The Hanover Insurance (THG) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited interim consolidated financial statements of The Hanover Insurance Group, Inc. and its subsidiaries for the periods ended June 30, 2022, including statements of income, comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, investment performance, fair value measurements, segment information, and other critical accounting policies Consolidated Statements of Income The company experienced a significant decrease in net income for both the three and six months ended June 30, 2022, primarily driven by net realized and unrealized investment losses, despite an increase in premiums Consolidated Statements of Income (in millions) | Metric (in millions) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Premiums | $1,293.8 | $1,179.8 | $2,557.6 | $2,341.6 | | Net investment income | $70.5 | $75.6 | $147.4 | $152.4 | | Total net realized and unrealized investment gains (losses) | $(77.9) | $31.1 | $(93.8) | $68.6 | | Total revenues | $1,292.9 | $1,292.3 | $2,623.6 | $2,574.4 | | Net income | $22.6 | $128.5 | $127.4 | $221.2 | | Basic EPS | $0.64 | $3.58 | $3.58 | $6.12 | | Diluted EPS | $0.63 | $3.52 | $3.52 | $6.03 | - Net income decreased significantly for both the three and six months ended June 30, 2022, primarily due to net realized and unrealized investment losses[8] Consolidated Statements of Comprehensive Income The company reported a comprehensive loss for both the three and six months ended June 30, 2022, primarily driven by substantial net unrealized losses on available-for-sale investment securities Consolidated Statements of Comprehensive Income (in millions) | Metric (in millions) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $22.6 | $128.5 | $127.4 | $221.2 | | Total other comprehensive income (loss), net of tax | $(263.3) | $62.8 | $(642.1) | $(122.0) | | Comprehensive income (loss) | $(240.7) | $191.3 | $(514.7) | $99.2 | - The company experienced a comprehensive loss of $(240.7) million for the three months and $(514.7) million for the six months ended June 30, 2022, a significant decline from comprehensive income in the prior year, mainly due to changes in net unrealized gains (losses) on available-for-sale securities[10] Consolidated Balance Sheets As of June 30, 2022, total assets and shareholders' equity decreased compared to December 31, 2021, primarily due to a reduction in investments and accumulated other comprehensive income (loss) Consolidated Balance Sheets (in millions) | Metric (in millions) | June 30, 2022 | December 31, 2021 | | :------------------- | :------------ | :---------------- | | Total investments | $8,468.1 | $9,152.6 | | Total assets | $13,600.9 | $14,254.3 | | Loss and loss adjustment expense reserves | $6,606.9 | $6,447.6 | | Unearned premiums | $2,804.1 | $2,734.9 | | Total liabilities | $11,029.1 | $11,109.4 | | Total shareholders' equity | $2,571.8 | $3,144.9 | - Total assets decreased by $653.4 million (4.6%) and total shareholders' equity decreased by $573.1 million (18.2%) from December 31, 2021, to June 30, 2022, largely due to a decline in investment fair values[13] Consolidated Statements of Shareholders' Equity Shareholders' equity significantly decreased for the six months ended June 30, 2022, primarily due to a substantial decline in accumulated other comprehensive income (loss) driven by net unrealized depreciation on available-for-sale securities Consolidated Statements of Shareholders' Equity (in millions) | Metric (in millions) | June 30, 2022 | June 30, 2021 | | :------------------- | :------------ | :------------ | | Total accumulated other comprehensive income (loss) | $(519.9) | $250.5 | | Retained earnings | $3,056.7 | $2,837.9 | | Treasury Stock | $(1,862.4) | $(1,808.4) | | Total shareholders' equity | $2,571.8 | $3,154.0 | - Accumulated Other Comprehensive Income (Loss) shifted from a gain of $250.5 million in June 2021 to a loss of $(519.9) million in June 2022, primarily due to net unrealized depreciation on available-for-sale securities[15] Consolidated Statements of Cash Flows Net cash provided by operating activities decreased for the six months ended June 30, 2022, compared to the same period in 2021, while net cash used in investing activities increased, leading to a net decrease in cash and cash equivalents Consolidated Statements of Cash Flows (in millions) | Metric (in millions) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $208.7 | $309.0 | | Net cash used in investing activities | $(217.6) | $(160.6) | | Net cash used in financing activities | $(76.1) | $(162.6) | | Net change in cash and cash equivalents | $(85.0) | $(14.2) | | Cash and cash equivalents, end of period | $145.9 | $106.4 | - Net cash provided by operating activities decreased by $100.3 million, from $309.0 million in 2021 to $208.7 million in 2022[18] - Net cash used in investing activities increased by $57.0 million, from $(160.6) million in 2021 to $(217.6) million in 2022[18] Notes to Interim Consolidated Financial Statements The notes provide detailed disclosures on the company's accounting policies, investment portfolio, fair value measurements, income taxes, pension plans, comprehensive income, segment performance, stock-based compensation, earnings per share, loss reserves, and commitments and contingencies, offering crucial context to the interim financial statements Note 1. Basis of Presentation and Principles of Consolidation The interim consolidated financial statements are prepared in accordance with U.S. GAAP for interim information, including the accounts of The Hanover Insurance Group, Inc. and its subsidiaries, with all intercompany transactions eliminated. Estimates and assumptions are used, and results for the six months ended June 30, 2022, are not necessarily indicative of the full year - Financial statements are unaudited and prepared under U.S. GAAP for interim reporting, omitting some annual disclosures[20] - Consolidated entities include principal property and casualty insurance companies (Hanover Insurance, Citizens Insurance) and other subsidiaries, including discontinued operations[21] - The preparation of financial statements involves estimates and assumptions, and actual results may differ[22] Note 2. New Accounting Pronouncements The company did not adopt any new accounting standards during the first six months of 2022, and no recently issued standards are expected to materially affect its financial position or results of operations - No new accounting standards were adopted during the six months ended June 30, 2022[24] - No new accounting standards issued in the period are expected to have a material effect on the Company's financial position or results of operations[24] Note 3. Investments The company's investment portfolio, primarily fixed maturities, experienced a significant increase in gross unrealized losses at June 30, 2022, compared to December 31, 2021, mainly due to rising interest rates. Despite these losses, the company does not intend to sell these securities before recovery of their amortized cost Fixed Maturities Fair Value and Unrealized Losses (in millions) | Metric (in millions) | June 30, 2022 | December 31, 2021 | | :------------------- | :------------ | :---------------- | | Total fixed maturities (Fair Value) | $7,244.7 | $7,723.9 | | Gross Unrealized Losses (June 30, 2022) | $596.7 | | | Gross Unrealized Losses (Dec 31, 2021) | | $48.0 | - Gross unrealized losses on fixed maturities increased significantly from $48.0 million at December 31, 2021, to $596.7 million at June 30, 2022, primarily due to higher interest rates[29] - The company views gross unrealized losses as non-credit related and does not intend to sell these securities before recovery of their amortized cost[30] Note 4. Fair Value The company categorizes its financial instruments into a three-level fair value hierarchy, with the majority of fixed maturities and equity securities valued using observable market data (Level 2 and Level 1, respectively). Level 3 assets, which use unobservable inputs, represent a small portion of the total investment assets at fair value - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[35][36] Total Investment Assets at Fair Value by Level (June 30, 2022, in millions) | (in millions) | Total | Level 1 | Level 2 | Level 3 | | :------------ | :---- | :------ | :------ | :------ | | Fixed maturities | $7,244.7 | $228.3 | $6,997.2 | $19.2 | | Equity securities | $429.8 | $419.7 | $— | $10.1 | | Other investments | $4.3 | $— | $— | $4.3 | | Total investment assets at fair value | $7,678.8 | $648.0 | $6,997.2 | $33.6 | - Level 3 assets, which rely on significant unobservable inputs, totaled $33.6 million at June 30, 2022, representing a small fraction of total investment assets at fair value[52] Note 5. Income Taxes Income tax expense for the six months ended June 30, 2022, decreased compared to 2021, with effective tax rates remaining consistent. The company is subject to ongoing tax examinations in various jurisdictions Income Tax Expense (in millions) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :----------------------------- | :----------------------------- | | Total income tax expense | $30.1 | $51.6 | - The U.S. federal income tax expense decreased from $51.6 million in 2021 to $30.1 million in 2022 for the six months ended June 30[59] - The company and its subsidiaries are subject to U.S. federal and state income tax examinations for years after 2017[60] Note 6. Pension Plans Net periodic pension cost for defined benefit plans increased for both the three and six months ended June 30, 2022, primarily due to higher recognized net actuarial losses Net Periodic Pension Cost (Benefit) (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net periodic pension cost (benefit) | $0.8 | $(0.1) | $1.6 | $(0.2) | - Net periodic pension cost shifted from a benefit of $(0.1) million in Q2 2021 to a cost of $0.8 million in Q2 2022, and from a benefit of $(0.2) million in H1 2021 to a cost of $1.6 million in H1 2022[61] Note 7. Other Comprehensive Income (Loss) Other comprehensive income (loss) significantly deteriorated for both the three and six months ended June 30, 2022, primarily due to substantial net unrealized losses on available-for-sale investment securities Other Comprehensive Income (Loss), Net of Tax (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net unrealized gains (losses) | $(264.4) | $62.1 | $(644.3) | $(123.4) | | Other comprehensive income (loss) | $(263.3) | $62.8 | $(642.1) | $(122.0) | - Net unrealized gains (losses) on investment securities, net of tax, shifted from a gain of $62.1 million in Q2 2021 to a loss of $(264.4) million in Q2 2022, and from a loss of $(123.4) million in H1 2021 to a loss of $(644.3) million in H1 2022[63] Note 8. Segment Information The company operates through four segments: Core Commercial, Specialty, Personal Lines, and Other. During Q1 2022, the former Commercial Lines segment was disaggregated into Core Commercial and Specialty. Operating income before interest expense and income taxes increased for the six months ended June 30, 2022, driven by Specialty and Core Commercial, while Personal Lines saw a significant decrease - The company disaggregated its former Commercial Lines segment into Core Commercial and Specialty segments in Q1 2022[65] Operating Income Before Interest Expense and Income Taxes by Segment (in millions) | Segment | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------ | :----------------------------- | :----------------------------- | | Core Commercial | $134.4 | $55.1 | | Specialty | $95.2 | $51.5 | | Personal Lines | $39.1 | $114.0 | | Other | $0.7 | $1.8 | | Total | $269.4 | $222.4 | - Operating income before interest expense and income taxes increased by $47.0 million for the six months ended June 30, 2022, primarily driven by Core Commercial and Specialty segments, while Personal Lines operating income decreased significantly[69] Note 9. Stock-based Compensation Shareholders approved a new 2022 Long-Term Incentive Plan, replacing the 2014 plan, authorizing 3,380,000 new shares for various stock awards. Stock-based compensation expense increased for both the three and six months ended June 30, 2022 - The Hanover Insurance Group 2022 Long-Term Incentive Plan was approved, authorizing 3,380,000 shares for new awards[70] Stock-based Compensation Expense (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock-based compensation expense | $7.4 | $5.4 | $14.1 | $11.0 | - Stock-based compensation expense increased by $2.0 million (37.0%) for the three months and $3.1 million (28.2%) for the six months ended June 30, 2022, compared to the prior year periods[71] Note 10. Earnings Per Share and Shareholders' Equity Transactions Basic and diluted earnings per share decreased significantly for the three and six months ended June 30, 2022. The company repurchased common stock under its $1.3 billion authorization, with approximately $341 million remaining available Earnings Per Common Share | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic Net income per share | $0.64 | $3.58 | $3.58 | $6.12 | | Diluted Net income per share | $0.63 | $3.52 | $3.52 | $6.03 | - The Board of Directors authorized a stock repurchase program of up to $1.3 billion, with approximately $341 million available at June 30, 2022[78] - Weighted average shares outstanding for basic EPS were 35.6 million for both periods in 2022, slightly lower than 35.9 million (Q2 2021) and 36.2 million (H1 2021)[77] Note 11. Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses Gross reserve for losses and LAE increased to $6,606.9 million at June 30, 2022. The company experienced net favorable loss and LAE development of $27.2 million for the six months ended June 30, 2022, primarily from Core Commercial and Specialty, partially offset by unfavorable Personal Lines development Gross Reserve for Losses and LAE (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Gross reserve for losses and LAE, end of period | $6,606.9 | $6,447.6 | - Net favorable loss and LAE development was $27.2 million for the six months ended June 30, 2022, compared to $35.8 million in 2021[82] - Favorable development in 2022 was primarily due to Core Commercial ($20.1 million) and Specialty ($17.5 million), partially offset by unfavorable Personal Lines development ($10.4 million)[83] Note 12. Commitments and Contingencies The company is involved in various legal proceedings and regulatory examinations in the normal course of business, which are not expected to materially affect its financial position but could impact results of operations for a particular period. It also participates in residual markets for high-risk insureds - The company is a defendant in various legal proceedings and subject to governmental and self-regulatory agency examinations[86] - The ultimate resolution of legal and regulatory proceedings is not expected to have a material effect on financial position, but could impact results of operations for a specific period[86] - The company is required to participate in residual markets for high-risk insureds, which are significant to personal and commercial automobile lines[87] Note 13. Subsequent Events There were no subsequent events requiring adjustment to the financial statements or additional disclosure in the notes - No subsequent events requiring adjustment or additional disclosure occurred[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting a decrease in net income due to investment losses, an increase in operating income driven by lower catastrophe losses, and challenges from inflation and supply chain disruptions affecting claims costs - Net income for the six months ended June 30, 2022, decreased by $93.8 million to $127.4 million, primarily due to changes in the fair value of equity securities[97] - Operating income before interest expense and income taxes increased by $47.0 million to $269.4 million for the six months ended June 30, 2022, driven by lower catastrophe losses and earned premium growth[98] - The company is experiencing higher claims costs, particularly in automobile and homeowners lines, due to persistent supply chain disruptions and significant inflation[100] Introduction This introduction outlines the purpose of the Management's Discussion and Analysis, emphasizing its role in assisting readers to understand the interim consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and its subsidiaries, prepared in accordance with U.S. GAAP - The Management's Discussion and Analysis aims to help readers understand the interim consolidated results of operations and financial condition[93] - Consolidated results are prepared in accordance with U.S. GAAP[93] - The discussion should be read in conjunction with interim consolidated financial statements and the Annual Report on Form 10-K[93] Executive Overview The company's strategy focuses on profitable growth through independent agency distribution, with increased capabilities in specialty markets. Net income decreased significantly due to investment losses, while operating income increased due to lower catastrophe losses and premium growth, despite higher current accident year losses from inflation and supply chain issues - The company's strategy focuses on generating profitable growth through the independent agency distribution channel, including expansion in underpenetrated geographies and investments in specialty markets[96] Key Financial Highlights (in millions) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----- | | Net income | $127.4 | $221.2 | $(93.8) | | Operating income before interest expense and income taxes | $269.4 | $222.4 | $47.0 | | Pre-tax catastrophe losses | $122.9 | $210.1 | $(87.2) | | Net favorable development on prior years' loss reserves | $15.2 | $20.8 | $(5.6) | - Higher current accident year losses are primarily due to increased severity in personal automobile lines, driven by inflation and supply chain disruptions[98] Description of Operating Segments The company operates through four segments: Core Commercial, Specialty, Personal Lines, and Other. Core Commercial and Specialty were disaggregated from the former Commercial Lines segment in Q1 2022, reflecting how management evaluates performance and allocates resources - Primary business operations are conducted through four operating segments: Core Commercial, Specialty, Personal Lines, and Other[107] - Core Commercial includes commercial multiple peril, commercial automobile, workers' compensation, and other commercial lines for small and mid-sized businesses[107] - Specialty includes Professional and Executive Lines, Specialty P&C, Marine, and Surety and Other divisions[107] Results of Operations - Consolidated Consolidated net income significantly decreased for both the three and six months ended June 30, 2022, primarily due to substantial after-tax net realized and unrealized investment losses, mainly from equity securities. This was partially offset by an increase in operating income before interest expense and income taxes, driven by lower catastrophe losses and earned premium growth Consolidated Net Income (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $22.6 | $128.5 | $127.4 | $221.2 | - The decrease in consolidated net income was primarily due to after-tax net realized and unrealized investment losses of approximately $60.8 million (Q2 2022) and $73.2 million (H1 2022), mainly from changes in the fair value of equity securities[109][110] - Operating income before interest expense and income taxes increased by $47.0 million for the six months ended June 30, 2022, primarily due to lower catastrophe losses and earned premium growth, partially offset by higher current accident year losses in Personal Lines[110] Results of Operations - Segments Operating income before interest expense and income taxes increased for the six months ended June 30, 2022, driven by strong performance in Core Commercial and Specialty segments due to earned premium growth and lower catastrophe losses. Personal Lines, however, experienced a significant decrease in underwriting profit due to higher current accident year losses from inflation and increased severity Operating Income Before Interest Expense and Income Taxes by Segment (in millions) | Segment | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change | | :------------------- | :----------------------------- | :----------------------------- | :----- | | Core Commercial | $134.4 | $55.1 | $79.3 | | Specialty | $95.2 | $51.5 | $43.7 | | Personal Lines | $39.1 | $114.0 | $(74.9) | | Other | $0.7 | $1.8 | $(1.1) | | Total | $269.4 | $222.4 | $47.0 | - Core Commercial underwriting profit for the six months ended June 30, 2022, was $66.5 million, a favorable change of $82.7 million from a $16.2 million loss in 2021, primarily due to lower catastrophe losses[146] - Personal Lines underwriting loss for the six months ended June 30, 2022, was $7.6 million, a decrease of $76.0 million from a $68.4 million profit in 2021, mainly due to higher current accident year loss severity in personal automobile and homeowners lines[152][153] Investments Net investment income decreased due to lower partnership income and fixed maturity yields. The total cash and investments declined by 8.2% due to market value depreciation. Gross unrealized losses on fixed maturities significantly increased to $596.7 million, primarily from higher interest rates and wider credit spreads, though the company expects recovery and does not intend to sell these assets prematurely Net Investment Income (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net investment income | $70.5 | $75.6 | $147.4 | $152.4 | | Earned yield, total portfolio | 3.19% | 3.65% | 3.35% | 3.70% | - Total cash and investments decreased by $769.5 million, or 8.2%, for the six months ended June 30, 2022, primarily due to net market value depreciation[172] - Gross unrealized losses on fixed maturities increased by $548.7 million to $596.7 million at June 30, 2022, primarily due to higher interest rates and wider credit spreads[183] Other Items Net realized and unrealized investment results shifted from gains in 2021 to significant losses in 2022, primarily due to changes in equity security fair values. Discontinued operations continued to incur losses, mainly from the long-term care pool Net Realized and Unrealized Investment Gains (Losses) (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net realized and unrealized investment gains (losses) | $(77.9) | $31.1 | $(93.8) | $68.6 | | Discontinued life businesses | $(0.2) | $(1.1) | $(0.7) | $(1.2) | - Net realized and unrealized investment results shifted from gains of $31.1 million (Q2 2021) and $68.6 million (H1 2021) to losses of $(77.9) million (Q2 2022) and $(93.8) million (H1 2022), primarily due to changes in equity security fair values[192][193] - Losses from discontinued life businesses primarily reflect adverse loss trends related to the long-term care pool[194] Income Taxes The provision for income taxes from continuing operations decreased for both the three and six months ended June 30, 2022, compared to 2021, with consolidated effective federal tax rates remaining stable around 19% Income Tax Provision from Continuing Operations (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Provision for income taxes from continuing operations | $5.4 | $30.3 | $30.1 | $51.6 | | Consolidated effective federal tax rates | 19.1% | 18.9% | 19.0% | 18.8% | - The income tax provision on operating income was an expense of $50.8 million for the six months ended June 30, 2022, compared to $40.0 million in 2021, with effective tax rates of 20.1% and 19.5% respectively[199] Critical Accounting Estimates The company identifies several critical accounting estimates that involve significant judgment and uncertainty, including reserves for losses and loss expenses, reinsurance recoverable balances, pension benefit obligations, and investment credit losses. These estimates are subject to change based on new information and different assumptions - Critical accounting estimates include reserves for losses and loss expenses, reinsurance recoverable balances, pension benefit obligations, and investment credit losses[201] - These estimates involve significant judgment and uncertainty, and different assumptions could produce materially different results[201] Statutory Surplus of Insurance Subsidiaries Statutory capital and surplus for insurance subsidiaries decreased by $26.5 million during the first six months of 2022, primarily due to unrealized investment losses and a $100 million dividend payment to the parent company, partially offset by underwriting profits Total Statutory Capital and Surplus (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Total Statutory Capital and Surplus | $2,693.5 | $2,720.0 | - The decrease in statutory capital and surplus was primarily driven by unrealized investment losses and a $100 million dividend payment to the parent company[202] RBC Ratios for The Hanover Insurance Company (June 30, 2022) | Metric | Value | | :----- | :---- | | Company Action Level | $1,201.5 million | | Authorized Control Level | $600.7 million | | RBC Ratio (Industry Scale) | 223% | | RBC Ratio (Regulatory Scale) | 447% | Liquidity and Capital Resources Net cash provided by operating activities decreased by $100.3 million for the first six months of 2022, while net cash used in investing activities increased. The company maintains sufficient liquidity through holding company assets, investment portfolios, and access to credit facilities, despite market value declines in securities and ongoing stock repurchases - Net cash provided by operating activities decreased to $208.7 million in H1 2022 from $309.0 million in H1 2021, primarily due to increased loss and LAE payments and higher federal income tax payments[206] - Net cash used in investing activities increased to $217.6 million in H1 2022 from $160.6 million in H1 2021, mainly due to net purchases of fixed maturities[207] - The company has approximately $341 million available for additional common stock repurchases under its $1.3 billion authorization[213] Contingencies and Regulatory Matters Regulatory responses to the Pandemic, including premium adjustments and payment grace periods, continue to impact the insurance industry. Proposed legislation seeking retroactive payment for business interruption claims and mandating prospective pandemic coverage could pose significant solvency risks. The company is also monitoring federal proposals for government-funded pandemic insurance programs - Regulators have issued orders or guidance pertaining to premium refunds, payment grace periods, and reassessment of rates in response to the Pandemic[217] - Draft legislation proposes requiring insurers to retroactively pay unfunded Pandemic business interruption claims, which could create substantial solvency risks for the property and casualty insurance sector[218] - Proposals for government-funded pandemic insurance programs are being considered at the federal level[219] Risks and Forward-Looking Statements This section highlights various risks and uncertainties that could cause actual results to differ materially from forward-looking statements, including changes in demand, claims experience, regulatory conditions, market volatility, and economic factors like inflation and potential recession - Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially[235] - Key risk factors include changes in demand, ability to retain profitable policies, adverse claims experience (including catastrophes), changes in regulation, market volatility, and economic conditions (inflation, recession)[236] - The company operates in a continually changing and competitive business environment, with new risk factors potentially emerging[235] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risks, management strategies, and sensitivity to interest rate and equity price risk remain consistent with those disclosed in its 2021 Annual Report on Form 10-K, with no material changes identified in the first six months of 2022 - No material changes occurred in market risks or their management during the first six months of 2022[225] - Market risks, management strategies, and sensitivity to interest rates and equity price risk are summarized in the 2021 Annual Report on Form 10-K[225] Item 4. Controls and Procedures The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2022, providing reasonable assurance that required information is recorded, processed, and reported timely. No material changes to internal control over financial reporting were identified during the quarter - Disclosure controls and procedures were effective as of June 30, 2022, providing reasonable assurance of timely and accurate information disclosure[229] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2022[230] - Control systems provide reasonable, not absolute, assurance and can be subject to inherent limitations like error, collusion, or management override[228] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings and regulatory actions arising in the normal course of business. While the ultimate liability is difficult to predict, these are not expected to materially affect the company's financial position, though they could impact results of operations for a specific period - The company is a defendant in various legal proceedings and subject to governmental and self-regulatory agency examinations[233] - The ultimate resolution of such proceedings is not expected to have a material effect on the company's financial position[233] - Legal proceedings could have a material effect on the results of operations for a particular quarterly or annual period[233] Item 1A. Risk Factors This section reiterates that the document contains forward-looking statements subject to various risks and uncertainties, including changes in demand, claims experience, regulatory conditions, market volatility, and economic factors. These factors could cause actual results to differ materially from projections, and new risks may emerge - All statements, other than statements of historical facts, may be forward-looking statements, subject to risks and uncertainties[235] - Key risk factors include changes in demand for products, ability to retain profitable policies, adverse claims experience (including catastrophes), changes in regulation, market volatility, and economic conditions (inflation, recession)[236] - The company operates in a continually changing and competitive business environment, and new risk factors may emerge over time[235] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 33,657 shares of its common stock during the second quarter of 2022 at an average price of $150.36 per share, as part of its publicly announced repurchase program. Approximately $341 million remained available under this program as of June 30, 2022 Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----- | :------------------------------- | :--------------------------- | | April 1 - 30, 2022 | 20,465 | $151.60 | | May 1 - 31, 2022 | 13,078 | $148.44 | | June 1 - 30, 2022 | 114 | $145.64 | | Total | 33,657 | $150.36 | - Approximately $341 million remained available for repurchases under the publicly announced program as of June 30, 2022[241] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various stock option and restricted stock unit agreements under the 2022 Long-Term Incentive Plan, certifications from the CEO and CFO, and financial statements formatted in iXBRL - Exhibits include forms of Non-Qualified Stock Option Agreement and Restricted Stock Unit Agreements under The Hanover Insurance Group 2022 Long-Term Incentive Plan[245] - Certifications from the Chief Executive Officer and Chief Financial Officer are included pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[245] - Financial statements for the quarter ended June 30, 2022, are provided in Inline eXtensible Business Reporting Language (iXBRL) format[245] SIGNATURES