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The Hanover Reports First Quarter Net Income and Operating Income of $2.51 and $1.66 per Diluted Share, Respectively; Combined Ratio of 98.8%; Combined Ratio, Excluding Catastrophes, of 87.3%

04/29/2021

WORCESTER, Mass., April 29, 2021 /PRNewswire/ -- The Hanover Insurance Group, Inc. (NYSE: THG) today reported net income of $92.7 million, or $2.51 per diluted share, in the first quarter of 2021, compared to a net loss of $40.0 million, or $1.04 per basic share*, in the prior-year quarter. Operating income (1) was $61.4 million, or $1.66 per diluted share, for the first quarter of 2021. This compared to operating income of $86.8 million, or $2.23 per diluted share, in the prior-year quarter. The difference between net and operating income in the first quarter of 2021 was primarily due to an after-tax increase in the fair value of equity securities of $30.9 million, or $0.84 per diluted share, which is excluded from operating income.

First Quarter Highlights

  • Net premiums written increase of 5.2%**, reflecting growth in all segments
  • Combined ratio of 98.8%; combined ratio, excluding catastrophes(2) of 87.3%
  • Consistent with the pre-announcement, catastrophe losses of $133.3 million, or 11.5% of net premiums earned, primarily due to freeze events in Texas and surrounding states
  • Rate increases of 6.1% in core commercial lines(3) and 3.1% in Personal Lines(4)
  • Improved current accident year loss and loss adjustment expense ("LAE") ratio, excluding catastrophes(5), of 56.4%, due to continued favorable loss frequency, particularly in personal and commercial auto
  • Net investment income of $76.8 million, up 10.3% from the prior-year quarter, primarily from higher partnership income
  • Book value per share of $84.21, down 4.3% from December 31, 2020, primarily driven by a decrease in net unrealized gains on fixed maturity investments, net of tax, partially offset by net income. Excluding net unrealized gains on fixed maturity investments, net of tax, book value per share(6) increased 1.7% from December 31, 2020

"We are very pleased with our strong financial performance in the first quarter, in light of the unprecedented catastrophe activity," said John C. Roche, president and chief executive officer at The Hanover. "We delivered net premiums written growth of 5.2%, exceeding our original first quarter expectations and demonstrating our ability to capitalize on attractive market opportunities in this dynamic environment. In Commercial Lines, our growth surpassed pre-COVID levels, as we benefitted from our deep agency relationships, rate increases, and an improvement in the overall economic environment. The Commercial Lines rate environment continues to be robust, as evidenced by average rate increases of 6.1% in our core commercial business and further rate acceleration in most of our specialty businesses. We believe the commercial pricing environment will remain strong moving forward. In Personal Lines, we accelerated our top-line momentum throughout the quarter, improving retention and delivering strong new business results, providing further validation of the effectiveness of our customer-centric strategy. As we look ahead, we are focused on driving profitable growth across our portfolio, enabling us to continue to invest in our company and deliver increasing value for our shareholders, agents, customers and other stakeholders."

Commenting on the company's first quarter results, Jeffrey M. Farber, executive vice president and chief financial officer, said, "We reported strong underlying underwriting performance, as demonstrated by a combined ratio, excluding catastrophes, of 87.3%, largely the result of mix improvement, earning-in of rate increases, and the continuing benefit of lower loss frequency, primarily in auto lines. Although our expense ratio in the quarter was slightly elevated compared to the first quarter 2020, due to the timing of certain expenses in the year-ago quarter, we remain on track to deliver a 30-basis point improvement in 2021. Our high-quality investment portfolio performed exceptionally well, generating $76.8 million of pre-tax income in the quarter, and we continued to thoughtfully manage our capital, returning $110 million to our shareholders through April 27, including $84 million through share repurchases."


Three months ended



March 31


  ($ in millions, except per share data)

2021


2020


Net premiums written

$1,196.1


$1,136.9


Net income (loss)

92.7


(40.0)


per diluted/(basic) share

2.51


(1.04)


Operating income

61.4


86.8


per diluted share

1.66


2.23


Net investment income

76.8


69.6


Book value per share

$84.21


$72.05


Ending shares outstanding (in millions)

36.2


38.0


Combined ratio

98.8 %


95.2 %


Prior-year development ratio

(0.7)%


(0.2)%


Catastrophe ratio

11.5 %


3.3 %


Combined ratio, excluding catastrophes

87.3 %


91.9 %


Current accident year combined ratio, excluding catastrophes(2)

88.0 %


92.1 %


 

(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.

* Operating income per share metrics are calculated using diluted shares outstanding; prior year non-operating items, loss from continuing and discontinued operations and net loss per share metrics were calculated using basic shares outstanding due to antidilution. Basic shares outstanding consist of the daily weighted average number of common shares outstanding during the period. Diluted shares outstanding consist of the daily weighted average number of basic and dilutive common equivalent shares (employee stock options and non-vested stock grants) outstanding.

**Unless otherwise stated, net premiums written growth and other growth comparisons are to the same period of the prior year.

First Quarter Operating Highlights

Commercial Lines
Commercial Lines operating income before taxes was $2.2 million in the first quarter of 2021, compared to $54.6 million in the first quarter of 2020. The Commercial Lines combined ratio was 106.9%, compared to 98.2% in the prior-year quarter. Catastrophe losses in the first quarter of 2021 were $118.8 million, or 17.1 points of the combined ratio. Catastrophe losses were driven by severe winter freeze events in Texas and surrounding states, which primarily impacted the commercial multiple peril ("CMP") line, of which the company holds 2.9% market share in Texas. This compared to catastrophe losses of $23.8 million, or 3.5 points of the combined ratio, in the prior-year quarter.

First quarter 2021 results included $3.3 million, or 0.5 points, of net favorable prior-year reserve development, driven primarily by continued favorability in workers' compensation. This compared to net favorable prior-year reserve development of $3.7 million, or 0.5 points, in the first quarter of 2020.

Commercial Lines current accident year combined ratio, excluding catastrophes, decreased 4.9 points to 90.3% in the first quarter of 2021, from 95.2% in the prior-year quarter. The current accident year loss and LAE ratio, excluding catastrophes, decreased by 5.0 points to 56.2%, driven primarily by continued favorable loss frequency in the auto line, as well as improved underwriting and mix. The first quarter of 2021 also reflected a favorable comparison to the prior-year quarter, which included one large fire loss in CMP and a reserve provision for potential COVID-19 losses.

Net premiums written were $757.4 million in the quarter, up 7.0% from the prior-year quarter, with particularly strong growth in specialty(7), largely reported in other commercial lines ("OCL"). The core commercial average base rate increased 6.1% for the first quarter, while pricing(3) increases averaged 6.3%.

The following table summarizes premiums and the components of the combined ratio for Commercial Lines:


Three months ended



March 31


  ($ in millions)

2021


2020


Net premiums written

$757.4


$707.6


Net premiums earned

692.9


675.9


Operating income before taxes

2.2


54.6


Loss and LAE ratio

72.8%


64.2%


Expense ratio(8)

34.1%


34.0%


Combined ratio

106.9%


98.2%


Prior-year development ratio

(0.5)%


(0.5)%


Catastrophe ratio

17.1 %


3.5 %


Combined ratio, excluding catastrophes

89.8 %


94.7 %


Current accident year combined ratio, excluding catastrophes

90.3 %


95.2 %


Personal Lines
Personal Lines operating income before taxes was $81.8 million in the first quarter of 2021, compared to $64.9 million in the first quarter of 2020. The Personal Lines combined ratio was 87.0%, compared to 90.0% in the prior-year quarter. Catastrophe losses in the first quarter of 2021 were $14.5 million, or 3.1 points of the combined ratio, compared to $14.1 million, or 3.0 points of the combined ratio, in the prior-year quarter.

First quarter 2021 results included $5.2 million, or 1.1 points, of net favorable prior-year reserve development, primarily in the auto line. This compared to net favorable prior-year reserve development of $1.6 million, or 0.3 points, in the first quarter of 2020.

Personal Lines current accident year combined ratio, excluding catastrophe losses, decreased by 2.3 points to 85.0% in the quarter, from 87.3% in the prior-year quarter. The current accident year loss and LAE ratio, excluding catastrophes, decreased by 2.8 points to 57.0%, driven by favorable loss frequency in the auto line, partially offset by a higher incidence of large losses in the homeowners line in the first quarter of 2021.

The expense ratio(8) increased by 0.5 points to 28.0% in the first quarter of 2021, primarily due to an increase in agency variable compensation.

Net premiums written were $438.7 million in the quarter, up 2.2% from the prior-year quarter, driven by rate increases and higher new business. Personal Lines average rate increases in the first quarter of 2021 were 3.1%.

The following table summarizes premiums and components of the combined ratio for Personal Lines:


Three months ended



March 31


  ($ in millions)

2021


2020


Net premiums written

$438.7


$429.3


Net premiums earned

468.9


465.5


Operating income before taxes

81.8


64.9


Loss and LAE ratio

59.0%


62.5%


Expense ratio

28.0%


27.5%


Combined ratio

87.0%


90.0%


Prior-year development ratio

(1.1)%


(0.3)%


Catastrophe ratio

3.1 %


3.0 %


Combined ratio, excluding catastrophes

83.9 %


87.0 %


Current accident year combined ratio, excluding catastrophes

85.0 %


87.3 %


Investments
Net investment income was $76.8 million for the first quarter of 2021, compared to $69.6 million in the prior-year quarter. The increase was driven by unusually high income from certain limited partnerships, partially offset by lower new money yields. The average pre-tax earned yield on fixed maturities was 3.11% and 3.45% for the quarters ended March 31, 2021, and 2020, respectively. Total pre-tax earned yield on the investment portfolio for the quarter ended March 31, 2021, was 3.74%, up from 3.60% in the prior-year quarter.

Net realized and unrealized investment gains recognized in net income were $37.5 million, pre-tax, in the first quarter of 2021, primarily due to changes in the fair value of equity securities. This compared to net realized and unrealized investment losses of $161.6 million, pre-tax, in the first quarter of 2020.

The company held $8.9 billion in cash and invested assets on March 31, 2021.  Fixed maturities and cash represented approximately 84% of the investment portfolio. Approximately 96% of the company's fixed maturity portfolio is rated investment grade. Net unrealized gains on the fixed maturity portfolio as of March 31, 2021, were $281.2 million before taxes, a decrease in fair value of $227.6 million since December 31, 2020, primarily due to higher interest rates.

Shareholders' Equity and Capital Actions
On March 31, 2021, book value per share was $84.21, down 4.3% from December 31, 2020, primarily driven by a decrease in net unrealized gains on fixed maturity investments, net of tax, as well as the ordinary quarterly cash dividend, partially offset by net income. Excluding net unrealized gains on fixed maturity investments, net of tax, book value per share increased 1.7% from December 31, 2020.

During the quarter, the company repurchased approximately 358,000 shares of common stock in the open market for $45.3 million. Additionally, through April 27, the company repurchased approximately 289,000 shares for $38.8 million. The company has approximately $39 million of remaining capacity under its existing $900 million share repurchase program.

Earnings Conference Call
The company will host a conference call to discuss its first quarter results on Friday, April 30, at 10:00 a.m. E.T.  A PowerPoint slide 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 at www.hanover.com, in the "Investors" section. Investors may access the conference call by dialing 1-844-413-3975 in the U.S. and 1-412-317-5458 internationally. Web-cast participants should go to the website 15 minutes early to register, download and install any necessary audio software.  A re-broadcast of the conference call will be available on The Hanover's website approximately two hours after the call.

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 the United States. The company provides exceptional insurance solutions through a select group of independent agents and brokers. Together with its agent partners, the company offers standard and specialized insurance protection for small and mid-sized businesses, as well as for homes, automobiles, and other personal items. For more information, please visit hanover.com.

Contact Information

Investors:

Media:


Oksana Lukasheva

Michael F. Buckley

Emily P. Trevallion

Email: olukasheva@hanover.com

Email: mibuckley@hanover.com

Email: etrevallion@hanover.com

1-508-525-6081

1-508-855-3099

1-508-855-3263

Definition of Reported Segments
Continuing operations include three operating segments: Commercial Lines, Personal Lines and Other. The Commercial Lines segment offers a suite of products targeted at the small to mid-size business markets, which include commercial multiple peril, commercial automobile, workers' compensation and other commercial coverages such as management and professional liability, marine, Hanover Programs, specialty industrial and commercial property, monoline general liability, surety and other commercial lines. 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, the operations of the holding company, as well as a block of run-off voluntary property and casualty pools business in which the company has not actively participated since 1995.

Financial Supplement
The Hanover's first quarter earnings news release and financial supplement are available in the "Investors" section of the company's website at hanover.com.

Condensed Financial Statements and Reconciliations

The Hanover Insurance Group, Inc.






Condensed Consolidated Income Statements


Three months ended




March 31


($ in millions)


2021


2020


Revenues






Premiums earned


$1,161.8


$1,141.4


Net investment income


76.8


69.6


Net realized and unrealized investment gains (losses):






 Net realized gains (losses) from sales and other


(1.6)


3.1


 Net change in fair value of equity securities


39.1


(136.2)


    Impairment losses on investments


-


(28.5)


Total net realized and unrealized investment gains (losses)


37.5


(161.6)


Fees and other income


7.2


6.8


Total revenues


1,283.3


1,056.2


Losses and expenses






Losses and loss adjustment expenses


781.3


728.2


Amortization of deferred acquisition costs


240.3


236.9


Interest expense


8.5


9.4


Other operating expenses


139.1


135.6


Total losses and expenses


1,169.2


1,110.1


Income (loss) from continuing operations before income taxes


114.1


(53.9)


Income tax expense (benefit)


21.3


(15.2)


Income (loss) from continuing operations


92.8


(38.7)


Discontinued operations (net of taxes):






Loss from discontinued life businesses


(0.1)


(1.3)


Net income (loss)


$92.7


(40.0)


 

The Hanover Insurance Group, Inc.






Condensed Consolidated Balance Sheets








March 31


December 31


($ in millions)


2021


2020


Assets






Total investments


$8,804.5


$8,846.1


Cash and cash equivalents


112.1


120.6


Premiums and accounts receivable, net


1,369.6


1,339.3


Reinsurance recoverable on paid and unpaid losses and unearned premiums


1,882.9


1,874.3


Other assets


1,179.3


1,153.2


Assets of discontinued businesses


99.6


110.2


Total assets


$13,448.0


$13,443.7


Liabilities






Loss and loss adjustment expense reserves


$6,223.7


$6,024.0


Unearned premiums


2,553.1


2,482.7


Debt


781.0


780.8


Other liabilities


723.1


833.2


Liabilities of discontinued businesses


120.3


120.8


Total liabilities


10,401.2


10,241.5


Total shareholders' equity


3,046.8


3,202.2


Total liabilities and shareholders' equity


$13,448.0


$13,443.7


The following is a reconciliation from operating income to net income (loss)(9):











The Hanover Insurance Group, Inc.












Three months ended March 31




2021


2020


 ($ in millions, except per share data)


$

Amount


Per Share

(Diluted)

$

Amount


Per Share*


Operating income (loss)










Commercial Lines


$2.2




$54.6




Personal Lines


81.8




64.9




Other


1.1




(2.4)




Total


85.1




117.1




Interest expense


(8.5)




(9.4)




Operating income before income taxes


76.6


$2.07


107.7


$2.77


Income tax expense on operating income


(15.2)


(0.41)


(20.9)


(0.54)


Operating income after income taxes


61.4


1.66


86.8


2.23


Per share adjustment


-


-


-


0.04


Non-operating items:










Net realized gains (losses) from sales and other


(1.6)


(0.04)


3.1


0.08


Net change in fair value of equity securities


39.1


1.06


(136.2)


(3.56)


Impairment losses on investments


-


-


(28.5)


(0.74)


Income tax benefit (expense) on non-operating items


(6.1)


(0.16)


36.1


0.94


Income (loss) from continuing operations, net of taxes


92.8


2.52


(38.7)


(1.01)


Discontinued operations (net of taxes):










Loss from discontinued life businesses


(0.1)


(0.01)


(1.3)


(0.03)


Net income (loss)


$92.7


$2.51


(40.0)


($1.04)


Dilutive weighted average shares outstanding




36.9




38.9


Basic weighted average shares outstanding




36.4




38.3













*Operating income per share metrics are calculated using diluted shares outstanding. Income (loss) from continuing operations and net income (loss) per share 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," "moving forward" 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 judgement, 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 or including both prior-year reserve development and/or 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; and/or the effective tax rate;
  • The impact of the COVID-19 outbreak and subsequent 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, declining claims frequency as a result of reduced economic activity, severity from higher cost of repairs due to, among other things, supply chain disruptions, 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, 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 capital levels;
  • Variability of catastrophe losses due to risk concentrations, changes in weather patterns including climate change, wildfires, 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;
  • 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;
  • Mix improvement, underwriting initiatives, coverage restrictions and pricing segmentation actions, 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 and corresponding governmental initiatives taken in response, 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:

  • The severity, duration and long-term impact related to the Pandemic, including, but not limited to, actual and possible government responses, legislative, regulatory and judicial actions, changes in frequency and severity of claims in both Commercial and Personal Lines, impacts to distributors (including agent partners), and the possibility of additional premium adjustments, including credits and returns, for the benefit of insureds;
  • Changes in regulatory, legislative, economic, market and political conditions, particularly in response to COVID-19 and the Pandemic (such as legislative or regulatory actions that would retroactively require insurers to cover business interruption or other types of claims irrespective of terms, exclusions or other conditions included in the contractual terms of the policies that would otherwise preclude coverage, mandatory returns and other rate-related actions, as well as presumption legislation in regards to workers' compensation);
  • Heightened investment market volatility, fluctuations in interest rates (which have a significant impact on the market value of the investment portfolio and thus book value), U.S. Federal Reserve actions, inflationary pressures, default rates, prolonged global market conditions and other factors that affect investment returns from the investment portfolio;
  • Adverse claims experience, including those driven by large or increased frequency of catastrophe events (including those related to terrorism, riots and civil unrest), and severe weather;
  • The uncertainty in estimating weather-related losses or the long-term impacts of the Pandemic, and the limitations and assumptions used to model other 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;
  • 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, global trade wars, 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 or breaches on the company's systems 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; and
  • 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).

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.

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, 2020, the company uses non-GAAP financial measures as important measures of its operating performance, including operating income, operating income before interest expense and income taxes, operating income per 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 2020 Annual Report on pages 67-70.

Operating income and operating income 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, as they are, to a certain extent, determined by interest rates, financial markets and the timing of sales. Operating income 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 is the sum of the segment income from: Commercial Lines, Personal Lines, and Other, after interest expense and income taxes. In reference to one of the company's three segments, "operating income" is the segment income before both interest expense and income taxes. The company also uses "operating income per share" (which is after both interest expense and income taxes). It is calculated by dividing operating income by the weighted average number of diluted shares of common stock. The company believes that metrics of operating income and operating income in relation to its three 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 (and operating income before income taxes) and measures of operating income 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 9 of this news release and in the Financial Supplement.

The company may also provide measures of operating income 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 "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 reserve development. The presentation of loss and combined ratios calculated excluding the effects of catastrophe losses and/or reserve development should not be misconstrued as substitutes for the loss and/or combined ratios determined in accordance with GAAP.

Endnotes

(1)

Operating income and operating income per diluted 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. These measures are used throughout this document. The reconciliation of operating income and operating income per diluted share to the closest GAAP measures, income (loss) from continuing operations and income (loss) from continuing operations per diluted share, respectively, is provided on the preceding pages of this news release. See the disclosure on the use of this and other non-GAAP measures under the heading "Forward-Looking Statements and Non-GAAP Financial Measures."



(2)

Combined ratio, excluding catastrophes, and current accident year combined ratio, excluding catastrophes, are non-GAAP measures. These measures are used throughout this document. The combined ratio (which includes catastrophe losses and prior-year loss reserve development) is the most directly comparable GAAP measure. 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




March 31, 2021




Commercial
Lines


Personal
Lines


Total


Total combined ratio (GAAP)


106.9 %


87.0 %


98.8 %


Less: Catastrophe ratio


17.1 %


3.1 %


11.5 %


Combined ratio, excluding catastrophe losses (non-GAAP)


89.8 %


83.9 %


87.3 %


Less: Prior-year reserve development ratio


(0.5)%


(1.1)%


(0.7)%


Current accident year combined ratio, excluding catastrophe losses (non-GAAP)


90.3 %


85.0 %


88.0 %












March 31, 2020


Total combined ratio (GAAP)


98.2 %


90.0 %


95.2 %


Less: Catastrophe ratio


3.5 %


3.0 %


3.3 %


Combined ratio, excluding catastrophe losses (non-GAAP)


94.7 %


87.0 %


91.9 %


Less: Prior-year reserve development ratio


(0.5)%


(0.3)%


(0.2)%


Current accident year combined ratio, excluding catastrophe losses (non-GAAP)


95.2 %


87.3 %


92.1 %












(3)

Core Commercial business provides commercial property and casualty coverages to small and mid-sized businesses in the U.S., generally with annual premiums per policy up to $250,000, primarily through the commercial multiple peril, commercial auto and workers' compensation lines of business, as reported on page 7 of the First Quarter 2021 Financial Supplement. Price increases in Commercial Lines 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 Commercial Lines 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.





Three months ended


Three months ended




March 31, 2021


March 31, 2020


($ in millions)


Core
Commercial


Other
Commercial


Total

Commercial


Core
Commercial


Other
Commercial


Total

Commercial


Net premiums written


$431.9


$325.5


$757.4


$421.7


$285.9


$707.6


Net premiums earned


$396.1


$296.8


$692.9


$395.4


$280.5


$675.9




(4)

Price increases 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, pricing changes do not represent actual increases or decreases realized by the company.



(5)

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





March 31, 2021





Commercial
Lines


Personal
Lines


Total



Total loss and LAE ratio


72.8 %


59.0 %


67.2 %



Less:









Prior-year reserve development ratio


(0.5)%


(1.1)%


(0.7)%



Catastrophe ratio


17.1 %


3.1 %


11.5 %



Current accident year loss and LAE ratio, excluding catastrophes


56.2 %


57.0 %


56.4 %














March 31, 2020



Total loss and LAE ratio


64.2 %


62.5 %


63.8 %



Less:









Prior-year reserve development ratio


(0.5)%


(0.3)%


(0.2)%



Catastrophe ratio


3.5 %


3.0 %


3.3 %



Current accident year loss and LAE ratio, excluding catastrophes


61.2 %


59.8 %


60.7 %






















(6)

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






December 31,


March 31,






2020


2021











Book value per share


$           87.96


$           84.21



Less: Net unrealized appreciation (depreciation) on fixed maturity investments, net of tax, per share


11.76


6.71



Book value per share, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax


$           76.20


$           77.50











Change in book value per share




(4.3)%



Change in book value per share, excluding net unrealized appreciation (depreciation) on fixed maturity investments, net of tax




1.7 %












(7)

Specialty lines, a major component of Other Commercial Lines, consist of products such as marine, surety, specialty industrial property, professional liability, management liability and various other program businesses. When discussing net premiums written and other financial measures of our specialty businesses, we may include non-specialty premiums that are written as part of the entire account.



(8)

Here, and later in this document, the expense ratio is reduced by installment and other fee revenues for purposes of the ratio calculation.



(9)

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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