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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    

Commission File Number 1-13754

 

THE HANOVER INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-3263626

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

440 Lincoln Street, Worcester, Massachusetts 01653

(Address of principal executive offices) (Zip Code)

(508) 855-1000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbols

 

Name of each exchange on which registered 

Common Stock, $.01 par value

 

THG

 

New York Stock Exchange

7 5/8% Senior Debentures due 2025

 

THG

 

New York Stock Exchange

6.35% Subordinated Debentures due 2053

 

THGA

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares outstanding of the registrant’s common stock was 39,391,552 as of October 30, 2019.

 

 

 

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

 

2

 

 

 

 

Item 1.

Financial Statements

 

2

 

Consolidated Statements of Income

 

2

 

Consolidated Statements of Comprehensive Income

 

3

 

Consolidated Balance Sheets

 

4

 

Consolidated Statements of Shareholders’ Equity

 

5

 

Consolidated Statements of Cash Flows

 

6

 

Notes to Interim Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

51

 

 

 

 

Item 4.

Controls and Procedures

 

51

 

 

 

 

PART II.

OTHER INFORMATION

 

52

 

 

 

 

Item 1.

Legal Proceedings

 

52

 

 

 

 

Item 1A.

Risk Factors

 

52

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

54

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

SIGNATURES

 

56

 

 

 

 


Table of Contents

 

 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

September 30,

 

(In millions, except per share data)

 

2019

 

 

2018

 

 

 

2019

 

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

1,124.1

 

 

$

1,071.7

 

 

 

$

3,330.2

 

 

 

$

3,172.4

 

Net investment income

 

 

68.8

 

 

 

66.4

 

 

 

 

208.6

 

 

 

 

198.0

 

Net realized and unrealized investment gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses) from sales and other

 

 

0.6

 

 

 

(0.2

)

 

 

 

1.0

 

 

 

 

(0.1

)

Net change in fair value of equity securities

 

 

15.0

 

 

 

23.6

 

 

 

 

75.3

 

 

 

 

6.7

 

Net other–than–temporary impairment losses on

   investments recognized in earnings

 

 

(0.8

)

 

 

(0.4

)

 

 

 

(1.2

)

 

 

 

(2.8

)

Total net realized and unrealized investment gains

 

 

14.8

 

 

 

23.0

 

 

 

 

75.1

 

 

 

 

3.8

 

Fees and other income

 

 

7.0

 

 

 

5.5

 

 

 

 

18.9

 

 

 

 

17.3

 

Total revenues

 

 

1,214.7

 

 

 

1,166.6

 

 

 

 

3,632.8

 

 

 

 

3,391.5

 

Losses and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

705.3

 

 

 

676.4

 

 

 

 

2,122.6

 

 

 

 

2,018.5

 

Amortization of deferred acquisition costs

 

 

232.8

 

 

 

224.4

 

 

 

 

692.8

 

 

 

 

664.7

 

Interest expense

 

 

9.4

 

 

 

11.2

 

 

 

 

28.1

 

 

 

 

33.9

 

Other operating expenses

 

 

136.9

 

 

 

131.9

 

 

 

 

400.6

 

 

 

 

393.0

 

Total losses and expenses

 

 

1,084.4

 

 

 

1,043.9

 

 

 

 

3,244.1

 

 

 

 

3,110.1

 

Income from continuing operations before income taxes

 

 

130.3

 

 

 

122.7

 

 

 

 

388.7

 

 

 

 

281.4

 

Income tax expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

22.2

 

 

 

16.2

 

 

 

 

54.8

 

 

 

 

27.1

 

Deferred

 

 

1.3

 

 

 

2.5

 

 

 

 

13.9

 

 

 

 

17.4

 

Effect of new tax regulations on Chaucer gain on sale

 

 

(4.4

)

 

 

 

 

 

 

1.2

 

 

 

 

 

Total income tax expense

 

 

19.1

 

 

 

18.7

 

 

 

 

69.9

 

 

 

 

44.5

 

Income from continuing operations

 

 

111.2

 

 

 

104.0

 

 

 

 

318.8

 

 

 

 

236.9

 

Discontinued operations (net of taxes):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of Chaucer business

 

 

6.4

 

 

 

 

 

 

 

(2.6

)

 

 

 

 

Income (loss) from Chaucer business

 

 

2.1

 

 

 

(3.6

)

 

 

 

1.6

 

 

 

 

30.5

 

Loss from discontinued life businesses

 

 

(0.8

)

 

 

 

 

 

 

(2.5

)

 

 

 

 

Net income

 

$

118.9

 

 

$

100.4

 

 

 

$

315.3

 

 

 

$

267.4

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2.81

 

 

$

2.45

 

 

 

$

7.91

 

 

 

$

5.57

 

Discontinued operations (net of taxes):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of Chaucer business

 

 

0.16

 

 

 

 

 

 

 

(0.06

)

 

 

 

 

Income (loss) from Chaucer business

 

 

0.05

 

 

 

(0.09

)

 

 

 

0.03

 

 

 

 

0.72

 

Loss from discontinued life businesses

 

 

(0.02

)

 

 

 

 

 

 

(0.06

)

 

 

 

 

Net income per share

 

$

3.00

 

 

$

2.36

 

 

 

$

7.82

 

 

 

$

6.29

 

Weighted average shares outstanding

 

 

39.6

 

 

 

42.5

 

 

 

 

40.3

 

 

 

 

42.5

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2.77

 

 

$

2.41

 

 

 

$

7.80

 

 

 

$

5.50

 

Discontinued operations (net of taxes):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of Chaucer business

 

 

0.16

 

 

 

 

 

 

 

(0.06

)

 

 

 

 

Income (loss) from Chaucer business

 

 

0.05

 

 

 

(0.08

)

 

 

 

0.03

 

 

 

 

0.71

 

Loss from discontinued life businesses

 

 

(0.02

)

 

 

 

 

 

 

(0.06

)

 

 

 

 

Net income per share

 

$

2.96

 

 

$

2.33

 

 

 

$

7.71

 

 

 

$

6.21

 

Weighted average shares outstanding

 

 

40.2

 

 

 

43.1

 

 

 

 

40.9

 

 

 

 

43.1

 

 

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

2


Table of Contents

 

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

118.9

 

 

$

100.4

 

 

$

315.3

 

 

$

267.4

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net appreciation (depreciation) during the period

 

 

42.3

 

 

 

(25.0

)

 

 

258.4

 

 

 

(197.9

)

Change in other-than-temporary impairment losses

   recognized in other comprehensive income

 

 

0.7

 

 

 

(0.2

)

 

 

2.6

 

 

 

0.1

 

Total available-for-sale securities

 

 

43.0

 

 

 

(25.2

)

 

 

261.0

 

 

 

(197.8

)

Pension and postretirement benefits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net actuarial loss and prior service cost

 

 

2.3

 

 

 

1.9

 

 

 

6.8

 

 

 

0.5

 

Cumulative foreign currency translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount recognized as cumulative foreign currency

   translation during the period

 

 

 

 

 

1.6

 

 

 

0.7

 

 

 

0.6

 

Total other comprehensive income (loss), net of tax

 

 

45.3

 

 

 

(21.7

)

 

 

268.5

 

 

 

(196.7

)

Comprehensive income

 

$

164.2

 

 

$

78.7

 

 

$

583.8

 

 

$

70.7

 

 

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

3


Table of Contents

 

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

September 30,

 

 

December 31,

 

(In millions, except share data)

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost of $6,692.5 and $6,245.9)

 

$

6,946.3

 

 

$

6,161.5

 

Equity securities, at fair value

 

 

570.8

 

 

 

464.4

 

Other investments

 

 

722.5

 

 

 

661.5

 

Total investments

 

 

8,239.6

 

 

 

7,287.4

 

Cash and cash equivalents

 

 

157.6

 

 

 

1,020.7

 

Accrued investment income

 

 

53.0

 

 

 

53.2

 

Premiums and accounts receivable, net

 

 

1,298.8

 

 

 

1,176.7

 

Reinsurance recoverable on paid and unpaid losses and unearned premiums

 

 

1,734.2

 

 

 

1,648.6

 

Deferred acquisition costs

 

 

474.9

 

 

 

450.8

 

Deferred income tax asset

 

 

 

 

 

50.6

 

Goodwill

 

 

178.8

 

 

 

178.8

 

Other assets

 

 

384.3

 

 

 

371.6

 

Assets held-for-sale

 

 

 

 

 

57.4

 

Assets of discontinued businesses

 

 

106.0

 

 

 

103.9

 

Total assets

 

$

12,627.2

 

 

$

12,399.7

 

Liabilities

 

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

5,550.5

 

 

$

5,304.1

 

Unearned premiums

 

 

2,456.8

 

 

 

2,277.8

 

Expenses and taxes payable

 

 

649.0

 

 

 

909.8

 

Deferred income tax liability

 

 

46.3

 

 

 

 

Reinsurance premiums payable

 

 

52.8

 

 

 

37.3

 

Debt

 

 

667.8

 

 

 

777.9

 

Liabilities held-for-sale

 

 

 

 

 

22.2

 

Liabilities of discontinued businesses

 

 

117.2

 

 

 

115.9

 

Total liabilities

 

 

9,540.4

 

 

 

9,445.0

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share; 20.0 million shares authorized; none issued

 

 

 

 

 

 

Common stock, par value $0.01 per share; 300.0 million shares authorized;

   60.5 million shares issued

 

 

0.6

 

 

 

0.6

 

Additional paid-in capital

 

 

1,837.0

 

 

 

1,871.8

 

Accumulated other comprehensive income (loss)

 

 

153.5

 

 

 

(116.5

)

Retained earnings

 

 

2,423.1

 

 

 

2,182.3

 

Treasury stock at cost (20.9 million and 18.2 million shares)

 

 

(1,327.4

)

 

 

(983.5

)

Total shareholders’ equity

 

 

3,086.8

 

 

 

2,954.7

 

Total liabilities and shareholders’ equity

 

$

12,627.2

 

 

$

12,399.7

 

 

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

4


Table of Contents

 

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended