical measure for insurance companies, indicating that for every dollar of premium earned, the company spent 94.2 cents on claims and expenses. A ratio below 100% denotes profitability in underwriting activities. The reduction in the loss and LAE ratio from the prior year and the improvement in the ex-CAT combined ratio suggest a stronger underwriting discipline and effective cost management, likely contributing to the company's positive financial performance.
The increase in net premiums written by 1.5% and 6.1% for the quarter and full year, respectively, coupled with the substantial renewal price increases across all business segments, reflects a robust pricing strategy that can offset claim costs and contribute to the bottom line. However, investors should note the potential impact of aggressive pricing on customer retention and new business acquisition.
The 16.4% increase in book value per share is a strong indicator of the company's financial health and value creation for shareholders. The dividend increase signals confidence in the company's earnings stability and financial position, which could be attractive to income-focused investors.
The insurance sector is highly sensitive to catastrophic events and the company's proactive measures to address inflation and changing weather patterns are commendable. The focus on loss control and preventive measures is likely to enhance the company's resilience against future claims. However, the deceleration in top-line growth towards the year's end raises questions about the sustainability of the growth trajectory, especially in the context of the competitive insurance landscape.
Investors should also consider the broader market implications of rising renewal rates and how this could affect consumer behavior. There is a delicate balance between maintaining profitability through rate increases and the risk of losing market share to competitors offering more competitive rates.
The increase in net investment income by 7.5% for the quarter and 12.1% for the full year indicates a favorable investment environment, particularly with higher bond reinvestment rates. This trend is likely a reflection of the rising interest rate environment, which can boost insurers' investment income, as they typically hold significant fixed-income assets. However, it is important to monitor the potential risks associated with a higher interest rate environment, such as increased borrowing costs and the potential for economic slowdown, which could impact claim frequencies and severities.
Fourth Quarter Highlights
- Combined ratio of
94.2% ; combined ratio, excluding catastrophes(1), of90.2% - Catastrophe losses of
$57.7 million - Net premiums written increase of
1.5% * - Renewal price increases(2) of
20.6% in Personal Lines, including29.1% in homeowners, as well as increases of12.4% in Core Commercial and11.6% in Specialty - Rate increases(2) of
13.2% in Personal Lines,9.3% in Core Commercial and9.0% in Specialty - Loss and loss adjustment expense ("LAE") ratio of
63.6% , 13.5 points below the prior-year quarter, driven by both lower catastrophe and non-catastrophe losses - Current accident year loss and LAE ratio, excluding catastrophes(3), of
60.2% , 3.1 points below the prior-year quarter - Net investment income of
$81.6 million 7.5% from the prior-year quarter, primarily due to higher bond reinvestment rates and the continued investment of operational cashflows, partially offset by lower partnership income - Book value per share of
$68.93 16.4% from September 30, 2023, primarily due to an increase in the fair value of fixed maturity investments and strong earnings in the quarter - On December 4, 2023, the Board of Directors approved an increase of
5% to the regular quarterly dividend
Full Year Highlights
- Combined ratio of
103.5% ; combined ratio, excluding catastrophes, of91.3% - Catastrophe losses of
$690.1 million - Net premiums written of
$5.8 billion 6.1% * from the prior year - Loss and LAE ratio of
73.0% , 4.0 points above the prior year, driven by higher catastrophe losses - Current accident year loss and LAE ratio, excluding catastrophes, improved from the prior year, reflecting the benefit of rate increases in each segment and loss ratio improvements in Core Commercial and Specialty, partially offset by a higher loss ratio in Personal Lines in the first half of the year
- Net investment income of
$332.1 million 12.1% from 2022, driven primarily by higher-than-expected bond reinvestment rates and higher cashflows
Net income was
"The fourth quarter represented a strong finish to a very productive year, as we delivered operating return on equity(5) of
"Having delivered on our most critical underlying operating and financial targets for 2023, including ex-CAT combined ratio, we enter 2024 with an increased confidence in our profitability and growth trajectory, with the foundation of our proven strategy, capabilities and distribution distinctiveness, as well as our talented and determined team focused on delivering strong and sustainable value for our shareholders and all of our stakeholders," Roche concluded.
"Our fourth quarter current accident year loss and LAE ratio, excluding catastrophes, of approximately
Fourth Quarter and Full Year 2023 Highlights
Three months ended | Year ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
($ in millions, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net premiums written | $ | 1,345.5 | $ | 1,326.0 | $ | 5,810.2 | $ | 5,476.5 | ||||||||
Growth | 1.5 | % | 9.1 | % | 6.1 | % | 9.7 | % | ||||||||
Net premiums earned | $ | 1,440.3 | $ | 1,363.5 | $ | 5,663.1 | $ | 5,252.3 | ||||||||
Current accident year loss and | 60.2 | % | 63.3 | % | 61.1 | % | 61.7 | % | ||||||||
Prior year development ratio | (0.6) | % | (0.1) | % | (0.3) | % | (0.4) | % | ||||||||
Catastrophe ratio | 4.0 | % | 13.9 | % | 12.2 | % | 7.7 | % | ||||||||
Expense ratio(6) | 30.6 | % | 30.9 | % | 30.5 | % | 30.8 | % | ||||||||
Combined ratio | 94.2 | % | 108.0 | % | 103.5 | % | 99.8 | % | ||||||||
Combined ratio, excluding catastrophes | 90.2 | % | 94.1 | % | 91.3 | % | 92.1 | % | ||||||||
Current accident year combined ratio, | 90.8 | % | 94.2 | % | 91.6 | % | 92.5 | % | ||||||||
Net income (loss) | $ | 107.9 | $ | (12.1) | $ | 35.3 | $ | 116.0 | ||||||||
per diluted (basic) share | 2.98 | (0.34) | 0.98 | 3.21 | ||||||||||||
Operating income (loss) | 113.1 | (37.4) | 56.2 | 199.9 | ||||||||||||
per diluted (basic) share | 3.13 | (1.05) | 1.56 | 5.53 | ||||||||||||
Book value per share | $ | 68.93 | $ | 65.61 | $ | 68.93 | $ | 65.61 | ||||||||
Ending shares outstanding (in millions) | 35.8 | 35.6 | 35.8 | 35.6 | ||||||||||||
*Unless otherwise stated, net premiums written growth and other growth comparisons are to the same period of the prior year |
(1) See information about this and other non-GAAP measures and definitions used throughout this press release on the final pages of this document. |
The Hanover Insurance Group, Inc. may also be referred to as "The Hanover" or "the company" interchangeably throughout this press release. |
Fourth Quarter Operating Highlights
Core Commercial
Core Commercial operating income before income taxes was
Fourth quarter 2023 results included net favorable prior-year reserve development, excluding catastrophes, of
Core Commercial current accident year combined ratio, excluding catastrophes, improved 1.7 points to
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 Core Commercial:
Three months ended | Year ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net premiums written | $ | 465.5 | $ | 453.2 | $ | 2,107.0 | $ | 1,999.9 | ||||||||
Growth | 2.7 | % | 5.9 | % | 5.4 | % | 7.2 | % | ||||||||
Net premiums earned | 519.9 | 503.0 | 2,060.3 | 1,950.5 | ||||||||||||
Operating income (loss) before taxes | 52.8 | (52.7) | 167.2 | 106.9 | ||||||||||||
Loss and LAE ratio | 63.1 | % | 84.3 | % | 65.8 | % | 68.5 | % | ||||||||
Expense ratio | 33.6 | % | 32.9 | % | 33.2 | % | 32.7 | % | ||||||||
Combined ratio | 96.7 | % | 117.2 | % | 99.0 | % | 101.2 | % | ||||||||
Prior-year development ratio | (0.4) | % | (0.5) | % | 0.2 | % | (0.5) | % | ||||||||
Catastrophe ratio | 5.7 | % | 24.6 | % | 8.3 | % | 9.9 | % | ||||||||
Combined ratio, excluding catastrophes | 91.0 | % | 92.6 | % | 90.7 | % | 91.3 | % | ||||||||
Current accident year combined ratio, | 91.4 | % | 93.1 | % | 90.5 | % | 91.8 | % | ||||||||
Specialty
Specialty operating income before income taxes was
Fourth quarter 2023 results included net favorable prior-year reserve development, excluding catastrophes, of
Specialty current accident year combined ratio, excluding catastrophes, decreased 1.4 points to
The expense ratio increased by 0.6 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 | |||||||||||||||
December 31 | December 31 | |||||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net premiums written | $ | 304.9 | $ | 309.5 | $ | 1,293.3 | $ | 1,243.7 | ||||||||
Growth | (1.5) | % | 8.7 | % | 4.0 | % | 11.2 | % | ||||||||
Net premiums earned | 321.0 | 308.4 | 1,274.2 | 1,189.0 | ||||||||||||
Operating income before taxes | 70.5 | 43.9 | 243.5 | 186.0 | ||||||||||||
Loss and LAE ratio | 46.8 | % | 54.7 | % | 50.7 | % | 54.0 | % | ||||||||
Expense ratio | 36.4 | % | 35.8 | % | 35.5 | % | 35.3 | % | ||||||||
Combined ratio | 83.2 | % | 90.5 | % | 86.2 | % | 89.3 | % | ||||||||
Prior-year development ratio | (4.4) | % | - | (3.8) | % | (1.6) | % | |||||||||
Catastrophe ratio | 1.7 | % | 3.2 | % | 3.4 | % | 2.8 | % | ||||||||
Combined ratio, excluding catastrophes | 81.5 | % | 87.3 | % | 82.8 | % | 86.5 | % | ||||||||
Current accident year combined ratio, | 85.9 | % | 87.3 | % | 86.6 | % | 88.1 | % | ||||||||
Personal Lines
Personal Lines operating income before income taxes was
Fourth quarter 2023 results included net unfavorable prior-year reserve development, excluding catastrophes, of
Personal Lines current accident year combined ratio, excluding catastrophe losses, decreased 5.9 points to
The expense ratio decreased by 1.3 points to
Net premiums written were
The following table summarizes premiums and components of the combined ratio for Personal Lines:
Three months ended | Year ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net premiums written | $ | 575.1 | $ | 563.3 | $ | 2,409.9 | $ | 2,232.9 | ||||||||
Growth | 2.1 | % | 12.2 | % | 7.9 | % | 11.1 | % | ||||||||
Net premiums earned | 599.4 | 552.1 | 2,328.6 | 2,112.8 | ||||||||||||
Operating income (loss) before taxes | 36.8 | (29.1) | (304.3) | (8.8) | ||||||||||||
Loss and LAE ratio | 72.6 | % | 82.8 | % | 91.6 | % | 77.8 | % | ||||||||
Expense ratio | 25.0 | % | 26.3 | % | 25.5 | % | 26.5 | % | ||||||||
Combined ratio | 97.6 | % | 109.1 | % | 117.1 | % | 104.3 | % | ||||||||
Prior-year development ratio | 0.8 | % | - | 1.1 | % | 0.4 | % | |||||||||
Catastrophe ratio | 3.8 | % | 10.2 | % | 20.4 | % | 8.3 | % | ||||||||
Combined ratio, excluding catastrophes | 93.8 | % | 98.9 | % | 96.7 | % | 96.0 | % | ||||||||
Current accident year combined ratio, | 93.0 | % | 98.9 | % | 95.6 | % | 95.6 | % | ||||||||
Full Year Underwriting Highlights
The company's combined ratio was
The current accident year combined ratio, excluding catastrophe losses, 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 losses recognized in earnings were
The company held
Shareholders' Equity and Capital Actions
On December 31, 2023, book value per share was
On December 31, 2023, operating subsidiary's statutory capital and surplus was
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 results on Thursday, February 1, at 10:00 a.m. E.T. A presentation will accompany the prepared remarks and has been posted on The Hanover's website. Interested investors and others can listen to the call and access the presentation through The Hanover's website, located in the "Investors" section at www.hanover.com. Investors may access the conference call by dialing 1-844-413-3975 in the
About The Hanover
The Hanover Insurance Group, Inc. is the holding company for several property and casualty insurance companies, which together constitute one of the largest insurance businesses in
Contact Information
Investors: | Media: | ||||||
Oksana Lukasheva | Michael F. Buckley | Emily P. Trevallion | |||||
olukasheva@hanover.com | mibuckley@hanover.com | etrevallion@hanover.com | |||||
1-508-525-6081 | 1-508-855-3099 | 1-508-855-3263 | |||||
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 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, 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 Opus Investment Management, Inc., which provides investment management services to institutions, pension funds and other organizations, and the operations of the holding company, as well as a block of run-off voluntary assumed property and casualty pools business in which the company has not actively participated since 1995, and run-off direct asbestos and environmental business and product liability businesses.
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.
The Hanover Insurance Group, Inc. | ||||||||||
Condensed Consolidated Income Statements | Three months ended | Year ended | ||||||||
December 31 | December 31 | |||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||
Revenues | ||||||||||
Premiums earned | $ | 1,440.3 | $ | 1,363.5 | $ | 5,663.1 | $ | 5,252.3 | ||
Net investment income | 81.6 | 75.9 | 332.1 | 296.3 | ||||||
Net realized and unrealized investment gains (losses): | ||||||||||
Net realized losses from sales and other | (7.0) | (10.2) | (8.9) | (26.5) | ||||||
Net change in fair value of equity securities | 7.8 | 42.8 | (5.6) | (63.3) | ||||||
Impairments on investments: | ||||||||||
Credit-related impairments | (1.5) | (0.4) | (7.7) | (1.9) | ||||||
Losses on intent to sell securities | - | - | (10.3) | (14.8) | ||||||
(1.5) | (0.4) | (18.0) | (16.7) | |||||||
Total net realized and unrealized investment gains (losses) | (0.7) | 32.2 | (32.5) | (106.5) | ||||||
Fees and other income | 7.6 | 7.1 | 30.8 | 26.5 | ||||||
Total revenues | 1,528.8 | 1,478.7 | 5,993.5 | 5,468.6 | ||||||
Losses and expenses | ||||||||||
Losses and loss adjustment expenses | 915.8 | 1,050.8 | 4,134.6 | 3,623.4 | ||||||
Amortization of deferred acquisition costs | 297.9 | 283.9 | 1,176.0 | 1,093.2 | ||||||
Interest expense | 8.5 | 8.6 | 34.1 | 34.1 | ||||||
Other operating expenses | 156.4 | 150.1 | 607.7 | 573.9 | ||||||
Total losses and expenses | 1,378.6 | 1,493.4 | 5,952.4 | 5,324.6 | ||||||
Income (loss) from continuing operations before income taxes | 150.2 | (14.7) | 41.1 | 144.0 | ||||||
Income tax expense (benefit) | 42.9 | (2.8) | 7.6 | 27.2 | ||||||
Income (loss) from continuing operations | 107.3 | (11.9) | 33.5 | 116.8 | ||||||
Discontinued operations (net of taxes): | ||||||||||
Income from discontinued Chaucer business | - | - | 1.2 | - | ||||||
Income (loss) from discontinued life businesses | 0.6 | (0.2) | 0.6 | (0.8) | ||||||
Net income (loss) | $ | 107.9 | $ | (12.1) | $ | 35.3 | $ | 116.0 | ||
The Hanover Insurance Group, Inc. | |||||||
Condensed Consolidated Balance Sheets | |||||||
December 31 | December 31 | ||||||
($ in millions) | 2023 | 2022 | |||||
Assets | |||||||
Total investments | $ | 8,913.1 | $ | 8,509.8 | |||
Cash and cash equivalents | 316.1 | 305.0 | |||||
Premiums and accounts receivable, net | 1,705.6 | 1,601.4 | |||||
Reinsurance recoverable on paid and unpaid losses and unearned premiums | 2,056.1 | 1,964.5 | |||||
Other assets | 1,535.1 | 1,530.3 | |||||
Assets of discontinued businesses | 86.6 | 84.1 | |||||
Total assets | $ | 14,612.6 | $ | 13,995.1 | |||
Liabilities | |||||||
Loss and loss adjustment expense reserves | $ | 7,308.1 | $ | 7,012.6 | |||
Unearned premiums | 3,102.5 | 2,954.2 | |||||
Debt | 783.2 | 782.4 | |||||
Other liabilities | 840.2 | 802.0 | |||||
Liabilities of discontinued businesses | 113.0 | 110.2 | |||||
Total liabilities | 12,147.0 | 11,661.4 | |||||
Total shareholders' equity | 2,465.6 | 2,333.7 | |||||
Total liabilities and shareholders' equity | $ | 14,612.6 | $ | 13,995.1 |
The following is a reconciliation from operating income (loss) to net income (loss)(4)(8):
The Hanover Insurance Group, Inc. | |||||||||||||||||||||||||
Three months ended December 31 | Year ended December 31 | ||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
($ in millions, except per share data) | $ Amount | Per Share | $ Amount | Per Share* | $ Amount | Per Share | $ Amount | Per Share | |||||||||||||||||
Operating income (loss) | |||||||||||||||||||||||||
Core Commercial | $ | 52.8 | $ | (52.7) | $ | 167.2 | $ | 106.9 | |||||||||||||||||
Specialty | 70.5 | 43.9 | 243.5 | 186.0 | |||||||||||||||||||||
Personal Lines | 36.8 | (29.1) | (304.3) | (8.8) | |||||||||||||||||||||
Other | (2.0) | (0.3) | (0.8) | 1.0 | |||||||||||||||||||||
Total | 158.1 | (38.2) | 105.6 | 285.1 | |||||||||||||||||||||
Interest expense | (8.5) | (8.6) | (34.1) | (34.1) | |||||||||||||||||||||
Operating income (loss) before income taxes | 149.6 | $ | 4.14 | (46.8) | $ | (1.31) | 71.5 | $ | 1.98 | 251.0 | $ | 6.95 | |||||||||||||
Income tax benefit (expense) on operating income (loss) | (36.5) | (1.01) | 9.4 | 0.26 | (15.3) | (0.42) | (51.1) | (1.42) | |||||||||||||||||
Operating income (loss) after income taxes | 113.1 | 3.13 | (37.4) | (1.05) | 56.2 | 1.56 | 199.9 | 5.53 | |||||||||||||||||
Non-operating items: | |||||||||||||||||||||||||
Net realized losses from sales and other | (7.0) | (0.19) | (10.2) | (0.29) | (8.9) | (0.25) | (26.5) | (0.73) | |||||||||||||||||
Net change in fair value of equity securities | 7.8 | 0.21 | 42.8 | 1.20 | (5.6) | (0.16) | (63.3) | (1.75) | |||||||||||||||||
Impairments on investments: | |||||||||||||||||||||||||
Credit-related impairments | (1.5) | (0.04) | (0.4) | (0.01) | (7.7) | (0.21) | (1.9) | (0.05) | |||||||||||||||||
Losses on intent to sell securities | - | - | - | - | (10.3) | (0.29) | (14.8) | (0.41) | |||||||||||||||||
(1.5) | (0.04) | (0.4) | (0.01) | (18.0) | (0.50) | (16.7) | (0.46) | ||||||||||||||||||
Other non-operating items | 1.3 | 0.04 | (0.1) | - | 2.1 | 0.06 | (0.5) | (0.02) | |||||||||||||||||
Income tax benefit (expense) on non-operating items | (6.4) | (0.18) | (6.6) | (0.18) | 7.7 | 0.22 | 23.9 | 0.66 | |||||||||||||||||
Income (loss) from continuing operations, net of taxes | 107.3 | 2.97 | (11.9) | (0.33) | 33.5 | 0.93 | 116.8 | 3.23 | |||||||||||||||||
Discontinued operations (net of taxes): | |||||||||||||||||||||||||
Income from discontinued Chaucer business | - | - | - | - | 1.2 | 0.03 | - | - | |||||||||||||||||
Income (loss) from discontinued life businesses | 0.6 | 0.01 | (0.2) | (0.01) | 0.6 | 0.02 | (0.8) | (0.02) | |||||||||||||||||
Net income (loss) | $ | 107.9 | $ | 2.98 | $ | (12.1) | $ | (0.34) | $ | 35.3 | $ | 0.98 | $ | 116.0 | $ | 3.21 | |||||||||
Dilutive weighted average shares outstanding | 36.2 | 36.1 | 36.1 | 36.1 | |||||||||||||||||||||
Basic weighted average shares outstanding | 35.8 | 35.6 | 35.7 | 35.6 | |||||||||||||||||||||
*Per share data is 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," "intends," "may," "projects," "projections," "plan," "likely," "potential," "targeted," "forecasts," "should," "could," "continue," "outlook," "guidance," "modeling," "target profitability," "target margins," "confident," "will," 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 and investment portfolio management, 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 impacts of general economic and sociopolitical 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, the potential impacts of inflation, and/or claims severity from higher cost of repairs due to, among other things, supply chain disruptions and inflation;
- 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;
- Catastrophe modeling and variability of catastrophe losses due to risk concentrations, changes in weather patterns, severe weather including wildfires, hurricanes and other convective storms, winter storms and freezes, and tornados, or terrorism, civil unrest, 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, global market disruptions, economic conditions, 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 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, changes in terms and conditions, and pricing segmentation, among others, to grow businesses believed to be more profitable or reduce premiums attributable to products or lines of business or geographies 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 or repair 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 governmental and/or central banking initiatives taken in response to inflationary pressures, 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 The Hanover Insurance Group, Inc. with the Securities and Exchange Commission ("SEC") and that are also available at www.hanover.com under "Investors." These risks and uncertainties include, but are not limited to:
- Changes in regulatory, legislative, economic, market and political conditions, particularly with respect to rates, the use of data, technology, artificial intelligence, cybersecurity, policy terms and conditions, restrictions on cancellations and/or non-renewals, payment flexibility, and regions where the company has geographical concentrations;
- Heightened financial market 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 and privacy 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 and freezes, hurricanes, or other severe weather, or due to terrorism, civil unrest, riots, or cybersecurity events (including from products not intended to provide cyber coverage);
- 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" and third-party litigation funding 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 or its operating model, including the impact of competition and consolidation in the industry and among agents and brokers, and the impact of artificial intelligence tools;
- Competition, particularly from competitors who have resource and capability advantages;
- The global macroeconomic environment, including 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, and/or increases in loss costs;
- Adverse state and federal regulation, legislative and/or regulatory actions (including significant revisions to
Michigan's automobile personal injury protection system and related litigation, and various regulations, orders and proposed legislation regarding bad faith, premium grace periods and returns, changes to terms and conditions, 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, the evolving use of artificial intelligence, and cyber-security threats;
- Uncertainties in estimating indemnification liabilities recorded in conjunction with obligations undertaken in connection with the sale of various businesses and discontinued operations; and
- The ability to collect from reinsurers, reinsurance availability and 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).
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 38 of the company's Annual Report on Form 10-K for the year ended December 31, 2022, the company uses non-GAAP financial measures as important measures of its operating performance, including operating income (loss), operating income (loss) before interest expense and income taxes, operating income (loss) per diluted (basic) share, and components of the combined ratio, both excluding and/or including catastrophe losses, prior-year reserve development and the expense ratio. Management believes these non-GAAP financial measures are important indications of the company's operating performance. The definition of other non-GAAP financial measures and terms can be found in the 2022 Annual Report on pages 63-66.
Operating income (loss) and operating income (loss) per diluted (basic) 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 diluted (basic) 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 prior-year 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 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, tornados, 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.
Book value per share is total shareholders' equity divided by the number of common shares outstanding. Book value per share excluding net unrealized gains and losses related to fixed maturity investments, net of tax, is total shareholders' equity excluding the after-tax effect of unrealized investment gains and losses on fixed maturities and market risk divided by the number of common shares outstanding.
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 | ||||||||||||||
December 31, 2023 | ||||||||||||||
Core | Specialty | Personal Lines | Total | |||||||||||
Total combined ratio (GAAP) | 96.7 | % | 83.2 | % | 97.6 | % | 94.2 | % | ||||||
Less: Catastrophe ratio | 5.7 | % | 1.7 | % | 3.8 | % | 4.0 | % | ||||||
Combined ratio, excluding catastrophe losses (non-GAAP) | 91.0 | % | 81.5 | % | 93.8 | % | 90.2 | % | ||||||
Less: Prior-year reserve development ratio | (0.4) | % | (4.4) | % | 0.8 | % | (0.6) | % | ||||||
Current accident year combined ratio, excluding catastrophe losses (non-GAAP) | 91.4 | % | 85.9 | % | 93.0 | % | 90.8 | % | ||||||
December 31, 2022 | ||||||||||||||
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 | % | ||||||
Year ended | ||||||||||||||
December 31, 2023 | ||||||||||||||
Core | Specialty | Personal Lines | Total | |||||||||||
Total combined ratio (GAAP) | 99.0 | % | 86.2 | % | 117.1 | % | 103.5 | % | ||||||
Less: Catastrophe ratio | 8.3 | % | 3.4 | % | 20.4 | % | 12.2 | % | ||||||
Combined ratio, excluding catastrophe losses (non-GAAP) | 90.7 | % | 82.8 | % | 96.7 | % | 91.3 | % | ||||||
Less: Prior-year reserve development ratio | 0.2 | % | (3.8) | % | 1.1 | % | (0.3) | % | ||||||
Current accident year combined ratio, excluding catastrophe losses (non-GAAP) | 90.5 | % | 86.6 | % | 95.6 | % | 91.6 | % | ||||||
December 31, 2022 | ||||||||||||||
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 | % | ||||||
(2) | 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, specific inflationary changes 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 charged at renewal 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 at 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. |
(3) | 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 | ||||||||||||||
December 31, 2023 | ||||||||||||||
Core | Specialty | Personal Lines | Total | |||||||||||
Total loss and LAE ratio | 63.1 | % | 46.8 | % | 72.6 | % | 63.6 | % | ||||||
Less: | ||||||||||||||
Prior-year reserve development ratio | (0.4) | % | (4.4) | % | 0.8 | % | (0.6) | % | ||||||
Catastrophe ratio | 5.7 | % | 1.7 | % | 3.8 | % | 4.0 | % | ||||||
Current accident year loss and LAE ratio, excluding catastrophes | 57.8 | % | 49.5 | % | 68.0 | % | 60.2 | % | ||||||
December 31, 2022 | ||||||||||||||
Total loss and LAE ratio | 84.3 | % | 54.7 | % | 82.8 | % | 77.1 | % | ||||||
Less: | ||||||||||||||
Prior-year reserve development ratio | (0.5) | % | - | - | (0.1) | % | ||||||||
Catastrophe ratio | 24.6 | % | 3.2 | % | 10.2 | % | 13.9 | % | ||||||
Current accident year loss and LAE ratio, excluding catastrophes | 60.2 | % | 51.5 | % | 72.6 | % | 63.3 | % | ||||||
Year ended | ||||||||||||||
December 31, 2023 | ||||||||||||||
Core | Specialty | Personal Lines | Total | |||||||||||
Total loss and LAE ratio | 65.8 | % | 50.7 | % | 91.6 | % | 73.0 | % | ||||||
Less: | ||||||||||||||
Prior-year reserve development ratio | 0.2 | % | (3.8) | % | 1.1 | % | (0.3) | % | ||||||
Catastrophe ratio | 8.3 | % | 3.4 | % | 20.4 | % | 12.2 | % | ||||||
Current accident year loss and LAE ratio, excluding catastrophes | 57.3 | % | 51.1 | % | 70.1 | % | 61.1 | % | ||||||
December 31, 2022 | ||||||||||||||
Total loss and LAE ratio | 68.5 | % | 54.0 | % | 77.8 | % | 69.0 | % | ||||||
Less: | ||||||||||||||
Prior-year reserve development ratio | (0.5) | % | (1.6) | % | 0.4 | % | (0.4) | % | ||||||
Catastrophe ratio | 9.9 | % | 2.8 | % | 8.3 | % | 7.7 | % | ||||||
Current accident year loss and LAE ratio, excluding catastrophes | 59.1 | % | 52.8 | % | 69.1 | % | 61.7 | % | ||||||
(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 below. |
Period ended | ||||||||||||||||||
($ in millions) | December 31 | March 31 | June 30 | September 30 | December 31 | |||||||||||||
2022 | 2023 | 2023 | 2023 | 2023 | ||||||||||||||
Total shareholders' equity (GAAP) | $ | 2,333.7 | $ | 2,389.0 | $ | 2,237.9 | $ | 2,116.3 | $ | 2,465.6 | ||||||||
Less: net unrealized appreciation on fixed maturity investments, net of tax | (637.4) | (545.2) | (610.0) | (720.9) | (462.4) | |||||||||||||
Total shareholders' equity, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax | $ | 2,971.1 | $ | 2,934.2 | $ | 2,847.9 | $ | 2,837.2 | $ | 2,928.0 | ||||||||
Quarter Averages | ||||||||||||||||||
Average shareholders' equity (GAAP) | $ | 2,291.0 | ||||||||||||||||
Average shareholders' equity, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax | $ | 2,882.6 | ||||||||||||||||
Year-to-date Averages | ||||||||||||||||||
Average shareholders' equity (GAAP) | $ | 2,308.5 | ||||||||||||||||
Average shareholders' equity, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax | $ | 2,903.7 | ||||||||||||||||
($ in millions) | Three months ended | Year ended | ||||||||
December 31 | December 31 | |||||||||
Net Income ROE | 2023 | 2023 | ||||||||
Net income (GAAP) | $ | 107.9 | $ | 35.3 | ||||||
Annualized net income* | 431.6 | |||||||||
Average shareholders' equity (GAAP) | $ | 2,291.0 | $ | 2,308.5 | ||||||
Return on equity | 18.8 | % | 1.5 | % | ||||||
Operating Income ROE (non-GAAP) | ||||||||||
Operating income after taxes | $ | 113.1 | $ | 56.2 | ||||||
Annualized operating income, net of tax* | 452.4 | |||||||||
Average shareholders' equity, excluding net unrealized appreciation | $ | 2,882.6 | $ | 2,903.7 | ||||||
Operating return on equity | 15.7 | % | 1.9 | % | ||||||
*For three months ended December 31, 2023, annualized net income and operating income after income taxes is calculated by multiplying three months ended net income and operating income after income taxes, respectively, by 4. |
(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) | Book value per share, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax, is a non-GAAP measure. Book value per share is the most directly comparable GAAP measure and is reconciled in the table below. |
Period ended | |||||||
September 30 | December 31 | ||||||
2023 | 2023 | ||||||
Book value per share | |||||||
Less: Net unrealized appreciation (depreciation) on fixed maturity investments, net of tax, per share | (20.17) | (12.93) | |||||
Book value per share, excluding net unrealized appreciation (depreciation) on | |||||||
Change in book value per share | 16.4 % | ||||||
Change in book value per share, excluding net unrealized appreciation | 3.1 % | ||||||
(8) | 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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SOURCE The Hanover Insurance Group, Inc.
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