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Hanover Insurance (THG) Risk Analysis
Risk Overview Q3, 2020
Source: the company's latest filing for the period ended Sep 30, 2020, filed Oct 28, 2020
Risk Change Over Time
No filing history is available.
- Economy & Political Environment - Risk 1The impact of the COVID-19 Pandemic and related general economic conditions could have a material adverse effect on our results of operations, financial condition or cash flows.
The Pandemic began significantly impacting the U.S. and global financial markets and economies during March 2020. Circumstances relating to the Pandemic are unprecedented in scope and impact, continue to evolve, and are complex and uncertain. We are continually monitoring and assessing the impact of the Pandemic due to such uncertainty and cannot estimate the full extent of its future impact on our business, financial condition or results of operations. A prolonged economic downturn or recession could impact the ability of our insureds to remain solvent, affect their ability to pay premiums or renew their existing insurance policies, or result in customers reducing or eliminating coverages. Prolonged disruptions related to the Pandemic may also affect our agent partners and their ability to operate their businesses and place business with us. Significant agent disruption could also lead consumers to choose our competitors that offer direct-to-consumer or other solutions. These changes may materially and adversely affect our ability to profitably grow our business or maintain our current premium levels, particularly if these conditions exist for a significant amount of time. Decreases in premiums from current levels could result in higher expense ratios. Additionally, it may be more difficult or more costly to obtain reinsurance for certain types of coverages or at retention levels appropriate for our business mix. As a result of the Pandemic and related economic conditions, our investment portfolio has become volatile, impairments are higher than experienced in recent years and yields on our fixed income investments have declined. The severity and length of the Pandemic may continue to have a negative impact on our investment portfolio, investment income, liquidity and capital position, of which the impact could be material. Due to government-mandated social distancing, public health guidance, lockdown and various stay-at-home and similar orders, the vast majority of our workforce is currently working remotely. The duration of this remote work environment may adversely impact our ability to perform in-person tasks like inspections and investigations for our underwriting and claims functions. Furthermore, if a significant percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with the Pandemic, or other disruptions, the quality or timeliness of our services and operations may be negatively impacted. In addition, with a large percentage of our workforce working remotely, we are highly reliant on the effective functioning of our business continuity plans and technology, and we are subject to ongoing cyber threats and vulnerabilities. We also outsource a variety of functions to third parties, including certain of our administrative operations. As a result, we rely upon the successful ongoing execution of the business continuity plans of such entities in the current environment. While we closely monitor the business continuity activities of these third parties, successful ongoing execution of their business continuity strategies are largely outside our control. If one or more of the third parties to whom we outsource certain critical business activities experience operational impacts, some of which could be significant, from the spread of COVID-19 and governmental reactions thereto, or claim that they cannot perform due to a force majeure, it could adversely impact our business, results of operations and/or financial condition. While we believe that our in-force commercial lines policies in large part do not cover business interruption losses related to the Pandemic, legislation has been discussed and introduced in various states and in the U.S. Congress to retroactively amend insurance contracts to provide business interruption coverage, to impose presumptions on insurance policy interpretation, and/or limit policy exclusions for losses allegedly related to the Pandemic. While we believe that many of those proposals, including retroactive legislation changing the terms of an insurance contract, would be unconstitutional and otherwise violative of well-established law, if such changes were to be enacted and upheld, we would be exposed to a significant unfunded liability. On the Federal level, there is also uncertainty around legislation to address insurance coverages for pandemics prospectively. State regulators may also continue to impose premium refund orders similar to those issued to date that call for premium refunds or credits across multiple lines of business, including both our Commercial and Personal Lines, mandate rate reductions for lines such as personal automobile and commercial automobile coverages due to a decrease in claims frequency as a result of less driving during the Pandemic, and/or mandate additional presumptions of compensability in workers' compensation coverages. The uncertainties related to these various legislative and regulatory matters, and the potential that other such uncertainties will arise in reaction to the Pandemic, could adversely impact our ability to sustain adequate returns in certain lines of business or in some cases operate lines profitably.
- Natural and Human Disruptions - Risk 2Instances of riots and civil unrest may continue to negatively impact our business.
Due to ongoing economic, political and social conditions, we may continue to experience losses associated with insureds' property damage arising from instances of riots and civil unrest, as occurred in the second and third quarters of 2020 in certain metropolitan areas where we have concentrations of business. Additional factors that could cause actual results to differ include, but are not limited to, the following: - changes in the demand for our products;- 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;- adverse claims experience or changes in our estimates of loss and loss adjustment expense reserves, including with respect to catastrophes, which may result in lower current year underwriting income or adverse loss development, and could impact our carried reserves;- uncertainties with respect to the long-term profitability of our products, including with respect to newer products such as our Hanover Platinum Personal Lines and excess and surplus lines, or longer-tail products covering casualty losses;- disruption in our distribution channels, including the loss or disruption of our independent agency channel, including the impact of competition and consolidation in the industry and among agents and brokers;- changes in frequency and loss severity trends;- changes in regulation, legislation, economic, market and political conditions, particularly with respect to rates, payment flexibility, and regions where we have geographical concentrations;- volatile and unpredictable developments, including severe weather and other natural physical events, catastrophes, pandemics, civil unrest, and terrorist actions, and the uncertainty in estimating the resulting losses;- changes in weather patterns, whether as a result of global climate change, or otherwise, causing a higher level of losses from weather events to persist;- limitations on the physical ability to adjust claims or the availability of sufficient information to accurately estimate a loss at a point in time and the limitations and assumptions used to model property and casualty losses in general;- risks and uncertainties with respect to our ability to collect all amounts due from reinsurers and to maintain current levels of reinsurance in the future at commercially reasonable rates, or at all;- heightened volatility, fluctuations in interest rates (which have a significant impact on the market value of our investment portfolio and thus our book value), inflationary pressures, default rates and other factors that affect investment returns from our investment portfolio;- risks and uncertainties associated with our participation in shared market mechanisms, mandatory reinsurance programs and mandatory and voluntary pooling arrangements, including the Michigan Catastrophic Claims Association;- an increase in mandatory assessments by state guaranty funds;- risks and uncertainties associated with the Michigan legislation that took effect on July 2, 2020 and reformed the existing requirements that all personal and commercial automobile polices issued in the state include no-fault personal injury protection coverage without a cap on maximum benefits allowed and the resulting increase in litigation challenging or associated with this reform;- actions by our competitors, many of which are larger or have greater financial resources than we do;- loss, prolonged illness or retirement of key employees;- operating difficulties and other unintended consequences from the introduction of new products and related technology changes and applications, as well as new operating models;- changes in our claims-paying and financial strength ratings;- negative changes in our level of statutory surplus;- risks and uncertainties with respect to our growth or operating strategies, or with respect to our expense and strategic initiatives;- our ability to declare and pay dividends;- changes in accounting principles and related financial reporting requirements;- errors or omissions in connection with the administration of any of our products;- risks and uncertainties with our operations and technology, including cloud-based data information storage, data security, cyber-security attacks, remote working capabilities, and/or outsourcing relationships and third-party operations and data security that may negatively impact our ability to conduct business;- an inability to be compliant with recently implemented regulations or existing regulation such as those relating to Sarbanes-Oxley;- unfavorable developments as a result of the implementation of recently enacted legislation in Michigan described above, or litigation matters, social inflation and the possibility of adverse judicial decisions, including those which expand policy coverage beyond its intended scope or award "bad faith" or other non-contractual damages; and
Risk Highlights Q3, 2020
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 39
- Share Price & Shareholder Rights - Risk 1Michigan PIP Reform
Since 1973, the state of Michigan has required all personal and commercial automobile polices issued in the state to include no-fault personal injury protection ("PIP") coverage without a cap on maximum benefits allowed (i.e., "unlimited PIP benefits"). Insurers are required to retain a portion of the risk and the Michigan Catastrophic Claims Association (the "MCCA"), a legislatively-created reinsurance mechanism, reinsures the portion of the risk in excess of the insurer's mandated retention. The mandatory retention amount increases biennially at a statutory mandated rate and is currently $580,000. Premiums on Michigan automobile policies include a charge for both the insurer's retained amount and a separately identified pass-through charge determined by the MCCA. These mandated PIP benefits, which are subject to limited cost and utilization controls, are much greater than provided in any other state. Michigan average automobile premium rates are reportedly the highest in the United States and this benefit is regarded as a primary driver to overall premium rates. In response to concerns about the overall cost and affordability of automobile insurance in Michigan, which has also contributed to a reportedly high incidence of uninsured drivers, especially in Detroit and in other urban areas of the state, the state enacted legislation in June 2019 that will significantly change the current no-fault and PIP system. The new legislation will eliminate, effective July 2, 2020, the current requirement that all insureds purchase unlimited PIP coverage and substitute instead tiered limits, ranging from zero (for those with certain health benefits meeting specified criteria) to unlimited benefits. In contrast, the minimum amounts of bodily injury coverage drivers are required to purchase will increase, and we anticipate an increase in tort liability and related litigation from these changes. The legislation includes underwriting and other restrictions and mandates, in addition to subjecting rates, forms and rules to prior approval from the Michigan Department of Insurance and Financial Services ("Michigan Insurance Department") before implementation. The legislation also imposes various cost controls, including medical fee schedules based on a multiple of Medicare reimbursement rates, and mandated PIP premium rate reductions with an eight-year premium rate freeze for the PIP component of automobile policies. The Michigan Insurance Department is also preparing regulations to establish utilization controls. The rate freeze was effective contemporaneously with the adoption of the legislation and the mandatory rate reduction is effective July 2, 2020. The expense and utilization controls do not go into effect until July 1, 2021. In response to the savings expected to be garnered from the expense and utilization controls when they become effective, the MCCA reassessed its outstanding liabilities and estimated that the deficit reported in more recent years had been "erased" (notwithstanding a persistent reported annual deficit, the MCCA's annual operations have always been cash flow positive). As of December 31, 2019, our estimated reinsurance recoverable from the MCCA was $1.0 billion. This estimate has not been reduced for the potential future claim cost savings. Many medical and other providers who receive reimbursement under the current PIP system strenuously object to the fee schedules, cost controls and utilization restrictions imposed by the new legislation. Since the reform legislation was adopted, we have experienced an increase in litigation from medical and other providers demanding higher reimbursements under the current system. On October 3, 2019, litigation captioned Andary et. al. v. USAA Casualty Insurance Company and Citizens Insurance Company of America [a subsidiary of THG], Circuit Court for the County of Ingham, Michigan Case 19-738-CZ, was filed. The plaintiffs seek a declaratory judgment that the fee schedules, attendant care reimbursement limits, cost controls and utilization provisions of the new legislation violate multiple provisions of the Michigan state constitution. We intend to vigorously contest plaintiffs' claims. For the year ending December 31, 2019, Michigan personal automobile insurance represented approximately 47% of our total personal automobile net premiums written. PIP net premium (which does not include the MCCA pass-through assessment) represents approximately 29% of those Michigan premiums. It is not clear at this time whether projected savings from the various cost control measures, assuming they remain in effect, will be commensurate with the required PIP reductions and rate controls. Accordingly, there is increased uncertainty attributable to these changes regarding the future performance of our Personal Lines business.
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