Operating income before interest expense and income taxes (a non-GAAP financial measure; see also “Results of Operations - Consolidated - Non-GAAP Financial Measures”) was $484.7 million in 2020 compared to $453.6 million in 2019, an increase of $31.1 million. This increase is primarily due to lower non-catastrophe current accident year losses, primarily in our personal and commercial automobile lines, and favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”), partially offset by higher catastrophe losses and, to a lesser extent, lower net investment income. The lower non-catastrophe current accident year losses reflect a reduced level of economic activity as a result of the Pandemic.
Personal Lines focuses on partnering with high quality, value-oriented agencies that deliver consultative selling to customers and stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and/or additional coverages, to address customers’ broader objectives). Approximately 85% of our policies in force have been issued to customers with multiple policies and/or coverages with us. We are focused on seeking profitable growth opportunities, building a distinctive position in the market in order to meet our customers’ needs and diversifying geographically. We continue to seek appropriate rate increases that meet or exceed underlying loss cost trends, subject to regulatory and competitive considerations. Due to uncertainty caused by the Pandemic, there is a level of uncertainty in our ability to grow our business, and to maintain or improve our underwriting profitability in this environment.
Net premiums written decreased by 0.5% in 2020. During the second quarter of 2020, we returned approximately $30 million of premiums to our eligible personal automobile customers in all of our markets, providing financial relief during the Pandemic. Excluding the impact of the premium refund, net premiums written would have increased 1.1%. Underwriting results improved in 2020, primarily due to lower non-catastrophe current accident year losses in our personal automobile line, a favorable change in development of prior years’ loss reserves and a non-recurring premium tax benefit, partially offset by higher catastrophe losses. The lower personal automobile losses were due to fewer accidents and decreased claim activity resulting from fewer miles driven as a result of the Pandemic.
Primary business operations include insurance products and services currently provided through three operating segments: Commercial Lines, Personal Lines and Other. Commercial Lines includes 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 and surety. Personal Lines includes personal automobile, homeowners, and other personal coverages, such as umbrella. Included in the “Other” segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds, and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to our former life insurance employees and agents; and a run-off voluntary property and casualty pools business. The operations of Chaucer are classified as discontinued operations for all periods presented. We present the separate financial information of each segment consistent with the manner in which our chief operating decision maker evaluates results in deciding how to allocate resources and in assessing performance.
We report interest expense on debt separately from the earnings of our operating segments. This consists of interest on our senior and subordinated debentures.
The following table reflects operating income (loss) before interest expense and income taxes for each operating segment and a reconciliation to consolidated net income from operating income before interest expense and income taxes (a non-GAAP measure).
In addition to consolidated net income, discussed above, we assess our financial performance based upon pre-tax “operating income,” and we assess the operating performance of each of our three operating segments based upon the pre-tax operating income (loss) generated by each segment. As reflected in the table above, operating income before interest expense and income taxes excludes interest expense on debt and certain other items, which we believe are not indicative of our core operations, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before interest expense and income taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before interest expense and income taxes are important components in understanding and assessing our overall financial performance, we believe a discussion of operating income before interest expense and income taxes enhances an investor’s understanding of our results of operations by highlighting net income attributable to the core operations of the business. However, operating income before interest expense and income taxes, which is a non-GAAP measure, should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.
Net premiums written increased by $196.9 million for the year ended December 31, 2019, compared to the year ended December 31, 2018, due to growth in both our Commercial and Personal Lines segments.
The following tables summarize GAAP underwriting results for the Commercial Lines, Personal Lines and Other segments and reconciles them to operating income (loss) before interest expense and income taxes.
Commercial Lines current accident year underwriting profit, excluding catastrophes, was $219.5 million for the year ended December 31, 2020, compared to $176.0 million for the year ended December 31, 2019. This $43.5 million increase was primarily due to lower non-catastrophe current accident year losses. The lower current year non-catastrophe losses were primarily due to lower large loss activity in our specialty industrial property and marine lines, and lower losses in our commercial automobile line, partially offset by reserve provisions for exposures due to the Pandemic and to higher property losses in our commercial multiple peril line. The reserve provisions for exposures due to the Pandemic of approximately $19 million were primarily reflected in our workers’ compensation, healthcare, commercial multiple peril, management and professional liability, and surety lines. The lower non-catastrophe current accident year losses reflect a reduced level of economic activity as a result of the Pandemic.
Personal Lines net premiums written were $1,865.4 million for the year ended December 31, 2020, compared to $1,874.5 million for the year ended December 31, 2019, a decrease of $9.1 million. During the second quarter of 2020, we returned approximately $30 million of premiums to our eligible Personal Lines automobile customers in all markets, providing financial relief during the Pandemic. Excluding the impact of the premium refund, net premiums written would have increased 1.1%.
Personal Lines underwriting profit for the year ended December 31, 2020 was $132.9 million, compared to $59.1 million for the year ended December 31, 2019, an increase of $73.8 million. Catastrophe losses for the year ended December 31, 2020 were $154.5 million, compared to $86.1 million for the year ended December 31, 2019, an increase of $68.4 million. Favorable development on prior years’ loss reserves for the year ended December 31, 2020 was $0.7 million, compared to unfavorable development of $26.6 million for the year ended December 31, 2019, a favorable change of $27.3 million.
In addition, in 2019, Michigan enacted major reforms of its current system governing personal and commercial automobile insurance, especially related to automobile Personal Injury Protection (“PIP”) coverage. We believe that we are effectively executing the transition and will be able to navigate this market successfully. As of December 31, 2020, the net impact of these reforms was not significant to our total net premiums written and underwriting profit. For 2020, net premiums written that were attributable to PIP coverage in Michigan were $144.3 million, or 3.1% of our total company full year 2020 net premiums written, while Michigan personal automobile net premiums written represented 11.7% of our total company full year 2020 net premiums written. For more information, please refer to “Risk Factors” in Part I - Item 1A.
Personal Lines net premiums written were $1,874.5 million for the year ended December 31, 2019, compared to $1,774.1 million for the year ended December 31, 2018, an increase of $100.4 million. This was primarily due to higher renewal premium driven by rate increases, which was modestly offset by lower policy retention.
Personal Lines current accident year underwriting profit, excluding catastrophes, was $171.8 million in the year ended December 31, 2019, compared to $176.8 million for the year ended December 31, 2018. This $5.0 million decrease was primarily due to higher current accident year losses in our personal automobile and homeowners lines, partially offset by earned premium growth and lower expenses.
Reinsurance recoverables were $1,874.3 million and $1,814.0 million at December 31, 2020 and December 31, 2019, respectively, of which $88.4 million and $89.8 million, respectively, represent billed recoverables. A reinsurance recoverable is billed after an eligible reinsured claim is paid by an insurer. Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (“MCCA”) were $35.5 million and $29.2 million at December 31, 2020 and December 31, 2019, respectively, and billed non-MCCA reinsurance recoverables totaled $52.9 million and $60.6 million at December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020 and December 31, 2019, there were no balances outstanding greater than 90 days.
We maintain reserves for our property and casualty insurance products to provide for our ultimate liability for losses and loss adjustment expenses (our “loss reserves”) with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves are estimates, taking into account past loss experience, modified for current trends, as well as prevailing economic, legal and social conditions. Loss reserves represent our largest liability.
We regularly review our loss reserves using a variety of industry accepted analytical techniques. We update the loss reserves as historical loss experience develops, additional claims are reported and resolved, and new information becomes available. Net changes in loss reserves are reflected in operating results in the period in which the reserves are changed.
The IBNR reserve includes a provision for claims that have occurred but have not yet been reported to us, some of which may not yet be known to the insured, as well as a provision for future development on reported claims. IBNR represents a significant proportion of our total net loss reserves, particularly for long-tail liability classes. In fact, approximately 50% of our aggregate net loss reserves at December 31, 2020 were for IBNR losses and loss expenses.
There is greater inherent uncertainty in estimating insurance reserves for certain types of property and casualty insurance lines, particularly liability lines, where a longer period of time may elapse before a definitive determination of ultimate liability and losses may be made (sometimes referred to as “long-tail” business). In addition, the technological, judicial, regulatory and political climates involving these types of claims are continuously evolving. The emergence of the Pandemic during 2020 resulted in an increased level of uncertainty for many lines of business, particularly for our long-tail lines. There is also greater uncertainty in establishing reserves with respect to business that is new to us, particularly new business which is generated with respect to newly introduced product lines, by newly appointed agents or in geographies in which we have less experience in conducting business. In both of these cases, there is less historical experience or knowledge, and less data upon which we can rely. A combination of business that is both new to us and has longer development periods provides even greater uncertainty in estimating insurance reserves. In our management and professional liability lines, we are modestly increasing, and expect to continue to increase, our exposure to longer-tailed liability lines, including directors and officers liability, errors and omissions liability and product liability coverages. In addition, in recent periods, we have experienced extensions of the “tails” in certain lines of business as the full value of claims are presented later than had been our historical experience. The broad impact of the Pandemic on our claims environment may extend these “tails” even further.
Some risk factors affect multiple lines of business. Examples include changes in claim handling and claim reserving practices, changes in claim settlement patterns due to the Pandemic and other factors, regulatory and legislative actions, court actions, so-called “social inflation,” timeliness of claim reporting, state mix of claimants and degree of claimant fraud. Additionally, there is also a higher degree of uncertainty due to growth in our acquired businesses, with respect to which we have less familiarity and, in some cases, limited historical claims experience. The extent of the impact of a risk factor will also vary by components within a line of business. Individual risk factors are subject to interactions with other risk factors within line of business components. Thus, risk factors can have offsetting or compounding effects on required reserves.
Inflation generally increases the cost of losses covered by insurance contracts. The effect of inflation varies by product. Our property and casualty insurance premiums are established before the amount of losses and LAE and the extent to which inflation may affect such expenses are known. Consequently, we attempt, in establishing rates and reserves, to anticipate the potential impact of inflation in the projection of ultimate costs. For example, we monitor, and continue to experience, increases in medical costs, wages and legal costs, which are key considerations in setting reserve assumptions for workers’ compensation, bodily injury and other liability lines. We are also monitoring the continued advancements in technology and design found in automobiles and homes and the increased claims settlement costs that result from repairs or replacement of such equipment. Estimated increases are reflected in our current reserve estimates, but continued increases are expected to contribute to increased losses and LAE in the future.
While we estimate that approximately half of our written premium is in what we would characterize as shorter-tail classes of business, most of our loss reserves relate to longer-tail liability classes of business. Long-tailed classes include automobile liability, commercial liability, third-party coverage and workers’ compensation. For many liability claims, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the discovery and reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for long-tailed liability coverage has limited statistical credibility because a relatively small proportion of losses in these accident years (the calendar years in which losses are incurred) are reported claims and an even smaller proportion are paid losses. Liability claims are also more susceptible to litigation and can be significantly affected by changing contract interpretations, the legal, political and social environment, the risk and expense of protracted litigation and inflation. Consequently, the estimation of loss reserves for these coverages is more complex and typically subject to a higher degree of variability and uncertainty compared to short-tailed coverages.
For longer-tailed lines of business, applying the loss development factor method often requires even more judgment in selecting development factors, as well as more significant extrapolation. For those long-tailed lines of business with high frequency and relatively low per-loss severity (e.g., personal automobile liability), volatility will often be sufficiently modest for the loss development factor method to be given significant weight, even in the most recent accident years, but expected loss methods and adjusted loss methods are always considered and frequently utilized in the selection process. For those long-tailed lines of business with low frequency and high loss potential (e.g., commercial general liability), anticipated loss experience is less predictable because of the small number of claims and erratic claim severity patterns. In these situations, the loss development factor methods may not produce a reliable estimate of ultimate losses in the most recent accident years since many claims either have not yet been reported or are only in the early stages of the settlement process. Therefore, the loss reserve estimates for these accident years may be based on methods less reliant on extrapolation, such as Bornheutter-Ferguson. Over time, as a greater number of claims are reported and the
statistical credibility of loss experience increases, loss development factor methods or adjusted loss methods are given increasing weight.
Our carried reserves for each line of business and coverage are determined based on our quarterly loss reserving process. In making the determination, we consider numerous quantitative and qualitative factors. Quantitative factors include changes in reserve estimates in the period, the maturity of the accident year, trends observed over the recent past, the level of volatility within a particular class of business, the estimated effects of reinsurance, including reinstatement premiums, general economic trends and other factors. Qualitative factors may include legal and regulatory developments, changes in claim handling and case reserving practices, recent entry into new markets or products, changes in underwriting practices or business mix, concerns that we do not have sufficient or quality historical reported and paid loss and LAE information with respect to a particular line or segment of our business, effects of the economy and political outlook, perceived anomalies in the historical results, evolving trends or other factors such as the impact of the Pandemic. In doing so, we must evaluate whether a change in the data represents credible actionable information or an anomaly. Such an assessment requires considerable judgment. Even if a change is determined to be apparent, it is not always possible to determine the extent of the change. As a result, there can be a time lag between the emergence of a change and a determination that the change should be partially or fully reflected in the carried loss reserves. In general, changes are made more quickly to reserves for more mature accident years and less volatile classes of business.
As part of our loss reserving analysis, we consider the various factors that contribute to the uncertainty in the loss reserving process. Those factors that could materially affect our loss reserve estimates include loss development patterns and loss cost trends, reporting lags, rate and exposure level changes, the effects of changes in coverage and policy limits, business mix shifts, the effects of regulatory and legislative developments, economic circumstances, the effects of changes in judicial interpretations, the effects of emerging claims and coverage issues and the effects of changes in claim handling and claim reserving practices. In making estimates of reserves, however, we do not necessarily make an explicit assumption for each of these factors. Moreover, all estimation methods do not utilize the same assumptions and typically no single method is determinative in the reserve analysis for a line of business and coverage. Consequently, changes in our loss reserve estimates generally are not the result of changes in any one assumption. Instead, the variability will be affected by the interplay of changes in numerous assumptions, many of which are implicit to the approaches used.
Personal and Commercial Automobile Bodily Injury - loss reserves recorded for bodily injury on voluntary business were $769.9 million as of December 31, 2020. A key assumption for bodily injury is the inflation rate underlying the estimated reserve. A five point change (e.g., 4% changed to 9% or -1%) in the embedded inflation rate would have changed total reserves by approximately $71 million, either positive or negative, respectively, at December 31, 2020.
Personal Automobile Personal Injury Protection Medical Payment - loss reserves recorded for personal injury protection medical payment on voluntary business were $148.5 million as of December 31, 2020, of which approximately 95% relates to Michigan policies. A key assumption for this coverage is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A five point change in the embedded inflation rate and a one point change to the tail factor assumption (e.g., 2% changed to 1%
“Other commercial lines - Other lines” in the table above, is primarily comprised of our fidelity and crime line of business. Loss and LAE reserves in our “Total Other Segment” relate to our run-off voluntary assumed reinsurance pools business.
In 2020, net favorable loss and LAE development, excluding catastrophes, was $15.5 million. Commercial Lines favorable development of $19.0 million was primarily due to lower than expected losses of $36.0 million within the workers’ compensation line in accident years 2016 through 2019. This was partially offset by higher than expected losses in our commercial automobile line driven by higher bodily injury and personal protection losses, primarily in accident years 2017 through 2019, and the commercial multiple peril line, primarily in accident years 2017 and 2019. Within other commercial lines, lower than expected losses in our marine line, in accident years 2017 through 2019 and specialty industrial property lines were partially offset by higher than expected losses in the general liability coverages within Hanover Programs. In addition, the adverse prior development in our Other Segment was due to our run-off voluntary assumed property and casualty reinsurance pools business primarily based on an updated third-party actuarial study received in the first quarter of 2020 for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool that consists primarily of asbestos and environmental exposures.
In addition to reserves we carry to cover exposure in our direct business, we have established gross and net loss and LAE reserves for assumed reinsurance pool business with asbestos and environmental damage liability of $31.5 million, $29.5 million and $30.0 million at December 31, 2020, 2019 and 2018, respectively. These reserves relate to pools in which we have terminated our participation; however, we continue to be subject to claims related to years in which we were a participant. Results of operations from these pools are included in our Other segment. A significant part of our pool reserves relates to our participation in the ECRA voluntary pool from 1950 to 1982. In 1982, the pool was dissolved and since that time, the business has been in run-off. Our percentage of the total pool liabilities varied from 1% to 6% during these years. Our participation in this pool has resulted in average paid losses of approximately $2 million annually over the past ten years. In the first quarter of 2020, we received an updated third-party actuarial study for the ECRA voluntary pool which resulted in the aforementioned modest increase in our asbestos and environmental reserves.
We estimate our ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, assumed reinsurance or pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not believed to be significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. We believe that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. Nevertheless, the asbestos, environmental and toxic tort liability reserves could be revised, and any such revisions could have a material adverse effect on our results of operations for a particular quarterly or annual period or on our financial position.
The decrease in net investment income in 2020 was primarily due to the impact of lower new money yields, the deployment of cash during 2019 for accelerated share repurchases and special dividends, and lower limited partnership income. These decreases were partially offset by the continued investment of operational cash flows. In 2019, the increase in net investment income was primarily due to the continued investment of operational cash flows and the investment of proceeds from the sale of Chaucer, partially offset by lower limited partnership income and the impact of lower new money yields. We expect average fixed income yields to continue to decline as new money rates remain lower than embedded book yields.
Equity securities primarily consist of U.S. income-oriented large capitalization common stocks and developed market equity index and corporate bond exchange-traded funds.
Other investments consist primarily of our interest in corporate middle market and real estate limited partnerships. Corporate middle market limited partnerships may invest in senior or subordinated debt, preferred or common equity or a combination thereof, of privately-held middle market businesses. Real estate limited partnerships hold equity ownership positions in real properties and invest in debt secured by real properties. Our limited partnerships are generally accounted for under the equity method, or as a practical expedient using the fund’s net asset value, with financial information provided by the partnership on a two or three month lag.
We deposit funds with various state and governmental authorities. See Note 3 - “Investments” in the Notes to Consolidated Financial Statements for additional information.
For the years ended December 31, 2020, 2019 and 2018, we recognized in earnings $26.3 million, $2.0 million and $4.6 million, respectively, of impairments. In 2020, impairments primarily consisted of $17.6 million on fixed maturities, primarily relating to intend-to-sell securities, and $6.7 million of estimated credit losses on mortgage loans. In 2019, impairments consisted entirely of corporate fixed maturity securities. In 2018, impairments consisted of $2.6 million on fixed maturities and $2.0 million on other invested assets.
At December 31, 2020 and 2019, the allowance for credit losses on mortgage loans was $7.9 million and $1.3 million, respectively. The allowance for credit losses on available-for-sale securities was $0.1 million at December 31, 2020. There was no allowance for credit losses on available-for-sale securities at December 31, 2019.
Gross unrealized losses on fixed maturities at December 31, 2020 were $3.3 million, a decrease of $4.3 million compared to December 31, 2019, primarily attributable to lower prevailing interest rates. At December 31, 2020, gross unrealized losses consisted
primarily of $2.0 million on U.S. government securities, $0.6 million on residential mortgage-backed securities and $0.4 million on corporate fixed maturities. See also Note 3 - “Investments” in the Notes to Consolidated Financial Statements.
We view gross unrealized losses on fixed maturities as non-credit related since it is our assessment that these securities will recover, allowing us to realize their anticipated long-term economic value. Further, we do not intend to sell, nor is it more likely than not we will be required to sell, such debt securities before this expected recovery of amortized cost (see also “Liquidity and Capital Resources”). Inherent in our assessment are the risks that market factors may differ from our expectations; the global economic downturn resulting from the Pandemic is longer and more severe than current expectations; we may decide to subsequently sell a security for unforeseen business needs; or changes in the credit assessment from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, an impairment would be recognized as a realized loss. Although unrealized losses on fixed maturities are not reflected in the results of financial operations until they are realized, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets.
The following table illustrates the estimated impact on the fair value of our fixed maturity portfolio at December 31, 2020 and 2019 of hypothetical changes in prevailing interest rates, defined as changes in interest rates on U.S. Treasury debt. It does not reflect changes in credit spreads, liquidity spreads and other factors that also affect the value of securities. Since changes in prevailing interest rates are often accompanied by changes in these other factors, the reader should not assume that an actual change in interest rates would result in the values illustrated.
The majority of our assets are invested in the fixed income markets. Through fundamental research and credit analysis, with a focus on value investing, our investment professionals seek to identify a portfolio of stable income-producing higher quality U.S. government, foreign government, municipal, corporate, residential and commercial mortgage-backed securities and asset-backed securities. We have a general policy of diversifying investments both within and across major investment and industrial sectors to mitigate credit and interest rate risk. We monitor the credit quality of our investments and our exposure to individual markets, borrowers, industries, sectors and, in the case of commercial mortgage-backed securities and commercial mortgage loan participations, property types and geographic locations. In addition, we currently carry debt that is subject to interest rate risk, which was issued at fixed interest rates between 2.50% and 8.207%. Current market conditions, in light of our risk tolerance, restrict our ability to invest fixed income assets at similar rates of return; therefore, earnings on a similar level of assets are not sufficient to cover current debt interest costs.
Net realized and unrealized investment gains were $5.0 million and $109.4 million in 2020 and 2019, respectively, compared to net realized and unrealized investment losses of $50.7 million in 2018. Net realized and unrealized investment gains in 2020 were primarily due to net realized gains from sales and other of $17.9 million and, to a lesser extent, appreciation in the fair value of our equity securities of $13.4 million, partially offset by impairment losses on investments. Net realized and unrealized investment gains in 2019 were primarily due to $106.5 million of appreciation in the fair value of our equity securities. Net realized and unrealized investment losses in 2018 were primarily due to $43.4 million of losses from the net change in the fair value of equity securities. The change in the fair value of equity securities in both 2019 and 2018 resulted from prevailing market conditions. Additionally, in 2018 we recognized $4.6 million of OTTI losses and $2.7 million of losses recognized from the sale of securities, primarily fixed maturities.
In addition, we recognized an income tax charge of $1.2 million in 2019 related to new tax regulations that were issued on June 14, 2019 by the U.S. Department of the Treasury, with an effective date retroactive to January 1, 2018. These new regulations retroactively changed the taxation of certain non-U.S. income. Although the impact of these regulations relates to the calculation of the income tax expense related to the sale of Chaucer, unlike the $42.5 million of income tax expense, noted above, that was reflected in discontinued operations, ASC 740, Income Taxes, prescribes that the effect of certain retroactive tax law changes be presented in continuing operations. Accordingly, we have presented this charge as a separate component of our non-operating items from continuing operations. (See also “Income Taxes” below). Additionally, in the third quarter of 2019, we recognized $3.4 million of tax benefits related to prior years.
The following table summarizes the results of operations for Chaucer for 2018, reflecting the results of operations for the period in which we owned the Chaucer U.K. entities, which concluded with their sale on December 28, 2018.
The income tax provision on operating income was an expense of $92.6 million, $84.5 million and $69.3 million for 2020, 2019 and 2018, respectively. These provisions resulted in effective tax rates for operating income of 20.7%, 20.3% and 19.2% in 2020, 2019 and 2018, respectively. The provisions for 2020, 2019 and 2018 reflect the aforementioned excess tax benefits related to stock-based compensation. In addition, the 2018 provision included the aforementioned tax benefit related to prior years of $4.3 million. Absent these items, the provision for income taxes for 2020, 2019 and 2018 would have been expenses of $94.7 million, $87.5 million and $75.9 million, or 21.2% for 2020 and 21.0% for 2019 and 2018.
The income tax provision on our former Chaucer business was an expense of $4.7 million for 2018. The 2018 income tax provision on the gain from the disposal of Chaucer business was an expense of $42.5 million. This provision includes a write off of $8.0 million of deferred tax assets primarily attributable to Lloyd’s underwriting losses.
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting estimates are those which we believe affect the more significant judgments and estimates used in the preparation of our financial statements. Additional information about other significant accounting policies and estimates may be found in Note 1 - “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.
To determine the expected long-term return on plan assets, we generally consider historical mean returns by asset class for passive indexed strategies, as well as current and expected asset allocations, and adjust for certain factors that we believe will have an impact on future returns. Actual returns on plan assets in any given year seldom result in the achievement of the expected rate of return on assets. Actual returns on plan assets in excess of these expected returns will generally reduce our net actuarial losses (or increase actuarial gains) that are reflected in the accumulated other comprehensive income balance in shareholders’ equity, whereas actual returns on plan assets that are less than expected returns will generally increase our net actuarial losses (or decrease actuarial gains) that are reflected in accumulated other comprehensive income. These gains or losses are amortized into expense in future years. The qualified benefit plan held assets consisting of approximately 90% fixed maturities and 10% equity securities at December 31, 2020.
Net actuarial gains related to the qualified benefit plan of $7.2 million and $20.5 million were reflected as changes to accumulated other comprehensive income in 2020 and 2019, respectively. Net actuarial gains in 2020 and 2019 resulted from net investment gains during each year, as well as favorable mortality experience, partially offset by decreases in the discount rate. In 2020 and 2019, amortization of actuarial losses from prior years was $5.4 million and $11.1 million, respectively.
Expenses related to our qualified benefit plan are generally calculated based upon information available at the beginning of the plan year. Our pre-tax expense related to our qualified benefit plan was $0.3 million and $7.6 million for 2020 and 2019, respectively. As a result of favorable market returns in 2020 and favorable mortality experience, that were only partially offset by decreases in the discount rate, our pension expense related to our qualified benefit plan is expected to decrease from $0.3 million in 2020 to a benefit of $2.3 million in 2021.
We estimate the amount of the credit impairment by comparing the amortized cost of the fixed maturity security with the net present value of the fixed maturity security’s projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment.
Declines in market value which are not credit loss related are recorded as unrealized losses, which do not affect net income and earnings per share, but reduce accumulated other comprehensive income, which is reflected in our Consolidated Balance Sheets. We cannot provide assurance that the impairments will be adequate to cover future losses or that we will not have substantial additional impairments in the future. See Note 3 - “Investments” and Note 4 - “Investment Income and Gains and Losses” in the Notes to Consolidated Financial Statements for further discussion regarding securities in an unrealized loss position and impairments.
The following are the components of our deferred tax assets and liabilities as of December 31, 2020.
The NAIC prescribes an annual calculation regarding risk based capital (“RBC”). RBC ratios for regulatory purposes, as described in the glossary, are expressed as a percentage of the capital required to be above the Authorized Control Level (the “Regulatory Scale”); however, in the insurance industry, RBC ratios are widely expressed as a percentage of the Company Action Level. The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other insurance subsidiaries), as of December 31, 2020 and 2019, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):
Net cash used in investing activities was $608.8 million during 2020, as compared to $311.9 million during 2019 and net cash provided of $271.3 million in 2018. During 2020 and 2019, cash used in investing activities primarily related to net purchases of fixed maturities and, to a lesser extent, equity securities and other investments. During 2018, cash provided by investing activities primarily related to net proceeds received from the sale of Chaucer. These proceeds were partially offset by net purchases of fixed maturities, commercial mortgage loan participations, and other investments.
The Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of our common stock of up to $900 million. Under the repurchase authorization, we may repurchase, from time to time, common shares in amounts, at prices and at such times as we deem appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. Pursuant to the terms of an ASR agreement executed on December 9, 2019 (the “December 2019 ASR”), we paid $150.0 million in exchange for shares of our common stock. Under the terms of the December 2019 ASR, we received an initial delivery of approximately 0.9 million shares of our common stock. On February 26, 2020, we received approximately 0.2 million shares of our common stock as final settlement of shares repurchased under the December 2019 ASR.
On August 24, 2020, we issued $300.0 million aggregate principal amount of 2.50% senior unsecured debentures due September 1, 2030. Net proceeds of the debt issuance were $297.7 million. A portion of the net proceeds was used to redeem $175.0 million outstanding 6.35% subordinated notes due 2053, resulting in a pre-tax loss of $6.1 million, related primarily to the accelerated amortization of debt issuance costs.
Amounts represent non-qualified defined benefit pension and postretirement benefit obligations and reflect estimated payments to be made through plan year 2030 for pension, postretirement, and postemployment benefits, although it is likely that payments will be made beyond 2030. Estimates of these payments and the payment patterns are based upon historical experience. We do not expect to make any significant contributions to our qualified plan in order to meet our minimum funding requirements for the next several years; therefore, no contributions for this plan are included in this schedule. However, additional contributions may be required in the future based on the level of pension assets and liabilities in future periods. The ultimate payment amount for our pension plan is based on several assumptions, including, but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates and the ultimate valuation of benefit obligations.
Information regarding litigation and legal contingencies appears in Note 16 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. Information related to certain regulatory and industry developments are contained in “Regulation” in Part I - Item 1 and in “Risk Factors” in Part I - Item 1A.
Current accident year results - A non-GAAP measure of the estimated earnings impact of current premiums offset by estimated loss experience and expenses for the current accident year. This measure includes the estimated increase in revenue associated with higher prices (premiums), including those caused by price inflation and changes in exposure, partially offset by higher volume driven expenses and inflation of loss costs. Volume driven expenses include acquisition costs such as commissions paid to agents, which are typically based on a percentage of premium dollars.
Exposure management actions - Actions that focus on improving underwriting profitability and/or lessening earnings volatility by reducing our exposures and property concentrations in certain geographies and lines that are believed to be more prone to catastrophe and non-catastrophe losses. These actions include, but are not limited to, non-renewal, rate increases, stricter underwriting standards and higher deductible utilization, agency management actions, and more selective portfolio management by modifying our business mix.
Morbidity - Morbidity relates to the occurrence of illness, disability or other physical or psychological impairment, whether temporary or permanent, for insured risks. Morbidity is a key assumption for long-term care insurance and other forms of individual and group health benefits.
Combined ratio - This ratio is the GAAP equivalent of the statutory ratio that is widely used as a benchmark for determining an insurer’s underwriting performance. A ratio below 100% generally indicates profitable underwriting prior to the consideration of investment income (loss). A combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income (loss). The combined ratio is the sum of the loss and loss adjustment expense ratio and the expense ratio.
Expense Ratio - The ratio of underwriting expenses (including the amortization of deferred acquisition costs), less premium installment and other fee income and premium charge offs, to premiums earned for a given period.
Loss ratio - The ratio of losses (including catastrophe losses) to premiums earned for a given period.
Reinstatement premium - A pro-rata reinsurance premium that may be charged to us by our reinsurers. A reinstatement premium may be contractually required to be charged for restoring an amount of reinsurance coverage reduced as the result of a reinsurance loss payment that depletes or exhausts a reinsurance treaty or treaty layer. For example, in 2005, this premium was required to ensure that our property catastrophe occurrence treaty, which was exhausted by hurricane Katrina, was available again in the event of another large catastrophe loss in 2005. Reinsurance reinstatement premiums accrued by us are accounted for as a reduction in net premiums earned rather than as an “expense”. For certain reinsurance treaties, a ceding commission adjustment is recorded commensurate with a reinstatement premium accrual. A ceding commission is a fee paid by a reinsurance company to a direct writer to cover the costs of issuing the policy and is recorded as a contra-expense.
We have audited the accompanying consolidated balance sheets of The Hanover Insurance Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and schedules of condensed financial information of the registrant, of supplementary insurance information, and of supplemental information concerning property and casualty insurance operations as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020, schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020, and schedule of summary of investments - other than investments in related parties as of December 31, 2020 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As described in Notes 1 and 15 to the consolidated financial statements, loss and loss adjustment expense reserves were $6.0 billion as of December 31, 2020. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. The loss reserve estimation process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for management to predict future outcomes. As part of this process, management uses a variety of analytical methods that consider experience, trends and other relevant factors, as well as considers numerous quantitative and qualitative factors, including the maturity of the accident year, the level of volatility within a particular class of business, the sufficiency or quality of historical reported and paid loss and loss adjustment expenses information, legal and regulatory developments and changes in underwriting, claim handling and case reserving practices. The Company’s ultimate incurred but not reported (“IBNR”) reserves are estimated by management and reserving actuaries on an aggregate basis for each line of business or coverage for loss and loss expense liabilities not reflected within the case reserves.
The consolidated financial statements of The Hanover Insurance Group, Inc. (“THG” or the “Company”), include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), THG’s principal property and casualty companies; and other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 13 - “Segment Information.” The consolidated financial statements also include the Company’s discontinued operations, consisting primarily of the Company’s former accident and health and life insurance businesses and its former Chaucer international business, Chaucer Holdings Limited (“Chaucer”), a United Kingdom (“U.K.”) domiciled specialist insurance underwriting group which operates through the Society and Corporation of Lloyd’s (“Lloyd’s”), and other international insurance and non-insurance subsidiaries. All intercompany accounts and transactions have been eliminated. On December 28, 2018, the Company completed the sale of Chaucer to China Reinsurance (Group) Corporation (“China Re”), and subsequently completed the sales of the Chaucer-related Irish and Australian entities on February 14, 2019 and April 10, 2019, respectively. Accordingly, for all prior periods presented in this Annual Report on Form 10-K, operations from Chaucer are presented as discontinued operations.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of the Company’s management these financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair presentation of the financial position and results of operations.
Equity securities are carried at fair value. Increases and decreases in fair value are reported in net income.
Other investments consist primarily of mortgage participations and limited partnerships. Mortgage participations represent interests in commercial mortgage loans originated and serviced by a third-party of which the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgage loans. Mortgage participations are stated at unpaid principal balances adjusted for deferred fees or expenses, net of an allowance for credit losses. Prior to May 2018, certain reacquisition rights retained by the third-party in the loan participations required that these investments be accounted for as secured borrowings under Accounting Standards Codification (“ASC”) 860, Transfers and Servicing. Investments in limited partnerships include interests in private equity and real estate funds. Investments in limited partnership interests purchased prior to January 1, 2018, where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies, are accounted for at fair value utilizing the net asset value (“NAV”) as a practical expedient to determine fair value. All other limited partnerships are accounted for in accordance with the equity method of accounting.
The Company excludes accrued interest receivable from both the estimated fair value and the amortized cost basis of its investment securities and reports such amounts separately on the consolidated balance sheets as accrued investment income. When accrued interest receivable is deemed uncollectible it is written off as a charge to investment income, rather than recorded through an allowance.
Realized investment gains and losses on sales are reported as a component of revenues based upon specific identification of the investment assets sold. Impairments are reported as realized investment losses, and include credit losses (and any subsequent recoveries) on fixed maturities and mortgage participations, and intend-to-sell impairment losses on fixed maturities. Changes in the fair value of equity securities are reported in net realized and unrealized investment gains (losses), including increases and decreases in fair value on securities that are still held and realized gains and losses on securities that have been sold.
The Company reviews fixed maturity securities in an unrealized loss position and assesses whether it intends to sell the security or more likely than not will be required to sell the security before the recovery of its amortized cost basis. If the debt security meets either of these two criteria, an intend-to-sell impairment is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. If neither of the above criteria are met, the credit loss portion of the unrealized loss is recorded through earnings and the non-credit portion remains in other comprehensive income. Credit losses are estimated by comparing the amortized cost of the fixed maturity security with the net present value of the security’s projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment. The non-credit portion of the impairment is equal to the difference between the fair value and the net present value of the security’s cash flows at the impairment measurement date. Until January 1, 2020, intend-to-sell impairments and credit losses on fixed maturities resulted in a reduction of the amortized cost basis of the security, and reversal of an impairment was not allowed. Beginning January 1, 2020, credit losses are recorded through an allowance for credit losses rather than an adjustment to amortized cost. Recoveries of impairments on fixed maturities are recognized as reversals of the allowance for credit loss and are no longer accreted as investment income through an adjustment to investment yield. The allowance for credit losses is limited to the amount that fair value is less than amortized cost and therefore, increases in the fair value of investments due to reasons other than credit could result in decreases in the allowance and an increase in net income.
Mortgage participations are pooled by similar risk characteristics and evaluated for credit losses. The allowance for credit losses is calculated using expected loss rates, which vary based on risk factors such as property type, geographic market, and loan-to-value and debt service coverage ratios.
The Company has entered into operating and financing leases through which it uses “right-of-use” assets that are recorded at the present value of future minimum lease payments, less accumulated depreciation. Depreciation is generally provided using the straight-line method over the estimated useful lives of the related assets, which generally range from 4 to 6 years for real estate and fleet leases.
In accordance with the provisions of ASC 350, Intangibles - Goodwill and Other, the Company carries its goodwill at cost, net of amortization accumulated prior to January 1, 2002, and net of impairments. Increases to goodwill are generated through acquisition and represent the excess of the cost of an acquisition over the fair value of net assets acquired, including any intangibles acquired. Since January 1, 2002, goodwill is no longer amortized but rather, is reviewed for impairment. Additionally, acquisitions can also produce intangible assets, which have either a definite or indefinite life. Intangible assets with definite lives are amortized over that life, whereas those intangible assets determined to have an indefinite life are reviewed at least annually for impairment.
Insurance premiums written are generally recorded at the policy inception and are primarily earned on a pro-rata basis over the terms of the policies for all products. Premiums written may also include estimates that are derived from multiple sources, which include the historical experience of the underlying business, similar businesses and available industry information. These estimates are regularly reviewed and updated, and any resulting adjustments are included in the current year’s results. Unearned premium reserves represent the portion of premiums written that relates to the unexpired terms of the underlying in-force insurance policies and reinsurance contracts. Premium receivables reflect the unpaid balance of premiums written as of the balance sheet date. Premium receivables are
Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by ASC 740, Income Taxes (“ASC 740”). These temporary differences are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. These differences result primarily from insurance reserves, investments, deferred acquisition costs, software capitalization and employee benefit plans.
In February 2018, the FASB issued ASC Update No. 2018-02 (Topic 220) Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASC update allows for a reclassification into retained earnings of the stranded tax effects in AOCI resulting from the enactment of the TCJA. Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of the enactment of the TCJA related to items in AOCI. The updated guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company early adopted this guidance effective January 1, 2018 with a cumulative effect adjustment, which reclassified $6.5 million of benefits from AOCI to retained earnings with no overall impact on the Company’s financial position.
In June 2016, the FASB issued ASC Update No. 2016-13, (Topic 326) Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASC Update No. 2016-13”). This ASC update introduces new guidance for the accounting for credit losses on financial instruments within its scope. A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider both historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments. The estimated credit losses and subsequent adjustment to such loss estimates are recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings. ASC Update No. 2016-13 also modifies the impairment model for available-for-sale debt securities. The new model requires an estimate of expected credit losses only when the fair value is below the amortized cost of an asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost no longer affects the determination of whether a credit loss exists. In addition, credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASC Update No. 2018-19, Codification Improvement to Topic 326, Financial Instruments - Credit Losses, which explicitly states that receivables arising from operating leases are not within the scope of Subtopic 326-20.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC Update No. 2016-02, Leases (Topic 842) . This ASC update requires a lessee to recognize a right-of-use asset, which represents the lessee’s right to use a specified asset for the lease term, and a corresponding lease liability, which represents a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, for all leases that extend beyond 12 months. For finance or capital leases, interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statements of income and comprehensive income. In addition, the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. For operating leases, the asset and liability will be amortized as a single lease cost, such that the cost of the lease is allocated over the lease term, on a generally straight-line basis, with all cash flows
included within operating activities in the statement of cash flows. ASC Update No. 2016-02 requires that implementation of this guidance be through a modified retrospective transition approach. In July 2018, the FASB issued ASC Update No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an additional transition method to adopt ASC Update No. 2016-02. Under this optional transition method, an entity can initially apply the new guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company implemented this guidance effective January 1, 2019 using the optional transition method provided in ASC Update No. 2018-11 and elected to utilize the practical expedient package available in ASC Update 2016-02. The Company has also elected to utilize the practical expedient which allows an entity not to separate lease and nonlease components for all of its asset classes. The effect of implementing this guidance increased total assets and total liabilities each by approximately $35 million on January 1, 2019 and did not have a material effect on the results of operations.
In October 2020, the FASB issued ASC Update No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. This guidance clarifies, for each reporting period, that an entity should reevaluate whether a callable debt security with multiple call dates is required to amortize any premium to the next call date. The updated guidance is effective for annual and interim periods beginning after December 15, 2020 and should be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASC Update No. 2020-08 to have a material impact on its financial position or results of operations.
Transaction and other sale related costs primarily include brokerage, legal, actuarial, tax and other professional fees, employee retention costs, costs for the purchase of aggregate excess of loss catastrophe coverage in consideration of the contingent proceeds provision, along with certain other miscellaneous charges related to the execution of the transaction.
Included in the previously recorded $174.4 million gain was $31.7 million of contingent proceeds, which were subject to change, based on development of Chaucer’s 2018 catastrophe losses. During the first half of 2019, Chaucer experienced unfavorable development on its 2018 catastrophe losses, primarily due to higher than expected losses for hurricane Michael, Typhoon Jebi and a Columbian dam construction loss. Accordingly, the Company updated and reduced its best estimate of pre-tax contingent proceeds by $9.7 million. The Company received a cash payment of $22.0 million in final settlement of the contingent proceeds.
Revenues from the portion of the Chaucer business remaining after the sale of the U.K. entities in 2018 was $6.7 million during the year ended December 31, 2019. Pre-tax operating losses in this business totaled $0.5 million during the same period, whereas this business provided after-tax income of $1.6 million for the year ended December 31, 2019. Income from the Chaucer business in 2019 included a $2.0 million tax benefit related to a decrease in an uncertain tax position due to the expiration of the statute of limitations.
The sales of the Chaucer businesses were completed in 2019, therefore there were no material cash flows associated with the Chaucer business in 2020. The following table details the cash flows associated with the Chaucer business during the years indicated:
The Company enters into various agreements that may require its fixed maturities to be held as collateral by others. At December 31, 2020 and 2019, fixed maturities with fair values of $103.9 million and $94.0 million, respectively, were held as collateral for the FHLB collateralized borrowing program. See Note 6 - “Debt and Credit Arrangements” for additional information related to the Company’s FHLB program. Additionally, at December 31, 2020 and 2019, fixed maturities with fair values of $315.2 million and $308.7 million, respectively, were on deposit with various state governmental authorities or trustees.
The following tables provide information about the Company’s available-for-sale fixed maturity securities that were in an unrealized loss position at December 31, 2020 and 2019 including the length of time the securities have been in an unrealized loss position:
The Company views gross unrealized losses on fixed maturities as non-credit related and through its assessment of unrealized losses has determined that these securities will recover, allowing the Company to realize the anticipated long-term economic value. The Company currently does not intend to sell, nor does it expect to be required to sell these securities before recovery of their amortized cost. The Company employs a systematic methodology to evaluate declines in fair value below amortized cost for fixed maturity securities. In determining impairments, the Company evaluates several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the degree to which the fair value of an issuer’s securities is below the Company’s amortized cost. The Company also considers any factors that might raise doubt about the issuer’s ability to make contractual payments as they come due and whether the Company expects to recover the entire amortized cost basis of the security.
At December 31, 2020, scheduled maturities of mortgage participations and other loans were as follows: due in 2021 - $57.5 million; in 2022 - $27.7 million; 2023 - $16.5 million; 2024 - $77.1 million and thereafter - $288.8 million. Actual maturities could differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties and loans may be refinanced. During 2020, the Company did not refinance any loans based on terms that differed from current market rates.
At December 31, 2020 and 2019, the Company’s exposure to concentration of investments in a single investee that exceeded 10% of shareholders’ equity included securities of U.S. government-sponsored agencies, as well as mortgage participations with a highly rated single third-party of $459.3 million and $432.3 million, respectively.
At December 31, 2020, there were contractual investment commitments of up to $205.3 million.
The change in fair value of limited partnerships measured using NAV is reported in net investment income, of which, $6.9 million and $4.6 million of holding losses related to securities still owned at December 21, 2020 and 2019, respectively, and $5.3 million of holding gains related to securities still owned at December 31, 2018.
The carrying values of fixed maturity securities on non-accrual status at December 31, 2020 and 2019 were not material. The effects of non-accruals for the years ended December 31, 2020, 2019 and 2018, compared with amounts of net investment income that would have been recognized in accordance with the original terms of the fixed maturities were also not material.
Net realized and unrealized gains (losses) on investments, including impairments, were as follows:
Included in net realized and unrealized investment gains (losses) for the years ended December 31, 2020, 2019 and 2018, were impairments of investment securities totaling $26.3 million, $2.0 million and $4.6 million, respectively. In 2020, impairments primarily consisted of $17.6 million on fixed maturities and $6.7 million of estimated credit losses on mortgage loans. Impairments on fixed maturities included $16.5 million relating to intend-to-sell securities and $1.1 million of estimated credit losses. In 2019, impairments consisted entirely of corporate fixed maturity securities. In 2018, impairments consisted of $2.6 million on fixed maturities and $2.0 million on other invested assets.
The proceeds from sales of available-for-sale fixed maturities and the gross realized gains and gross realized losses on those sales, were as follows:
obtained, primarily due to the illiquid nature of the securities, and for which significant inputs used to determine fair value are based on the Company’s own assumptions.
Residential mortgage-backed securities - estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; government or monetary authority support programs; tax policies and delinquency/default trends.
Asset-backed securities - overall credit quality, including assessments of the underlying collateral type such as credit card receivables, automobile loan receivables and equipment lease receivables; geographic diversification; vintage year; historical collateral performance including delinquency, default and casualty trends; economic conditions influencing use rates and resale values; and contract structural support features.
The Company holds privately placed fixed maturity securities and certain other fixed maturity securities that do not have an active market and for which the pricing service cannot provide fair values. The Company determines fair values for these securities using either matrix pricing utilizing the market approach or broker quotes. The Company will use observable market data as inputs into the fair value techniques, as discussed in the determination of Level 2 fair values, to the extent it is available, but is also required to use a certain amount of unobservable judgment due to the illiquid nature of the securities involved. Unobservable judgment reflected in the Company’s matrix model accounts for estimates of additional spread required by market participants for factors such as issue size, credit stress, structural complexity, high bond coupon or other unique features. These matrix-priced securities are reported as Level 2 or Level 3, depending on the significance of the impact of unobservable judgment on the security’s value. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.
Other investments primarily include mortgage participations and limited partnerships not subject to the equity method of accounting. The fair values of limited partnerships not subject to the equity method of accounting are based on the net asset value (“NAV”) provided by the general partner adjusted for recent financial information and are excluded from the fair value hierarchy.
The following tables provide, for each hierarchy level, the Company’s investment assets that were measured at fair value on a recurring basis.
The Company also held $375.0 million par value of unsecured senior debentures at December 31, 2020 and 2019, that were issued on April 8, 2016, and mature on April 15, 2026. Additionally, the Company had outstanding 7.625% unsecured senior debentures with a par value of $61.8 million and $62.6 million as of December 31, 2020 and 2019, respectively, maturing on October 15, 2025. All of the Company’s outstanding senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of stock of restricted subsidiaries and limitations on liens, and pay interest semi-annually.
On January 2, 2019, the Company repaid $125.0 million of its FHLB advances that were due 2029 and had an interest rate of 5.5%, along with related prepayment fees of $26 million; such fees were recognized in 2018. Membership in FHLB provides the Company with access to additional short-term liquidity based on the level of investment in FHLB stock and pledged collateral. Total holdings of FHLB stock were $2.6 million and $2.1 million at December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, the Company had pledged government agency securities with a fair value of $103.9 million and $94.0 million, respectively, as collateral for periodic short-term borrowings with the FHLB. There were no borrowings outstanding with the FHLB at December 31, 2020 or 2019.
As noted above, in Note 2 - “Discontinued Operations,” on June 14, 2019, the U.S. Department of the Treasury issued regulations that changed the taxation of certain non-U.S. income. These regulations were applied retroactively to January 1, 2018. As a result, the Company incurred additional federal income tax of $1.2 million from the 2018 sale of Chaucer. In accordance with ASC 740, the Company has recorded a provision for this amount as a component of income tax expense in continuing operations in its Consolidated Statements of Income for the year ended December 31, 2019.
The following are the components of the Company’s deferred tax assets and liabilities, (excluding those associated with its discontinued operations).
In prior years, the Company completed several transactions which resulted in, for tax purposes only, realized gains in its investment portfolio. As a result of these transactions, the Company was able to utilize capital losses carried forward and to release the valuation allowance recorded against the deferred tax asset related to these losses. The releases of valuation allowances were recorded as a benefit in accumulated other comprehensive income. Previously unrealized benefits of $9.2 million, $14.8 million and $9.2 million, were recognized as part of income from continuing operations during 2020, 2019 and 2018, respectively. The remaining amount of $11.6 million in accumulated other comprehensive income will be released into income from continuing operations in future years, as the investment securities subject to these transactions are sold or mature.
The Company recognizes interest and penalties related to unrecognized tax benefits in federal income tax expense. For the years ended December 31, 2020, 2019 and 2018 the Company recognized a de minimis amount of net interest and has not recognized any penalties associated with unrecognized tax benefits. During 2020 and 2019, the Company released accrued interest of $0.1 million and $0.3 million, respectively, due to the expirations of a statute of limitations.
In 2021, the Company is expecting to release the remaining $0.9 million of liability due to the expiration of a statute of limitations.
The Company recognizes the funded status of its defined benefit plans in its Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation of the Company’s defined benefit plans. The Company provides information for its overfunded plan separate from its underfunded plan.
As of January 1, 2005, the defined benefit pension plans were frozen and since that date, no further cash balance allocations have been credited to participants. Participants’ accounts are credited with interest daily, based upon the General Agreement of Trades and Tariffs rate (the 30-year Treasury Bond interest rate). In addition, the grandfathered benefits for the transition group were also frozen at January 1, 2005 levels with an annual transition pension adjustment calculated at an interest rate equal to 5% per year up to 35 years of completed service, and 3% thereafter. As of December 31, 2020, based on current estimates of plan liabilities and other assumptions, the assets of the qualified defined benefit pension plan exceeded the projected benefit obligation by approximately $27.4 million.
The expected rates of return were determined by using historical mean returns for each asset class, adjusted for certain factors believed to have an impact on future returns. These returns are generally weighted to the plan’s actual asset allocation, and are net of administrative expenses. For the qualified defined benefit plan, the 2020 expected return on plan assets of 4.75% reflects long-term expectations and decreased modestly based upon long-term market expectations and expense management efforts. The Company reviews and updates, at least annually, its expected return on plan assets based on changes in the actual assets held by the plan and market conditions.
The following table provides its year-end 2020 target allocations and actual invested asset allocations at December 31, 2020 and 2019.
Actuarial losses related to the change in the benefit obligation for the Company’s qualified benefit plan were $25.9 million and $20.4 million for the years ended December 31, 2020 and 2019, respectively. Actuarial losses related to the change in the benefit obligation for the Company’s non-qualified benefit plan were $3.0 million for the year ended December 31, 2020, compared to actuarial gains of $0.6 million for the year ended December 31, 2019. For both plans, the actuarial losses in 2020 primarily reflect reductions in the discount rate driven by decreases in corporate bond interest rates, partially offset by favorable mortality experience. In 2019, the actuarial gains or losses in both plans also reflect the effect of lower discount rates and favorable mortality experience. The non-qualified plan also had favorable demographic experience ultimately producing actuarial gains in 2019.
The unrecognized net actuarial gains or losses which exceed 10% of the greater of the projected benefit obligations or the fair value of plan assets are amortized as a component of net periodic pension cost over the next five years.
The benefit payments are based on the same assumptions used to measure the Company’s benefit obligations at the end of 2020. Benefit payments related to the qualified plan will be made from plan assets held in trust and not included with Company assets, whereas those payments related to the non-qualified plan will be provided for by the Company.
In addition to the defined benefit plans, THG provides a qualified defined contribution 401(k) plan for all of its employees, whereby the Company matches employee elective 401(k) contributions, up to a maximum of 6% of eligible compensation in 2020, 2019 and 2018. The Company’s expense for this matching provision was $24.1 million, $22.2 million and $21.7 million for 2020, 2019 and 2018, respectively. In addition to this matching provision, the Company can elect to make an annual contribution to employees’ accounts.
The amount reclassified from accumulated other comprehensive income for the pension and postretirement benefits was allocated approximately 40% to loss adjustment expenses and 60% to other operating expenses for each of the years ended December 31, 2020, 2019 and 2018.
On May 20, 2014, shareholders approved The Hanover Insurance Group 2014 Long-Term Incentive Plan (the “2014 Stock Plan”). With respect to new share-based award issuances, the 2014 Stock Plan replaced The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan (the “2006 Stock Plan”) and authorized the issuance of 6,100,000 shares in a new share pool, plus any shares subject to outstanding awards under the 2006 Stock Plan that may become available for reissuance as a result of the cash settlement, forfeiture, expiration or cancellation of such awards. The 2014 Stock Plan provides for the granting of the same types of awards as the 2006 Stock Plan, including stock options and stock appreciation rights (“SARS”), restricted and unrestricted stock, stock units, performance and market-based stock awards and cash awards. In accordance with the 2014 Stock Plan, the issuance of one share of common stock in the form of an option or SAR will reduce the share pool by one share, whereas the issuance of one share of common stock for the other types of stock awards provided by the Plan will reduce the pool by 3.8 shares. As of December 31, 2020, there were 2,790,071 shares available for grants under the 2014 Stock Plan.
Compensation cost, excluding the discontinued operations related to the Chaucer business, for the years ended December 31, 2020, 2019 and 2018 totaled $20.1 million, $17.4 million and $14.9 million, respectively. Related tax benefits were $4.2 million, $3.7 million and $3.1 million, respectively.
The excess tax benefit realized from options exercised for the years ended December 31, 2020, 2019 and 2018 was $2.1 million, $1.7 million and $1.6 million, respectively. The aggregate intrinsic value at December 31, 2020 for shares outstanding and shares exercisable was $29.9 million and $29.1 million, respectively. At December 31, 2020, the weighted average remaining contractual life for shares outstanding and shares exercisable was 6.6 years and 5.7 years, respectively. Additional information about employee options outstanding and exercisable at December 31, 2020 is included in the following table:
The Company granted market-based restricted share units in 2020, 2019 and 2018. Additionally, in 2020 and 2019 the Company granted performance-based restricted share units. These units generally vest after three years of continued employment and after the achievement of certain performance targets. The Company also granted time-based restricted stock units to eligible employees in 2020, 2019 and 2018 that generally vest after three years of continued employment.
In 2020, 2019 and 2018, the Company granted market-based awards totaling 21,379, 24,410, and 31,866, respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity. The vesting of these stock units is based on the relative total shareholder return (“TSR”) of the Company. This metric is generally based on relative TSR for a three-year period as compared to a group of Property and Casualty peer companies. The fair value of market-based awards was estimated at the date of grant using a valuation model. These units have the potential to range from 0% to 150% of the shares disclosed.
In 2020, 13,532 market-based restricted stock units were included as granted due to completion levels in excess of 100% for units granted in 2017. The weighted average grant date fair value of these awards was $80.92. In 2019, 5,820 market-based restricted stock units were included as granted due to completion levels in excess of 100% for units granted in both 2016 and 2017. The weighted average grant date fair value of these awards was $75.95. In 2018, 3,115 market-based restricted stock units were included as granted due to completion levels in excess of 100% for units granted in 2015. The weighted average grant date fair value of these awards was $70.24.
In 2020 and 2019, the Company also granted performance-based restricted stock units totaling 19,504 and 18,195, respectively to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity. The vesting of these stock units is determined through the use of a performance-based metric (return on equity) and has the potential to range from 0% to 150% of the shares disclosed.
The increase in intrinsic value from grant date of restricted stock and restricted stock units that vested during the years ended December 31, 2020, 2019 and 2018 was $4.5 million, $3.7 million and $2.9 million, respectively. The intrinsic value for performance and market-based restricted stock units that vested in 2020, 2019 and 2018 was $2.0 million, $1.1 million, $0.6 million, respectively. There were 1,949 shares, 1,674 shares and 10,330 shares of market-based awards that forfeited in 2020, 2019 and 2018, respectively.
At December 31, 2020, the aggregate intrinsic value of restricted stock units was $40.8 million and the weighted average remaining contractual life was 1.3 years. The aggregate intrinsic value of performance and market-based restricted stock units was $11.6 million and the weighted average remaining contractual life was 1.3 years. As of December 31, 2020, there was $25.1 million of total unrecognized compensation cost related to unvested restricted stock units and performance and market-based restricted stock units. The cost is expected to be recognized over a weighted average period of 1.8 years. Compensation cost associated with restricted stock, restricted stock units and performance and market-based restricted stock units is generally calculated based upon grant date fair value, which is determined using current market prices.
The Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of the Company’s common stock of up to $900 million, and under which the Company had approximately $124 million available at December 31, 2020. Under the repurchase authorization, the Company may repurchase, from time to time, common stock in amounts, at prices and at such times as the Company deems appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. The Company is not required to purchase any specific number of shares or to make purchases by any certain date under this program. During 2020, 2019 and 2018, the Company had executed several accelerated share repurchase (“ASR”) agreements, through which it repurchased a total of 5.2 million shares. Pursuant to the terms of ASR agreements executed on December 30, 2018 and on June 28, 2019, the Company repurchased approximately 3.2 million shares of its common stock for $400.0 million. On December 9, 2019 (the "December 2019 ASR"), the Company repurchased approximately 0.9 million shares of its common stock for $150.0 million pursuant to an additional ASR, which represented approximately 80% of the total number of shares expected to be repurchased under this agreement. On February 26, 2020, the Company received approximately 0.2 million of its common stock shares as a final settlement of shares repurchased under the December 2019 ASR. On October 29, 2020, pursuant to the terms of another ASR agreement (the "October 2020 ASR") the Company paid $100.0 million and received an initial delivery of approximately 0.8 million shares of its common stock, which was approximately 80% of the total number of shares expected to be repurchased under the October 2020 ASR. On January 29, 2021, the Company received approximately 45,000 shares of its common stock shares as final settlement of shares repurchased under the October 2020 ASR.
Pursuant to New Hampshire’s statute, the maximum dividends and other distributions that an insurer may pay in any twelve month period, without prior approval of the New Hampshire Insurance Commissioner, is limited to the lesser of 10% of such insurer’s statutory policyholder surplus as of the preceding December 31, or statutory net income less net realized gains. Hanover Insurance declared and paid dividends to its parent totaling $245.0 million in 2020, and $140.0 million in both 2019 and 2018. At January 1, 2021, the maximum dividend payable without prior approval was $13.3 million. In May 2021, the maximum dividend declared payable without prior approval will increase by $245.0 million to a total amount of $258.3 million.
Pursuant to Michigan’s statute, the maximum dividends and other distributions that an insurer may pay in any twelve month period, without prior approval of the Michigan Insurance Commissioner, is limited to the greater of 10% of policyholders’ surplus as of December 31 of the immediately preceding year or the statutory net income less net realized gains, for the immediately preceding calendar year. Citizens declared and paid an extraordinary dividend to its parent, Hanover Insurance, totaling $82.0 million in the fourth quarter of 2020. In 2019 and 2018, ordinary dividends of $106.0 million and $87.9 million, respectively, were declared and paid by Citizens. At January 1, 2021, the maximum dividend payable without prior approval was $26.7 million. In October 2021, the maximum dividend declared payable without prior approval will increase by $82.0 million to a total amount of $108.7 million.
The Company’s primary business operations include insurance products and services provided through three operating segments: Commercial Lines, Personal Lines and Other. Commercial Lines includes 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 and surety. Personal Lines includes personal automobile, homeowners and other personal coverages. Included in the Other segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to the Company’s former life insurance employees and agents; and, a run-off property and casualty voluntary pools business. In 2018 and 2019, the Company completed the sales of its former Chaucer segment to China Re. Accordingly, as of December 31, 2018, and for all periods presented, Chaucer’s results of operations are classified as Discontinued Operations in the Consolidated Statements of Income (see Note 2 - “Discontinued Operations”). The separate financial information 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.
The Company reports interest expense related to debt separately from the earnings of its operating segments. For 2020, this consisted of interest on the Company’s senior and subordinated debentures.
Management evaluates the results of the aforementioned segments based on operating income before income taxes, excluding interest expense on debt. Operating income before income taxes excludes certain items which are included in net income, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before income taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before income taxes may be important components in understanding and assessing the Company’s overall financial performance, management believes that the presentation of operating income before income taxes enhances an investor’s understanding of the Company’s results of operations by highlighting net income attributable to the core operations of the business. However, operating income before income taxes should not be construed as a substitute for income before income taxes or income from continuing operations and operating income should not be construed as a substitute for net income.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company determines the appropriate amount of reinsurance based on evaluations of the risks accepted and analyses prepared by consultants and on market conditions (including the availability and pricing of reinsurance). The Company also believes that the terms of its reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. The Company believes that its reinsurers are financially sound, based upon an ongoing review of financial strength ratings assigned to them by rating agencies, their reputations in the reinsurance marketplace, collections history, advice from third parties and the analysis, and guidance of the Company’s reinsurance advisors.
Management’s process for establishing loss reserves is a comprehensive process that involves input from multiple functions throughout the organization, including actuarial, finance, claims, legal, underwriting, distribution and business operations management. A review of loss reserves for each of the classes of business that the Company writes is conducted regularly, generally quarterly. This review process takes into consideration a variety of trends that impact the ultimate settlement of claims. Where appropriate, the loss reserving process includes a review of overall payment patterns and the emergence of paid and reported losses relative to expectations.
The loss reserve estimation process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes. As part of this process, the Company uses a variety of analytical methods that consider experience, trends and other relevant factors. Incurred but not reported (“IBNR”) reserves are generally calculated by first projecting the ultimate cost of all claims that have been reported or expected to be reported in the future and then subtracting reported losses and LAE. IBNR reserves include both incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. Reported losses include cumulative paid losses and LAE plus outstanding case reserves. The Company’s ultimate IBNR reserves are estimated by management and reserving actuaries on an aggregate basis for each line of business or coverage for loss and LAE liabilities not reflected within the case reserves. Case reserves are established by claim personnel individually on a claim by claim basis and based on information specific to the occurrence and terms of the underlying policy. Case reserves are periodically reviewed and modified based on new or additional information pertaining to the claim.
In 2020, net favorable loss and LAE development was $32.6 million, primarily as a result of net favorable Commercial Lines development of $37.8 million, partially offset by unfavorable development in the Other Segment. Commercial Lines favorable development was primarily due to lower than expected losses of $36.0 million within the workers’ compensation line in accident years 2016 through 2019 and within other commercial lines. These were partially offset by higher than expected losses in the commercial automobile line driven by higher bodily injury and personal injury protection losses, primarily in accident years 2017 through 2019. In addition, Commercial Lines favorable development includes lower than expected losses related to certain 2017, 2018 and 2019 wind storms, winter storms and hurricanes, and the 2017 and 2018 California wildfires. Within other commercial lines, lower than expected losses in the marine line, primarily in accident years 2017 through 2019, and the specialty industrial property lines were partially offset by higher than expected losses in the general liability coverages within Hanover Programs in accident years 2016 through 2019. Other Segment unfavorable development was due to the Company’s run-off voluntary assumed property and casualty reinsurance pools business primarily based on an updated third-party actuarial study received during 2020 for the Excess and Casualty Reinsurance Association pool that primarily consists of asbestos and environmental exposures.
was due to the Company’s run-off voluntary assumed property and casualty reinsurance pools business, which includes asbestos and environmental reserves.
General liability and umbrella - occurrence is primarily comprised of the Company’s commercial monoline general liability and umbrella coverages. General liability - claims made is primarily comprised of the Company’s commercial professional and management liability lines. Within total Commercial Lines and other, other lines is primarily comprised of marine, surety, specialty industrial and commercial property, product liability, voluntary pools, healthcare and fidelity lines. Included in the above table, primarily in other lines, are $57.7 million and $55.5 million of gross asbestos and environmental reserves as of December 31, 2020 and 2019, respectively.
The following table is information about average historical claims duration as of December 31, 2020. The table is computed based on the paid and incurred claims data, net of reinsurance, for the accident years presented in the preceding claims development tables.
The Company’s insurance subsidiaries are required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis), as codified by the National Association of Insurance Commissioners (“NAIC”). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state, and may change in the future. The Company’s insurance subsidiaries did not have any permitted practices as of or for the years ended December 31, 2020, 2019 and 2018.
The minimum statutory capital and surplus necessary to satisfy the Company’s regulatory requirements was $552.6 million, $531.8 million and $518.4 million, which equals the Authorized Control Level at December 31, 2020, 2019 and 2018, respectively.
The quarterly results of operations for 2020 and 2019 are summarized below.
On December 5, 2019 the Board of Directors declared a special cash dividend of $2.50 per share.
During the fourth quarter of 2020, pursuant to the terms of the October 2020 ASR, the Company paid $100.0 million, on October 29, 2020, in exchange for an initial delivery of approximately 0.8 million shares of common stock, which was approximately 80% of the total number of shares expected to be repurchased under this agreement. On January 29, 2021, the Company received approximately 45,000 shares of common stock as final settlement of shares repurchased under the October 2020 ASR.
There were no subsequent events requiring adjustment to the financial statements and no additional disclosures required in the notes to the consolidated financial statements.