We believe our facilities are adequate for our present needs in all material respects.
Results of operations include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), our principal property and casualty companies, and certain other insurance and non-insurance subsidiaries. Our results of operations also include the results of our discontinued operations, consisting primarily of our 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 international insurance and non-insurance subsidiaries, which collectively constituted our former Chaucer segment. On December 28, 2018, we 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. For all periods presented, operations from Chaucer are presented as discontinued operations. Discontinued operations also include the results of our accident and health and former life insurance businesses.
Our strategy, which focuses on the independent agency distribution channel, supports THG’s commitment to our agency partners. It is designed to generate profitable growth by leveraging the strengths of our distribution approach, including expansion of our agency footprint in underpenetrated geographies, as warranted. As part of that strategy, we have increased our capabilities in specialty markets and made investments designed to develop growth solutions for our agency distribution channel. Our goal is to grow responsibly in all of our businesses, while managing volatility.
The outbreak of the novel coronavirus, also known as COVID-19, and subsequent global pandemic (“Pandemic”) significantly impacted the U.S. and global financial markets and economies during the year ended December 31, 2020. Circumstances relating to the Pandemic are unprecedented in scope and impact, continue to evolve, and are complex and uncertain. Our investment portfolio was affected by the deterioration in investment markets during March 2020, as well as volatility in the subsequent months. In addition, we experienced both favorable and adverse effects from the Pandemic on our underwriting results and operations, as well as our financial condition, during March through December 2020. We continue to believe that the Pandemic’s impacts on our near-term results should be manageable. However, the severity, duration and long-term impacts of the Pandemic, including continued declines in general economic conditions, adverse impacts to our investment portfolio and uncertainty around possible and actual governmental responses to the crisis, may significantly affect the property and casualty insurance industry, our business, and our financial results over the intermediate and long-term. (See “Contingencies and Regulatory Matters” and “Item 1A - Risk Factors” for further discussion).
Net income was $358.7 million in 2020, compared to $425.1 million in 2019, a decrease of $66.4 million, primarily due to changes in the fair value of equity securities and, to a lesser extent, impairment losses on fixed income securities.
Pre-tax catastrophe losses were $286.7 million in 2020, compared to $169.3 million in 2019, an increase of $117.4 million primarily due to higher property damages related to riots and civil unrest in several major cities across the country, hurricane Isaias, wildfires on the West Coast, and wind and hailstorms in the Midwest and Southeast. Net favorable development on prior years’ loss reserves was $15.5 million in 2020, compared to $0.9 million in 2019.
Our account-focused approach to the small commercial market, distinctiveness in the middle market, and continued development of specialty lines provides us with a diversified portfolio of products and delivers significant value to agents and policyholders. We continue to pursue our core strategy of developing strong partnerships with agents, enhanced franchise value through selective distribution, distinctive products and coverages, and through continued investment in industry segmentation. Net premiums written increased 1.0% in 2020 compared to 2019. The modest premium growth during 2020 reflects a reduction in insured business activity as a result of the Pandemic.
Underwriting results declined in 2020, primarily due to higher catastrophe losses, partially offset by lower large non-catastrophe current accident year losses. The lower non-catastrophe current accident year losses were primarily due to lower 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 related to the Pandemic and to higher property losses in our commercial multiple peril line. The lower non-catastrophe current accident year losses reflect a reduced level of economic activity as a result of the Pandemic. The competitive nature of the Commercial Lines market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins, and we continue to seek rate increases across many lines of business. 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.
Consolidated net income was $358.7 million in 2020, compared to $425.1 million in 2019, a decrease of $66.4 million. The year over year comparison of consolidated net income reflects a decrease in after-tax net realized and unrealized investment gains of $82.5 million, principally related to changes in the fair value of equity securities. This was partially offset by an increase in operating income before interest expense and income taxes of $31.1 million, 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 reserves, partially offset by higher catastrophe losses and, to a lesser extent, lower net investment income.
Consolidated net income was $425.1 million in 2019, compared to $391.0 million in 2018, an increase of $34.1 million. The year over year comparison of consolidated net income reflects an increase in after-tax net realized and unrealized investment gains of $132.1 million, principally related to changes in the fair value of equity securities. Additionally, operating income before interest expense and income taxes increased $47.1 million, primarily due to lower catastrophe losses, earned premium growth, lower expenses and higher net investment income, partially offset by higher current accident year large loss activity, particularly in the property lines. The increase in the year over year net income comparison was partially offset by the $131.9 million gain from the sale of our former Chaucer business in 2018.
Catastrophe losses and prior years’ reserve development are significant components in understanding and assessing the financial performance of our business. Management reviews and evaluates catastrophes and prior years’ reserve development separately from the other components of earnings. References to “current accident year underwriting results” exclude prior accident year reserve development, and may also be presented, “excluding catastrophes.” Prior years’ reserve development and catastrophes are not predictable as to timing or the amount that will affect the results of our operations and have an effect on each year’s operating and net income. Management believes that providing certain financial metrics and trends excluding the effects of catastrophes and prior years’ reserve development helps investors to understand the variability in periodic earnings and to evaluate the underlying performance of our operations. Discussion of catastrophe losses in this Management’s Discussion and Analysis includes development on prior years’ catastrophe reserves and, unless otherwise indicated, such development is excluded from discussions of prior year loss and LAE reserve development.
The following is our discussion and analysis of the results of operations by business segment. The operating results are presented before interest expense, income taxes and other items which management believes are not indicative of our core operations, including realized gains and losses, as well as unrealized gains and losses on equity securities, and the results of discontinued operations.
Operating income before interest expense and income taxes was $484.7 million for the year ended December 31, 2020, compared to $453.6 million for the year ended December 31, 2019, an increase of $31.1 million. This increase was 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 reserves, partially offset by higher catastrophe losses and 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. The increase in catastrophe losses was primarily due to higher property damages related to riots and civil unrest in several major cities across the country, hurricane Isaias, wildfires on the West Coast, and wind and hailstorms in the Midwest and Southeast.
Net premiums written increased by $16.8 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. Premiums grew during 2020 in both our Commercial and Personal Lines segments, partially offset by the personal automobile premium refund of approximately $30 million in the second quarter of 2020.
Operating income before interest expense and income taxes was $453.6 million for the year ended December 31, 2019, compared to $406.5 million for the year ended December 31, 2018, an increase of $47.1 million. This increase was primarily due to lower catastrophe losses, earned premium growth, lower expenses and higher net investment income, partially offset by higher current accident year large loss activity in our specialty industrial property line, personal automobile and, to a lesser extent, our homeowners and marine lines.
The following tables summarize net premiums written, and loss and LAE and catastrophe loss ratios by line of business for the Commercial Lines and Personal Lines segments. Loss and LAE and catastrophe loss ratios include prior year reserve development.
Commercial Lines net premiums written were $2,733.1 million for the year ended December 31, 2020, compared to $2,707.2 million for the year ended December 31, 2019, an increase of $25.9 million. The modest premium growth during 2020 reflects a reduction of insured business activity as a result of the Pandemic.
Commercial Lines underwriting profit for the year ended December 31, 2020 was $106.3 million, compared to $121.5 million for the year ended December 31, 2019, a decrease of $15.2 million. Catastrophe-related losses for the year ended December 31, 2020 were $132.2 million, compared to $83.2 million for the year ended December 31, 2019, an increase of $49.0 million. Favorable development on prior years’ loss reserves, excluding catastrophes, for the year ended December 31, 2020 was $19.0 million, compared to $28.7 million for the year ended December 31, 2019, a decrease of $9.7 million.
Net premiums written in the personal automobile line of business for the year ended December 31, 2020 were $1,151.5 million, compared to $1,186.1 million for the year ended December 31, 2019, a decrease of $34.6 million. This decrease was primarily due to the aforementioned premium refund of approximately $30 million and a decrease in policies in force of 2.8%. Net premiums written in the homeowners line of business for the year ended December 31, 2020 were $653.4 million, compared to $636.9 million for the year ended December 31, 2019, an increase of $16.5 million. This increase was primarily driven by pricing increases, partially offset by a 1.1% decrease in policies in force.
Personal Lines current accident year underwriting profit, excluding catastrophes, was $286.7 million in the year ended December 31, 2020, compared to $171.8 million for the year ended December 31, 2019. This $114.9 million increase was primarily due to lower current accident year losses in our personal automobile line, and, to a lesser extent, a non-recurring premium tax benefit. Personal automobile losses were lower due to fewer accidents and decreased claim activity resulting from fewer miles driven as a result of the Pandemic.
We have been able to obtain rate increases in our Personal Lines markets and believe that our ability to obtain increases will continue over the long term. Our ability to maintain Personal Lines net premiums written may be affected, however, by price competition, and regulatory activity and legal developments. See “Contingencies and Regulatory Matters.” Additionally, these factors along with weather-related loss volatility may also affect our ability to maintain and improve underwriting results. We monitor these trends and consider them in our rate actions. Due to uncertainty caused by the Pandemic, there is a level of uncertainty in our ability to retain or grow our business, and to maintain or improve our underwriting profitability in this environment. The extent and duration of the Pandemic's future disruption to our businesses are unknown and may result in a continued moderation in claims volumes due to a substantial reduction in customer activity including, for example, fewer miles driven by the insureds in our personal automobile line.
Commercial Lines underwriting profit for the year ended December 31, 2019 was $121.5 million, compared to $85.0 million for the year ended December 31, 2018, an increase of $36.5 million. Catastrophe-related losses for the year ended December 31, 2019 were $83.2 million, compared to $142.3 million for the year ended December 31, 2018, a decrease of $59.1 million. This decrease is partially attributable to an increase in prior year favorable catastrophe development of $17.8 million, primarily due to the sale of subrogation rights on certain California wildfire losses incurred in 2017 and 2018. Favorable development on prior years’ loss reserves, excluding catastrophes, for the year ended December 31, 2019 was $28.7 million, compared to $34.1 million for the year ended December 31, 2018, a decrease of $5.4 million.
Commercial Lines current accident year underwriting profit, excluding catastrophes, was $176.0 million for the year ended December 31, 2019, compared to $193.2 million for the year ended December 31, 2018. This $17.2 million decrease was primarily due to higher current accident year large property loss activity in our specialty industrial property line and, to a lesser extent, in our marine and Hanover Programs lines within other commercial lines, partially offset by earned premium growth and lower expenses.
Net premiums written in the personal automobile line of business for the year ended December 31, 2019 were $1,186.1 million, compared to $1,127.5 million for the year ended December 31, 2018, an increase of $58.6 million. This increase was primarily due to rate increases and an increase in policies in force of 1.4%. Net premiums written in the homeowners line of business for the year ended December 31, 2019 were $636.9 million, compared to $604.0 million for the year ended December 31, 2018, an increase of $32.9 million. This is attributable to rate increases and an increase in policies in force of 2.1%.
Other operating income was $8.6 million for the year ended December 31, 2019, compared to other operating losses of $5.4 million for the year ended December 31, 2018, an improvement of $14.0 million. This was primarily due to higher net investment income, which includes the investment of the remaining proceeds from the Chaucer sale transaction. All of the proceeds of the Chaucer transaction were distributed in 2019 through share repurchases or special dividends.
Management’s process for establishing loss reserves is a comprehensive process that involves input from multiple functions throughout our organization, including actuarial, finance, claims, legal, underwriting, distribution and business operations management. The process incorporates facts currently known, as well as the current, and in some cases, the anticipated, state of the law and coverage litigation. Based on information currently available, we believe that the aggregate loss reserves at December 31, 2020 were adequate to cover claims for losses that had occurred as of that date, including both those known to us and those yet to be reported. However, as described below, there are significant uncertainties inherent in the loss reserving process. Our estimate of the ultimate liability for losses that had occurred as of December 31, 2020 is expected to change in future periods as we obtain further information, and such changes could have a material effect on our results of operations and financial position.
We determine the amount of our net loss reserves (i.e., net of estimated reinsurance recoverables) based on an estimation process that is complex and considers information from both company specific and industry data, as well as general economic and other information. The estimation process utilizes a combination of objective and subjective information, the blending of which requires significant professional judgment. There are various assumptions required, including future trends in frequency and severity of claims, operational changes in claim handling and case reserving practices and trends related to general economic and social conditions. Informed judgments as to our ultimate exposure to losses are an integral component of our loss reserve estimation process.
We regularly update our reserve estimates as new information becomes available and additional events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in the results of operations as adjustments to losses and LAE. Often, these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and the loss event occurred. When these types of subsequent adjustments affect prior years, they are described separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results and may vary by line of business. As discussed below, estimated loss and LAE reserves for claims occurring in prior years, in the aggregate, developed favorably by $15.5 million and $0.9 million for the years ended December 31, 2020 and 2019, respectively and unfavorably by $0.4 million for the year ended December 31, 2018, although there was some significant variance by line of business. Additionally, our estimated loss and LAE reserves for catastrophe claims occurring in prior years developed favorably by $17.1 million, $27.5 million and $9.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. There can be no assurance that current loss and LAE reserves will be sufficient.
We regularly review our reserving techniques, our overall reserving position and our reinsurance. Based on (i) our review of historical data, legislative enactments, judicial decisions, legal developments in impositions of damages and policy coverage, political attitudes and trends in general economic conditions, (ii) our review of per claim information, (iii) our historical loss experience and that of the industry, (iv) the nature of policies written by us, and (v) our internal estimates of required reserves, we believe that adequate provision has been made for loss reserves. Given the inherent complexity of our loss reserve estimation process and the potential variability of the assumptions used, the actual emergence of losses will vary, perhaps substantially, from the estimate of losses included in our financial statements, particularly in those instances where settlements or other claim resolutions do not occur until well into the future. Our net loss reserves at December 31, 2020 were $4.4 billion. Therefore, a relatively small percentage change in the estimate of net loss reserves would have a material effect on our results of operations. Similarly, a one percentage point change in the aggregate loss and LAE ratio resulting from a change in reserve estimation is currently projected to have an approximate $46 million impact on operating income, based on 2020 full year premiums.
Short-tail classes consist principally of automobile physical and property damage, homeowners property, commercial property and marine business. For these property coverages, claims are generally reported and settled shortly after the loss occurs because the claims relate to tangible property and are more likely to be discovered shortly after the loss occurs. Consequently, the estimation of loss reserves for these classes is generally less complex.
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, we use a variety of analytical methods that consider experience, trends and other relevant factors. 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 loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. Within the loss reserving process, standard actuarial methods which include: (1) loss development factor methods; (2) expected loss methods (Bornheutter-Ferguson); and (3) adjusted loss methods (Berquist-Sherman), are given due consideration. These methods are described below:
In addition to the methods described above, various tailored reserving methodologies are used for certain businesses. For example, for some low volume and high volatility classes of business, special reserving techniques are utilized that estimate IBNR by selecting the loss ratio that balances actual reported losses to expected reported losses as defined by the estimated underlying reporting pattern. Also, for some classes with long exposure periods (e.g., construction defect, engineering and surety), earnings patterns plus an estimated reporting lag applied to the Bornheutter-Ferguson initial expected loss ratio are used to estimate IBNR. This is done in order to reflect the changing average exposure periods by policy year (and consequently accident year).
Management endeavors to apply as much available data as practicable to estimate the loss reserve amount for each line of business, coverage and accident year, utilizing varying assumptions, projections and methods. The ultimate outcome is expected to fall within a range of potential outcomes around this loss reserve estimated amount.
For each line of business and coverage, we regularly adjust the assumptions and methods used in the estimation of loss reserves in response to our actual loss experience, as well as our judgments regarding changes in trends and/or emerging patterns. In those instances where we primarily utilize analyses of historical patterns of the development of paid and reported losses, this may be reflected, for example, in the selection of revised loss development factors. In longer-tailed classes of business and for which loss experience is less predictable due to potential changes in judicial interpretations, potential legislative actions, the cost of litigation or determining liability and the ultimate loss, inflation, potential claims and other issues, this may be reflected in a judgmental change in our estimate of ultimate losses for particular accident years. Most of the insurance policies we have written over many years are written on an “occurrence” basis, which means we insure specified acts or events which occurred during the covered period, even if claims first arise from such events many years later. For example, the industry incurred significant losses as a result of claims arising
from asbestos and environmental damage which occurred decades ago and was not known at such time, and in many cases policy limits were available for each year during which such occurrence policies were in place.
The impact of the Pandemic could have a material adverse effect on our carried loss reserves. While we believe that our in-force Commercial Lines policies in large part do not cover business interruption losses related to the Pandemic, legislation has been discussed and introduced to retroactively amend insurance contracts to provide business interruption coverage, to impose presumptions on insurance policy interpretation, and/or limit policy exclusions for losses allegedly related to the Pandemic. If these changes were to be enacted and upheld, we would be exposed to a significant unfunded liability.
For events designated as catastrophes, we generally calculate IBNR reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, aerial photographs of the affected area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date. In addition, loss emergence from similar historical events is compared to the estimated IBNR for our current catastrophe events to help assess the reasonableness of our estimates. However, in some cases, it may be difficult to estimate certain catastrophe losses which are unique and do not have instances of historical precedence, such as the property damage arising from the 2020 riots and civil unrest.
The following discussion presents disclosure related to possible variation in net reserve estimates (i.e., net of estimated reinsurance recoverables) due to changes in key assumptions. This information is provided for illustrative purposes only. Many other assumptions may also lead to material reserve adjustments. If any such variations do occur, then they would likely occur over a period of several years and therefore their impact on our results of operations would be recognized during the same periods. It is important to note, however, that there is the potential for future variations greater than the amounts described below and for any such variations to be recognized in a single quarterly or annual period. No consideration has been given to potential correlation or lack of correlation among key assumptions or among lines of business and coverage as described below. As a result, and because there are so many other factors which affect our net reserve estimate, it would be inappropriate to take the amounts described below and simply add them together in an attempt to estimate volatility in total. While we believe these are reasonably possible scenarios, the reader should not consider the following sensitivity analysis as illustrative of a net reserve range.
or 3%) would have changed total reserves by approximately $52 million, either positive or negative, at December 31, 2020.
Workers’ Compensation - loss reserves recorded for workers’ compensation on voluntary business were $448.0 million as of December 31, 2020. A key assumption for workers’ compensation 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 would have changed total reserves by approximately $132 million, either positive or negative, at December 31, 2020.
Monoline and Multiple Peril General Liability - loss reserves recorded for monoline and multiple peril general liability on voluntary business were $899.8 million as of December 31, 2020. A key assumption for monoline and multiple peril general liability is the implied adequacy of the underlying case reserves. A ten point change in case adequacy (e.g., 10% deficiency changed to 0% or 20% deficiency) would have changed total reserves by approximately $99 million, either positive or negative, at December 31, 2020.
Specialty Programs - loss reserves recorded for Hanover Programs were $361.3 million as of December 31, 2020. Two key assumptions underlying the actuarial reserve analysis for specialty programs are the inflation rate underlying the estimated reserve for our commercial automobile liability, general liability and workers' compensation coverages, as well as the tail factor selection for workers' compensation. A five point change to the embedded inflation rate for the aforementioned coverages, and a one point change in the workers' compensation tail factor on Hanover Programs would have changed total reserves by approximately $49 million at December 31, 2020.
The following table summarizes prior year (favorable) unfavorable development by segment for the periods indicated:
In 2019, net favorable loss and LAE development, excluding catastrophes, was $0.9 million. Commercial Lines favorable development of $28.7 million was primarily due to lower than expected losses of $32.6 million within the workers’ compensation line in accident years 2015 through 2018, and lower than expected losses in our commercial multiple peril line, primarily in accident years 2015 through 2016, partially offset by higher than expected losses in our commercial automobile and other commercial lines. Higher than expected losses in the commercial automobile line was driven by higher bodily injury severity and personal injury protection in accident years 2016 through 2017. Within other commercial lines, higher than expected losses of $24.6 million in Hanover Programs, primarily in accident years 2011, 2013, 2015, and 2017, was partially offset by lower than expected losses in our general liability, marine and surety lines. Personal Lines unfavorable development of $26.6 million was primarily due to higher than expected losses of $22.0 million in the personal automobile line, driven by bodily injury severity and personal injury protection in accident years 2016 through 2017. In addition, Other Segment unfavorable development of $1.2 million was due to adverse loss trends in our run-off voluntary assumed property and casualty reinsurance pools business which includes asbestos and environmental reserves.
In 2018, net unfavorable loss and LAE development, excluding catastrophes, was $0.4 million. Commercial Lines favorable development of $34.1 million was primarily due to lower than expected losses of $31.0 million within the workers’ compensation line in accident years 2015 through 2017, and $25.1 million in other commercial lines, partially offset by higher than expected losses of $23.2 million in the commercial automobile line, driven by higher bodily injury severity in the 2014, 2016 and 2017 accident years. Within other commercial lines, lower than expected losses in our general liability lines, related to the 2014 through 2016 accident years, and our surety line in accident years 2015 and 2017, was partially offset by higher than expected losses in Hanover Programs, primarily in accident years 2010 through 2014. Personal Lines unfavorable development of $33.3 million was primarily due to higher than expected losses within the homeowners line in accident years 2015 through 2017, and in the personal automobile line, driven by bodily injury severity in the 2016 accident year and, to a lesser extent, the 2015 accident year. In addition, Other segment unfavorable
development of $1.2 million was due to adverse loss trends in our run-off voluntary assumed property and casualty reinsurance pools business which includes asbestos and environmental reserves.
As of December 31, 2020, we have $39.8 million of net asbestos and environmental reserves, comprised of $8.3 million of direct reserves and $31.5 million of assumed reinsurance pool reserves. This compares to net reserves of $37.9 million and $38.9 million as of December 31, 2019 and 2018, respectively. Ending loss and LAE reserves for all direct business written by our property and casualty companies related to asbestos and environmental damage liability were $8.3 million, $8.4 million and $8.9 million, net of reinsurance of $17.9 million, $17.6 million and $18.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Activity for our direct asbestos and environmental reserves was not significant to our 2020, 2019 or 2018 financial results. As a result of our historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos and environmental damage liability loss experience has remained minimal in relation to our total loss and LAE incurred experience. Although we attempt to limit our exposures to asbestos and environmental damage liability through specific policy exclusions, we have been and may continue to be subject to claims related to these exposures.
Total cash and investments increased $755.0 million, or 9.2%, for the year ended December 31, 2020, primarily due to operational cash flows, net proceeds from our senior debt issuance in August 2020 and market value appreciation. These increases were partially offset by the funding of financing activities, including our stock repurchases, debt retirement and dividend payments.
The increase in net unrealized gains on fixed maturities was primarily due to lower prevailing interest rates.
Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 96% and 95% of our fixed maturity portfolio consisted of investment grade securities at December 31, 2020 and 2019, respectively. The quality of our fixed maturity portfolio remains strong based on ratings, capital structure position, support through guarantees, underlying security, issuer diversification and yield curve position.
Our fixed maturity and equity securities are carried at fair value. Financial instruments whose value was determined using significant management judgment or estimation constituted less than 1% of the total assets we measured at fair value. See also Note 5 - “Fair Value” in the Notes to Consolidated Financial Statements.
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 compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities for the years ended December 31, 2020, 2019 and 2018 were also not material. Any defaults in the fixed maturities portfolio in future periods may negatively affect investment income.
The following table sets forth gross unrealized losses for fixed maturities by maturity period at December 31, 2020 and 2019. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers.
Due to the Pandemic, global monetary policies remain extremely accommodative in support of financial market stability. Major central banks have lowered interest rates, relaxed collateral requirements and instituted various asset purchase programs to stabilize financial markets and support economic growth. In the U.S., for example, the Federal Reserve (the “Fed”) is maintaining its federal funds target range at 0% to 0.25% and is conducting unprecedented quantities of asset purchases.
Fundamental conditions in certain corporate sectors directly impacted by the Pandemic, such as energy, lodging, restaurant and transportation services, have deteriorated. While market values have recovered with government fiscal and monetary support, the value of our holdings of related fixed maturities in these sectors remain most at risk in the near term. We may experience defaults on fixed income securities, particularly with respect to non-investment grade debt securities. Although we perform rigorous credit analysis of our fixed income investments, it is difficult to foresee which issuers, industries or markets will be most affected. As a result, the value of our fixed maturity portfolio could change rapidly in ways we cannot currently anticipate, and we could incur additional realized and unrealized losses in future periods.
The valuation of the investment portfolio is subject to risk resulting from interest rate fluctuations, which may adversely impact the valuation of the investment portfolio. In a rising interest rate environment, the value of the fixed maturity sector, which comprises approximately 83% of our investment portfolio, may decline as a result of decreases in the fair value of the securities. Our intent is to hold securities to maturity and recover the decline in valuation as prices accrete to par. However, our intent may change prior to maturity due to changes in the financial markets, our analysis of an issuer’s credit metrics and prospects, or as a result of changes in cash flow needs. Interest rate fluctuations may also reduce net investment income and, as a result, profitability. The portfolio may realize lower yields and therefore lower net investment income on securities because securities with prepayment and call features may prepay at a different rate than originally projected. In an increasing rate environment, the duration of our fixed maturity portfolio could lengthen as issuers choose not to exercise their option to call or prepay their debt. For this and other reasons, funds may not be available to invest at higher interest rates.
Our equity securities portfolio is exposed to equity price risk arising from potential volatility in equity market prices. Portfolio characteristics are analyzed regularly and price risk is actively managed through a variety of techniques. A hypothetical increase or decrease of 10% in the market price of our equity securities would have resulted in an increase or decrease in the fair value of the equity securities portfolio of approximately $60 million at December 31, 2020 and $58 million at December 31, 2019, which amounts, after taxes, would be reported in net income.
At December 31, 2018, we had informed the Federal Home Loan Bank (“FHLB”) of our intent to repay a $125 million FHLB note due 2029 with a coupon of 5.5%, with settlement occurring on January 2, 2019. In the fourth quarter of 2018, we recorded a non-operating charge of $20.8 million after-taxes related to the pre-payment provision. Additionally, in 2018 we repurchased a portion of our 8.207% subordinated debentures with a net carrying value of $9.6 million at a cost of $11.5 million, resulting in a loss of $1.9 million.
Discontinued operations include our discontinued accident and health and life businesses as well as our former Chaucer operations. In 2020 and 2019, discontinued operations, in total, generated net losses of $3.3 million and $3.9 million, net of tax, respectively, primarily related to the long-term care pool in our discontinued accident and health business. In 2018, discontinued operations, in total, generated a gain of $152.0 million, net of tax, primarily related to the sale of the Chaucer business. See also “Discontinued Operations - Chaucer Business” below and Note 2 - “Discontinued Operations” in the Notes to Consolidated Financial Statements.
On December 28, 2018, we completed the sale of Chaucer Holdings Limited to China Re and recognized a pre-tax gain on the sale of $174.4 million and an income tax expense of $42.5 million. THG paid customary transaction costs along with providing certain representations and warranties and agreeing to indemnify China Re for certain pre-sale contingent liabilities.
Initial consideration for Chaucer Holdings Limited as determined in the sales and purchase agreement was $779 million. This amount, along with $28 million in cash proceeds received from the sale of the Irish entity on February 14, 2019 and $13 million from the sale of the Australian entities on April 10, 2019, estimated contingent consideration of $31.7 million, and an $85 million pre-signing dividend from Chaucer that was received in the second quarter of 2018, resulted in expected total proceeds from the entire transaction of $936.7 million. These amounts were partially offset by $17.0 million paid to China Re to adjust the purchase price for amounts received by the Company from Chaucer prior to December 28, 2018.
Contingent proceeds, as reflected in the sales and purchase agreement, could have been up to $45 million and was determined based upon 2018 catastrophe losses. In 2018, our best estimate of contingent consideration was $31.7 million.
The income tax expense represented the current tax obligation on the sale and the derecognition of deferred tax assets that were no longer likely to be realized.
We are subject to the tax laws and regulations of the U.S. and foreign countries in which we operate or where we operated previously. We file a consolidated U.S. federal income tax return that includes our holding company and its U.S. subsidiaries. Generally, taxes are accrued at the U.S. statutory tax rate of 21% for income from the U.S. operations. Our primary non-U.S. jurisdiction was the U.K., until the sale of our Chaucer business, which completed on April 10, 2019 with the final sale of the Australian entities. The U.K. statutory tax rate was 19% during 2018. We accrue taxes on certain non-U.S. income that is subject to U.S. tax at the enacted U.S. tax rate. Foreign tax credits, where available, were utilized to offset U.S. tax as permitted.
During 2020 and 2019, we recorded decreases in reserves related to uncertain tax positions, due to the expirations of certain statutes of limitations. The 2020 reserve release of $0.5 million was recorded as a benefit to the income (loss) from discontinued life businesses, net of taxes. The 2019 reserve release of $2.0 million was recorded as a benefit to income from Chaucer business, net of taxes. We are subject to U.S. federal and state examinations and foreign examinations for years after 2016. There are no ongoing audits on our open tax years.
We currently have a qualified defined benefit plan and several smaller non-qualified benefit plans. In order to measure the liabilities and expense associated with these plans, we must make various estimates and key assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates. These estimates and assumptions are reviewed at least annually and are based on our historical experience, as well as current facts and circumstances. In addition, we use outside actuaries to assist in measuring the expenses and liabilities associated with our defined benefit pension plan.
Two significant assumptions used in the determination of benefit plan obligations and expenses that are dependent on market factors, which have been subject to a greater level of volatility in recent years, are the discount rate and the return on plan asset assumptions. The discount rate enables us to state expected future benefit payments as a present value on the measurement date. We also use this discount rate in the determination of our pre-tax pension expense or benefit. A lower discount rate increases the present value of benefit obligations and increases pension expense. We determined our discount rate for the qualified benefit plan utilizing independent yield curves which provide for a portfolio of high quality bonds that are expected to match the cash flows of our pension plans. Bond information used in the yield curve included only those rated Aa or better as of December 31, 2020 and 2019, respectively, and had been rated by at least two well-known rating agencies. The discount rates used to value liabilities in our qualified pension plan were 3.00% and 3.75% as of December 31, 2020 and 2019, respectively.
The expected return on asset assumption was 4.75% and 5.50% in 2020 and 2019, respectively. Asset returns are reflected net of administrative expenses.
Holding all other assumptions constant, sensitivity to changes in our key assumptions related to our qualified benefit plan is as follows:
We employ a systematic methodology to evaluate declines in fair values below amortized cost for all fixed maturity investments. The methodology utilizes a quantitative and qualitative process that seeks to ensure that available evidence concerning the declines in fair value below amortized cost is evaluated in a disciplined manner. In determining whether a decline in fair value below amortized cost
should be recorded as an impairment, we evaluate 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, dividend payments 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 our cost. We consider factors that might raise doubt about the issuer’s ability to make contractual payments as they become due and whether we expect to recover the entire amortized cost basis of the security.
We monitor corporate fixed maturity securities with unrealized losses on a quarterly basis and more frequently when necessary to identify potential credit deterioration, as evidenced by ratings downgrades, unexpected price variances, and/or company or industry specific concerns. We apply consistent standards of credit analysis which includes determining whether the issuer is current on its contractual payments, and we consider past events, current conditions and reasonable and supportable forecasts to evaluate whether we expect to recover the entire amortized cost basis of the security. We utilize valuation declines as a potential indicator of credit deterioration and apply additional levels of scrutiny in our analysis as the severity of the decline increases.
When an impairment of a fixed maturity security occurs, and we intend to sell or more likely than not will be required to sell the investment before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings, which reduces net income and earnings per share. If we do not intend to sell the fixed maturity investment or more likely than not will not be required to sell it, we separate the impairment into the amount we estimate represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings, which reduces net income and earnings per share.
As of December 31, 2020, we did not have a valuation allowance and believe it is more likely than not that the remaining deferred tax assets will be realized.
The statutory capital and surplus for our insurance subsidiaries increased $118.3 million during 2020, primarily due to approximately $383 million of underwriting profits, partially offset by the payment of a $245 million dividend.
Liquidity is a measure of our ability to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, our primary ongoing source of cash is dividends from our insurance subsidiaries. However, dividend payments to us by our insurance subsidiaries are subject to limitations imposed by regulators, such as prior notice periods and the requirement that dividends in excess of a specified percentage of statutory surplus or prior year’s statutory earnings receive prior approval (so called “extraordinary dividends”). Hanover Insurance paid $245.0 million in dividends to the holding company in 2020. In both 2019 and 2018, Hanover Insurance paid $140.0 million in dividends to the holding company.
Net cash provided by operating activities was $707.6 million during 2020, as compared to $602.9 million during 2019 and $551.3 million in 2018. The $104.7 million increase in cash provided in 2020 as compared to 2019 was primarily due to lower loss and LAE payments, a decrease in Federal income tax payments, and a slight increase in premium collections. The $51.6 million increase in cash provided in 2019 as compared to 2018 was primarily the result of an increase in premiums collected, partially offset by higher loss payments.
Net cash used in financing activities was $193.9 million during 2020, as compared to $1,099.3 million during 2019 and $171.0 million in 2018. During 2020, cash used in financing activities primarily resulted from repurchases of common stock through both an accelerated share repurchase (“ASR”) agreement and the open market, the repayment of subordinated debentures and the payment of quarterly dividends to shareholders, partially offset by cash received from the issuance of senior debentures. During 2019, cash used in financing activities primarily resulted from repurchases of common stock through three ASR agreements, the payments of two special dividends in addition to regular quarterly dividends to shareholders, and the repayment of the FHLB advances. (See further discussion below for additional information regarding the special dividend, the ASR agreements and the repayment of the FHLB advances). During 2018, cash used in financing activities primarily resulted from the payment of dividends to shareholders and repurchases of common stock.
At December 31, 2020, THG, as a holding company, held approximately $396.9 million of fixed maturities and cash. We believe our holding company assets will be sufficient to meet our current year obligations, which we expect to consist primarily of quarterly dividends to our shareholders (as and to the extent declared), interest on our senior and subordinated debentures, certain costs associated with benefits due to our former life employees and agents and, to the extent required, payments related to indemnification of liabilities associated with the sale of various subsidiaries. As discussed below, we have, and opportunistically may continue to, repurchase our common stock and debt. We do not expect that it will be necessary to dividend additional funds from our insurance subsidiaries in order to fund 2021 holding company obligations; however, we may decide to do so.
We expect to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements relating to current operations, including the funding of our qualified defined benefit pension plan. We believe that this plan is fully funded. The ultimate payment amounts for our benefit 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, inflation and the ultimate valuation and determination of benefit obligations. Since differences between actual plan experience and our assumptions are almost certain, changes, both positive and negative, to our current funding status and ultimately our obligations in future periods are likely.
On October 29, 2020, pursuant to the terms of a second ASR agreement (the “October 2020 ASR”), we paid $100.0 million in exchange for shares of our common stock. Under the terms of the October 2020 ASR, we received an initial delivery of approximately 0.8 million shares of our common stock, which was approximately 80% of the total number of shares expected to be repurchased under the October 2020 ASR agreement. On January 29, 2021, we received approximately 45,000 shares of our common stock as final settlement of shares repurchased under the October 2020 ASR. In addition to the shares repurchased under the December 2019 ASR and the October 2020 ASR, during 2020 we repurchased approximately 1.1 million shares at an aggregate cost of $112.8 million. As of December 31, 2020, we have repurchased 6.4 million shares under this $900 million program and have approximately $124 million available for additional repurchases.
We maintain our membership in the FHLB to provide access to additional liquidity based on our holdings of FHLB stock and pledged collateral. At December 31, 2020, we had borrowing capacity of $94.9 million. There were no borrowings outstanding under this short-term facility at December 31, 2020; however, we have borrowed and may continue to borrow, from time to time, through this facility to provide short-term liquidity.
On April 30, 2019, we entered into a new credit agreement that provides for a five-year unsecured revolving credit facility not to exceed $200.0 million at any one time outstanding, with the option to increase the facility up to $300.0 million, (assuming no default and satisfaction of other specified conditions, including the receipt of additional lender commitments). The agreement also includes an uncommitted subfacility of $50.0 million for standby letters of credit. Borrowings, if any, under this new agreement are unsecured and incur interest at a rate per annum equal to, at our election, either (i) the greater of, (a) the prime commercial lending rate of the administrative agent, (b) the NYFRB Rate plus half a percent, or (c) the one month Adjusted LIBOR plus one percent and a margin that ranges from 0.25% to 0.625% depending on our debt rating, or (ii) Adjusted LIBOR for the applicable interest period, plus a margin that ranges from 1.25% to 1.625% depending on our debt rating. The agreement also contains certain financial covenants such as maintenance of specified levels of consolidated equity and leverage ratios, and requires that certain of our subsidiaries maintain minimum RBC ratios. We currently have no borrowings under this agreement during 2020. The LIBOR rate, upon which Adjusted LIBOR is based, is expected to be discontinued by the end of 2021. Our credit agreement permits us to agree with the Administrative Agent for the credit facility on a replacement to Adjusted LIBOR subject to the satisfaction of certain conditions.
At December 31, 2020, we were in compliance with the covenants of our debt and credit agreements.
Financing obligations generally include repayment of our senior debentures, subordinated debentures and lease payments. The following table represents our annual payments related to the contractual principal and interest payments of these financing obligations as of December 31, 2020, unless otherwise noted, and lease payments reflect expected cash payments based upon active lease terms. It is expected that in the normal course of business, leases that expire will generally be renewed or replaced by leases on similar property and equipment. In addition, we also have included our estimated payments related to our loss and LAE obligations and our current expectation of payments to be made to support the obligations of our benefit plans. The following table also includes commitments to purchase investment securities at a future date. Actual payments may differ from the contractual and/or estimated payments in the table.
Differences between actual plan experience and our assumptions are likely and will likely result in changes to our funding obligations in future periods.
Management’s Discussion and Analysis contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of indicators of forward-looking statements and specific important factors that could cause actual results to differ materially from those contained in forward-looking statements, see “Risk Factors” in Part I - Item 1A. This Management’s Discussion and Analysis should be read and interpreted in light of such factors.
Account rounding - The conversion of single policy customers to accounts with multiple policies and/or additional coverages, to address customers’ broader objectives.
Big data - large, diverse, complex sets of information that grow at ever-increasing rates and require special tools and methods to process. It encompasses the volume of information, the velocity or speed at which it is created and collected, and the variety or scope of the data points being covered. Big data analytics refers to the use of predictive analytics, user behavior analytics, or certain other advanced data analytics methods that extract value from big data.
Catastrophe loss - Loss and directly identified loss adjustment expenses from catastrophes, including development on prior years’ catastrophe loss reserves. The Insurance Services Office (“ISO”) Property Claim Services (“PCS”) defines a catastrophe loss as an event that causes $25 million or more in insured property losses from U.S. direct writers and affects a significant number of property and casualty policyholders and insurers. In limited instances where the impact of an event extends across multiple geographic areas or time periods, but is not within the specific parameters established by PCS, THG may determine that certain losses are better included within the same catastrophe event. In addition to those catastrophe events declared by ISO, claims management also generally includes within the definition of a “catastrophe loss”, a property loss event that causes approximately $5 million or more in Company insured losses and affects in excess of one hundred policyholders. For the international business in our Commercial Lines segment, management utilizes a “catastrophe loss” definition that is substantially consistent with the ISO definition framework.
Credit spread - The difference between the yield on the debt securities of a particular corporate debt issue and the yield of a similar maturity of U.S. Treasury debt securities.
Excess of loss reinsurance - Reinsurance that indemnifies the insured against all or a specific portion of losses under reinsured policies in excess of a specified dollar amount or “retention”.
Marine Insurance - In Commercial Lines, this is a type of coverage developed for insuring businesses against physical losses to property such as contractor’s equipment, builder’s risk and goods in transit. It covers articles in transit by all forms of land and air transportation as well as bridges, tunnels, ocean and other means of transportation and communication. In the context of Personal Lines, this term relates to floater policies that cover expensive personal items such as fine art and jewelry.
Partner agents; partner agencies; partner independent agents; agency partners; business partners - Independent agents (agencies) are self-employed, commission-based businesses who generally represent, and sell insurance policies provided by, several insurance companies. THG has appointed and developed mutually beneficial relationships with a limited number of independent agents who are demonstrated experts in their field, growth-oriented and align with our strategy. Although we may refer to those agencies as “partner agents”, these are not legally binding “partnerships”, but rather an opportunity for both the agent (agencies) and THG to work together and achieve common goals.
Loss and Loss adjustment expense (“LAE”) ratio - The ratio of loss and loss adjustment expenses to premiums earned for a given period. The LAE ratio includes catastrophe losses and prior year reserve development.
Social Inflation - A term used to explain rising insurance claim payouts due to various factors associated with a more costly legal environment, such as increased litigation frequency, expanded theories of liability and higher jury awards. Higher than the expected litigation payouts to plaintiffs due to these and other factors, may then give rise to the initiation of additional lawsuits seeking similarly elevated awards and increasing settlement costs, which can compound the effect.
Specialty Lines - A major component of our Other commercial lines. There is no accepted industry definition of “specialty lines”, but for our purpose specialty lines consist of products such as marine, surety, specialty industrial property, professional liability, management liability and various other program businesses. When discussing net premiums written and other financial measures of our specialty businesses, we may include non-specialty premiums that are written as part of the entire account.
The principal considerations for our determination that performing procedures relating to the valuation of loss and loss adjustment expense reserves is a critical audit matter are the significant judgment by management when developing their estimate. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the various analytical methods and factors used by management in developing the estimate, such as historical loss patterns and other relevant quantitative and qualitative factors, which related to the maturity of the accident year, the level of volatility within a particular class of business, and the sufficiency or quality of historical reported and paid loss and loss adjustment expenses information. Also, our audit effort included the involvement of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the audit evidence obtained from these procedures.
Net investment income includes interest, dividends and income from limited partnership interests. Interest income is recognized based on the effective yield method, which includes the amortization of premiums and accretion of discounts. The effective yield used to determine the amortization for fixed maturities subject to prepayment risk, such as mortgage-backed and asset-backed securities, is recalculated and adjusted periodically based upon actual historical and projected future cash flows. The adjustment to yields for highly rated prepayable fixed maturities is accounted for using the retrospective method. The adjustment to yields for all other prepayable fixed maturities is accounted for using the prospective method. Fixed maturities and mortgage participations for which payments are delinquent are placed on non-accrual status, and thereafter interest income is recognized only when cash payments are received.
The Company shares certain insurance risks it has underwritten, through the use of reinsurance contracts, with various insurance entities. Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944, Financial Services - Insurance, have been met. As a result, when the Company experiences loss or claims events that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business or an aggregate amount associated with a particular accident year. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, or an incurred but not reported loss. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business and the balance is disclosed separately in the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled. Allowances are established for amounts deemed uncollectible and reinsurance recoverables are recorded net of these allowances. The Company evaluates the financial condition of its reinsurers and monitors concentration risk to minimize its exposure to significant credit losses from individual reinsurers.
Property, equipment, leasehold improvements and capitalized software are recorded at cost, less accumulated depreciation and amortization. Depreciation is generally provided using the straight-line method over the estimated useful lives of the related assets, which generally range from 3 to 30 years. The estimated useful life for capitalized software is generally 5 to 7 years. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the term of the lease or the estimated useful life of the improvements.
The Company tests for the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of long-lived assets exceed the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. When an impairment loss occurs, the Company reduces the carrying value of the asset to fair value and no longer depreciates the asset. Fair values are estimated using discounted cash flow analysis.
The Company’s debt at December 31, 2020 includes senior and subordinated debentures. Debt instruments are carried at principal amount borrowed, net of any applicable unamortized discounts and issuance costs. See Note 6 - “Debt and Credit Arrangements.”
generally short-term in nature and are reported net of an allowance for estimated uncollectible premium accounts. The Company reviews its receivables for collectability at the balance sheet date. The allowance for uncollectible accounts was not material as of December 31, 2020 and 2019. Ceded premiums are charged to income over the applicable term of the various reinsurance contracts with third-party reinsurers. Reinsurance reinstatement premiums, when required, are recognized in the same period as the loss event that gave rise to the reinstatement premiums. Losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through estimated and unpaid losses and amortization of deferred acquisition costs.
The Company is subject to the tax laws and regulations of the U.S. and foreign countries in which it operates or where it operated previously. The Company files a consolidated U.S. federal income tax return that includes the holding company and its U.S. subsidiaries. Generally, taxes are accrued at the U.S. statutory tax rate of 21% for income from the U.S. operations. The Company accrues taxes on certain non-U.S. income that is subject to U.S. tax at the enacted U.S. tax rate. Foreign tax credits, where available, were utilized to offset U.S. tax as permitted.
The Company recognizes the fair value of compensation costs for all share-based payments, including employee stock options, in the financial statements. Unvested awards are generally expensed on a straight-line basis, by tranche, over the vesting period of the award. The Company’s stock-based compensation plans are discussed further in Note 10 - “Stock-Based Compensation Plans.”
Earnings per share (“EPS”) for the years ended December 31, 2020, 2019 and 2018 is based on a weighted average of the number of shares outstanding during each year. Basic and diluted EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. The weighted average shares outstanding used to calculate basic EPS differ from the weighted average shares outstanding used in the calculation of diluted EPS due to the effect of dilutive employee stock options, nonvested stock grants and other contingently issuable shares. If the effect of such items is antidilutive, the weighted average shares outstanding used to calculate diluted EPS would be equal to those used to calculate basic EPS.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASC Update No. 2018-14 (Topic 715-20) Compensation - Retirement Benefits - Defined Benefit Plans - General - Disclosure Framework - Changes to the Disclosure Requirements for the Defined Benefit Plans. This ASC update modifies disclosures related to defined benefit pension or other postretirement plans. This ASC update removes the disclosure of amounts in AOCI expected to be recognized over the next fiscal year and the effects of a one percentage point change of health care cost trends on net periodic benefit costs and postretirement benefit obligations and clarifies the specific requirements of disclosures related to the project benefit obligation and accumulated benefit obligation. This ASC Update also adds disclosures related to weighted average crediting rates for cash balance plans and requires disclosure of an explanation of any significant gains and losses related to changes in benefit obligations for the period. The amendments in this ASC update are effective for fiscal years ending after December 15, 2020, and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company implemented this guidance effective December 31, 2020, and it did not have an impact on the Company’s financial position or results of operations as the update is disclosure related.
In August 2018, the FASB issued ASC Update No. 2018-13, (Topic 820) Fair Value Measurement, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update removes the requirement for disclosure of the following: 1) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for Level 3 fair value measurements. This update also added a requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, in addition to other fair value disclosure modifications. This update required both prospective and retrospective application to certain disclosures upon implementation. The Company implemented this guidance effective January 1, 2020 and it did not have an impact on the Company’s financial position or results of operations as the update is disclosure related.
In 2019 and 2020, the FASB issued several updates to ASC Update 2016-13, including the issuance in April 2019 of ASC Update 2019-04, Codification Improvements to Topic 360, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments, the issuance in May 2019 of ASC Update 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, the issuance in November 2019 of ASC Update No.2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses and the issuance in February 2020 of ASC Update 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). The Company implemented this guidance effective January 1, 2020 and it did not have a material impact on its financial position or results of operations.
On December 28, 2018, the Company completed the sale of the Chaucer U.K. companies (“Chaucer”) to China Re and recognized a pre-tax gain on the sale of $174.4 million and an income tax expense of $42.5 million. THG paid customary transaction costs along with providing certain representations and warranties and agreeing to indemnify China Re for certain pre-sale contingent liabilities.
The following table summarizes the components of the estimated gain in 2018 related to the sale of the Chaucer business as of December 28, 2018. As discussed below the table, both the pre-tax gain and income tax expense were updated in 2019.
Contingent proceeds, as reflected in the sales and purchase agreement, could have been up to $45 million and was determined based upon 2018 catastrophe losses. In 2018, the Company’s best estimate of contingent consideration was $31.7 million.
The income tax expense represents the current tax obligation on the sale and the derecognition of deferred tax assets that were no longer likely to be realized.
In addition, the Company 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 Note - 7 “Income Taxes” below). Additionally, in the third quarter of 2019, the Company recognized $3.4 million of tax benefits related to prior years.
The Company recognized $0.8 million in foreign currency transaction losses in net income in 2018.
The following table provides the effects of reinsurance related to the Chaucer business for the year ended 2018.
At December 31, 2020 and 2019, the portion of the discontinued accident and health business that was directly assumed had assets of $90.3 million and $82.4 million, respectively, consisting primarily of invested assets, and liabilities of $89.8 million and $84.4 million, respectively, consisting primarily of policy liabilities. At December 31, 2020 and 2019, the assets and liabilities of this business, as well as those of the reinsured portion of the accident and health business are classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.
Discontinued accident and health and life operations for the year ended December 31, 2020 resulted in losses of $3.7 million, including $1.7 million related to income taxes. This business resulted in losses of $4.3 million, including $0.9 million related to income taxes in 2019, and gains of $0.1 million in 2018.
The Company’s mortgage participations and other mortgage loans were $467.6 million and $441.2 million at December 31, 2020 and 2019, respectively. Participating interests in commercial mortgage loans are originated and serviced by a third-party. For these investments, the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgages. Mortgage participations and other mortgage loans were comprised of the following property types and geographic locations.
Other investments also include interests in limited partnerships of $312.5 million and $278.5 million at December 31, 2020 and December 31, 2019, respectively.
The following table provides pre-tax net realized and unrealized gains (losses) on equity securities:
See Note 1, “Summary of Significant Accounting Policies - New Accounting Pronouncements: Recently Implemented Standards,” for a discussion of new guidance effective January 1, 2020, which affects the accounting for expected credit losses on fixed maturity securities and mortgage loans. Under the new guidance, credit losses on fixed maturities continue to be measured based on the present value of expected future cash flows compared to amortized cost; however, credit losses on available-for-sale fixed maturities are now recognized through an allowance instead of a direct write down of amortized cost. The new guidance stipulates that recoveries of previously recorded credit losses are recorded immediately as a reversal of the allowance. In addition, the allowance 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. Changes in the allowance for credit losses are recorded in net realized and unrealized investment gains (losses). 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.
The methodology and significant inputs used to measure the amount of credit losses were as follows:
Fixed maturities, Corporate bonds - the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating and asset duration, and loss-given-default factors based on security type. These factors are based on historical data provided by an independent third-party rating agency. In addition, other qualitative market data relevant to the realizability of contractual cash flows may be considered, including current conditions and reasonable and supportable forecasts.
Mortgage loans - the Company estimated losses by applying expected loss rates, which are based on historical data. Embedded in expected loss rates are mortgage risk ratings and risk factors associated with property type such as office, retail, lodging, multi-family and industrial. Risk ratings, based on property characteristics and metrics including the geographic market, are predominantly driven by estimates of loan-to-value and debt service coverage ratios. Ratings may be adjusted to reflect current conditions and to incorporate reasonable and supportable forecasts, such as volatility of cash flows and valuation.
Level 1 consists of publicly traded securities, including exchange traded funds, valued at quoted market prices. Level 2 includes securities that are valued using pricing for similar securities and pricing models that incorporate observable inputs. Level 3 consists of common or preferred stock of private companies for which observable inputs are not available.
The Company utilizes a third-party pricing service for the valuation of the majority of its equity securities and receives one quote for each equity security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. The Company holds certain equity securities that have been issued by privately-held entities that do not have an active market and for which the pricing service cannot provide fair values. Generally, the Company estimates fair value for these securities based on the issuer’s book value and market multiples and reports them as Level 3. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.
The Company has processes designed to ensure that the values received from its third-party pricing services are accurately recorded, that the data inputs and valuation approaches and techniques utilized are appropriate and consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. The Company reviews the pricing services’ policies describing its methodology, processes, practices and inputs, including various financial models used to value securities. For assets carried at fair value, the Company performs a review of the fair value hierarchy classifications and of prices received from its pricing service on a quarterly basis. Also, the Company reviews the portfolio pricing, including a process for which securities with changes in prices that exceed a defined threshold are verified to independent sources, if available. If upon review, the Company is not satisfied with the validity of a given price, a pricing challenge would be submitted to the pricing service along with supporting documentation for its review. The Company does not adjust quotes or prices obtained from the pricing service unless the pricing service agrees with the Company’s challenge. During 2020 and 2019, the Company did not adjust any prices received from its pricing service.
Changes in the observability of valuation inputs may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. As previously discussed, the Company utilizes a third-party pricing service for the valuation of the majority of its fixed maturities and equity securities. The pricing service has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company will use observable market data to the extent it is available, but may also be required to make assumptions for market based inputs that are unavailable due to market conditions.
Limited partnerships measured at fair value using the NAV based on an ownership interest in partners’ capital have not been included in the hierarchy tables. At December 31, 2020 and 2019, the fair values of these investments were $172.8 million and $183.6 million, respectively, approximately 2% of total investment assets.
The following table provides quantitative information about the significant unobservable inputs used by the Company in the fair value measurements of Level 3 assets. Where discounted cash flows were used in the valuation of fixed maturities, the internally-developed discount rate was adjusted by the significant unobservable inputs shown in the table.
The weighted average of the unobservable inputs was weighted by the relative fair value of the fixed maturity securities to which the inputs were applied. Each unobservable input is based on the Company’s subjective opinion and therefore inherently contains a degree of uncertainty. Significant increases (decreases) in any of the above inputs in isolation would result in a significantly lower (higher) fair value measurement. There were no interrelationships between these inputs which might magnify or mitigate the effect of changes in unobservable inputs on the fair value measurement.
On August 24, 2020, the Company issued $300.0 million aggregate principal amount of 2.50% unsecured senior debentures maturing September 1, 2030. Net proceeds from the issuance were $296.4 million. On September 19, 2020, the Company used a portion of these net proceeds to redeem its outstanding $175.0 million principal amount of 6.35% subordinated unsecured debentures due March 30, 2053. The Company recognized $6.1 million of unamortized debt issuance costs associated with this debt.
The Company also held subordinated debentures maturing February 3, 2027 which had a par value of $50.1 million as of December 31, 2020 and 2019, and pay cumulative dividends semi-annually at 8.207%.
At December 31, 2020, the Company had a $200.0 million credit agreement which expires in April 2024. The Company had no borrowings under this agreement as of December 31, 2020.
Interest expense was $37.1 million, $37.5 million, and $45.1 million in 2020, 2019 and 2018, respectively. At December 31, 2020, the Company was in compliance with the covenants associated with all of its debt indentures and credit arrangements.
The income tax expense attributable to the consolidated results of continuing operations is different from the amount determined by multiplying income from continuing operations before income taxes by the U.S. statutory federal income tax rate of 21% . The sources of the difference and the tax effects of each were as follows:
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized. The Company believes it is more likely than not that the deferred tax assets will be realized; therefore there was no valuation allowance required at December 31, 2020 or 2019.
There were no tax positions at December 31, 2020, 2019 and 2018 for which the ultimate deductibility was highly certain, but for which there was uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, a change in the timing of deductions would not impact the annual effective tax rate.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions, as well as foreign jurisdictions. The Company and its subsidiaries are subject to U.S. federal and state income tax examinations and foreign examinations for years after 2016.
For the qualified defined benefit plan, a target allocation approach is utilized, which focuses on creating a mix of assets that will generate modest growth from equity securities while minimizing volatility from changes in the markets and economic environment. Various factors are taken into consideration in determining the appropriate asset mix, such as census data, actuarial valuation information and capital market assumptions. Target allocations are reviewed and updated at least annually. Changes are made periodically.
The following table presents, for each hierarchy level, the qualified defined benefit plan’s investment assets that are measured at fair value at December 31, 2020 and 2019. Refer to Note 5 - “Fair Value” for a description of the different levels in the Fair Value Hierarchy.
Securities classified as Level 1 at December 31, 2020 and 2019 include actively traded mutual funds and publicly traded securities, which are valued at quoted market prices. Securities classified as Level 3 at December 31, 2020 and 2019 include assets held in a fixed account of an insurance company. The fair value of the investment is estimated using a comparable public market financial institution derived fair value curve that uses non-observable inputs for market liquidity and unique credit characteristics of its underlying securities.
The Plan also holds investments measured at fair value using NAV based on the value of the underlying investments, which is determined independently by the investment manager and have not been included in the table above. These include investments in commingled pools and investment-grade fixed income securities held in a custom fund, and other commingled pools that primarily invest in publicly traded common stocks. The daily NAV, which is not published as a quoted market price for these investments, is used as the basis for transactions. Redemption of these funds is not subject to restriction. The fair values of these investments are as follows:
The Company recognizes the current funded status of its plans in its Consolidated Balance Sheets. Changes in the funded status of the plans are reflected as components of either net income or accumulated other comprehensive income or loss. The components of accumulated other comprehensive income or loss are reflected as a net actuarial gain or loss.
The following table reflects the benefit obligations, fair value of plan assets and funded status of the plans at December 31, 2020 and 2019.
(1) The accumulated benefit obligation for these plans is equal to the projected benefit obligation.
The following table reflects the total amounts recognized in accumulated other comprehensive income relating to the defined benefit pension plans as of December 31, 2020 and 2019.
In accordance with ERISA guidelines, the Company is not required to fund its qualified benefit plan in 2021. The Company expects to contribute $2.9 million to its non-qualified pension plan to fund 2021 benefit payments. During 2019, the Company made a discretionary contribution of $10.0 million to its qualified benefit plan. At this time, no additional discretionary contributions are expected to be made into any of the plans during 2021.
Additionally, on May 20, 2014, shareholders approved The Hanover Insurance Group 2014 Employee Stock Purchase Plan (the “ESPP Plan”) authorizing the issuance of 2,500,000 shares under such plan. As of December 31, 2020, 2,332,094 shares were available for grant under the ESPP Plan.
Under the 2014 Stock Plan, options may be granted to eligible employees, directors or consultants at an exercise price equal to the market price of the Company’s common stock on the date of grant. Option shares may be exercised subject to the terms prescribed by the Compensation and Human Capital Committee of the Board of Directors (the “Committee”) at the time of grant. Options granted in 2020, 2019 and 2018 generally vest over 3 years with 33 1/3% vesting in each year. Options must be exercised not later than ten years from the date of grant.
In accordance with plan provisions, 2019 includes 67,605 options related to special dividends paid by the Company in January 2019 and December 2019, in order to retain the intrinsic value of outstanding awards. The remaining 185,208 option awards were granted at an exercise price of $119.36.
Cash received for options exercised for the years ended December 31, 2020, 2019 and 2018 was $3.9 million, $12.3 million and $14.3 million, respectively. The intrinsic value of options exercised for the years ended December 31, 2020, 2019 and 2018 was $2.7 million, $10.1 million and $9.6 million, respectively.
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. For all options granted through December 31, 2020, the exercise price equaled the market price on the grant date. Compensation cost related to options is based upon the grant date fair value and expensed on a straight-line basis over the service period for each separately vesting portion of the option as if the option was, in substance, multiple awards.
The weighted average grant date fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $14.45 , $18.12 and $16.30, respectively.
The fair value of shares that vested during the years ended December 31, 2020 and 2019 was $4.6 million and $9.5 million, respectively. As of December 31, 2020, the Company had unrecognized compensation expense of $2.6 million related to unvested stock options that is expected to be recognized over a weighted average period of 1.4 years.
As a result of the sale of Chaucer and included in forfeitures in 2018 are 19,655 shares of time-based restricted stock units, 43,449 shares of performance-based restricted stock units and 2,705 shares of market-based restricted stock units that were awarded to Chaucer employees.
Also, during 2020, 2019 and 2018, there were 1,074 shares, 996 shares and 43,449 shares, respectively, of performance-based awards that forfeited.
Diluted earnings per share during 2020, 2019 and 2018 excludes 0.4 million, 0.2 million and 0.3 million, respectively, of common shares issuable under the Company’s stock compensation plans, because their effect would be antidilutive.
The Company reviews the assets of its Property and Casualty Insurance Companies collectively and does not allocate them among the Commercial Lines, Personal Lines and Other segments.
As a condition to conduct certain business in various states, the Company is required to participate in residual market mechanisms, facilities, and pooling arrangements such as the Michigan Catastrophic Claims Association (“MCCA”). The Company is subject to concentration of risk with respect to reinsurance ceded to the MCCA. Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state for which the policyholders have elected unlimited personal injury protection (“PIP”) benefits. Insurers are allowed to pass along this cost to Michigan automobile policyholders that have elected unlimited PIP benefits. The Company ceded to the MCCA premiums earned and losses and LAE incurred of $84.6 million and $99.2 million, respectively, in 2020, $84.3 million and $108.5 million, respectively, in 2019, and $70.9 million and $108.8 million, respectively, in 2018. The MCCA represented 54.7% of the total reinsurance receivable balance at December 31, 2020. Reinsurance recoverables related to MCCA were $1,024.7 million and $1,023.7 million at December 31, 2020 and 2019, respectively. Because the MCCA is supported by assessments permitted by statute, and there have been no significant uncollectible balances from MCCA identified during the three years ending December 31, 2020, the Company believes that it has no significant exposure to uncollectible reinsurance balances from this entity.
The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in results of operations as adjustments to losses and LAE. Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and loss event occurred. These types of subsequent adjustments are described as loss and LAE “development.” Such development can be either favorable or unfavorable to the Company’s financial results and may vary by line of business. In this section, all amounts presented include catastrophe losses and LAE.
In 2019, net favorable loss and LAE development was $28.4 million, primarily as a result of net favorable Commercial Lines development of $53.3 million, partially offset by unfavorable Personal Lines development of $23.7 million. Commercial Lines favorable development was primarily due to lower than expected losses of $32.6 million within the workers’ compensation line in accident years 2015 through 2018, as well as within the commercial multiple peril line in accident years 2015 and 2016, and within other commercial lines. These were partially offset by higher than expected losses in the commercial automobile line driven by higher bodily injury severity and personal injury protection losses. In addition, Commercial Lines favorable development includes lower than expected losses related to the 2017 and 2018 California wildfires, including the sale of subrogation rights on certain California wildfire losses, and hurricane Florence in 2018. Within other commercial lines, lower than expected losses in the marine line, primarily in accident years 2015 through 2018, general liability lines and surety line were partially offset by higher than expected losses in Hanover Programs, primarily in accident years 2011, 2013, 2015 and 2017. Personal Lines unfavorable development was primarily due to higher than expected losses of $21.6 million in the personal automobile line, driven by bodily injury severity and personal injury protection in accident years 2016 through 2017. In addition, Other Segment unfavorable development of $1.2 million
In 2018, net favorable loss and LAE development was $8.9 million, primarily as a result of net favorable Commercial Lines development of $40.9 million, partially offset by unfavorable Personal Lines development of $30.8 million. Commercial Lines favorable development was primarily due to lower than expected losses of $31.0 million within the workers’ compensation line in accident years 2015 through 2017 and $29.1 million in other commercial lines, partially offset by higher than expected losses of $23.2 million in the commercial automobile line, driven by higher bodily injury severity in the 2014, 2016 and 2017 accident years. Within other commercial lines, lower than expected losses in the general liability lines, related to the 2014 through 2016 accident years, marine line in accident years 2015 through 2017, and surety line, were partially offset by higher than expected losses in Hanover Programs, primarily in accident years 2010 through 2014. Personal Lines unfavorable development was primarily due to higher than expected losses of $ 14.3 million in the personal automobile line, driven by bodily injury severity in the 2015 and 2016 accident years, and in the homeowners line in accident years 2015 through 2017. In addition, Other Segment unfavorable development of $1.2 million was due to the Company’s run-off voluntary assumed property and casualty reinsurance pools business, which includes asbestos and environmental reserves.
The table below summarizes the gross, ceded and net reserve for losses and LAE and reconciles to the incurred claims development in the following section. Accordingly, the commercial multiple peril, workers’ compensation, commercial automobile liability and general liability and umbrella - occurrence lines presentation includes Hanover Programs business.
For the following net reserve components, commercial multiple peril, workers’ compensation, commercial automobile liability, general liability and umbrella - occurrence, general liability - claims made, personal automobile liability and homeowners, the Company is presenting incurred claims development tables by accident year. The commercial multiple peril, workers’ compensation, commercial automobile liability, general liability and umbrella - occurrence lines presentation includes Hanover Programs business. In each of these tables, the Company is presenting the number of years for which claims are typically outstanding, which is consistent with the period at which substantially all of the reserve development has emerged based on past history. The tables presented below include cumulative incurred loss and allocated loss adjustment expenses (“ALAE”), cumulative paid loss and ALAE and IBNR balances at December 31, 2020. IBNR includes both incurred but not reported liabilities and expected development on reported claims. In addition, cumulative incurred claim counts are presented as of December 31, 2020 and claim duration is presented in a separate table disclosing the average annual percentage payout of incurred claims by age, net of reinsurance. Claim duration is calculated as an average of paid loss and ALAE divided by incurred loss and ALAE by elapsed year. The incurred claims development tables presented are reconciled to the net carried reserves in the preceding table as of December 31, 2020.
The Company has been named a defendant in various legal proceedings arising in the normal course of business. In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry or investigation, and its ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. The ultimate resolutions of such proceedings are not expected to have a material effect on its financial position, although they could have a material effect on the results of operations for a particular quarterly or annual period.
The following table provides statutory net income for the years ended December 31 and statutory capital and surplus for the insurance subsidiaries as of December 31 for the periods indicated: