HANOVER INSURANCE GROUP, INC. (Form: 10-Q, Received: 10/28/2020 15:54:53)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-13754

THE HANOVER INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

04-3263626

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

440 Lincoln Street, Worcester, Massachusetts 01653

(Address of principal executive offices) (Zip Code)

(508) 855-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbols	Name of each exchange on which registered
Common Stock, $.01 par value	THG	New York Stock Exchange
7 5/8% Senior Debentures due 2025	THG	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock was 37,252,437 as of October 26, 2020.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	2

Item 1.	Financial Statements	2
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Shareholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Interim Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	48

PART II.	OTHER INFORMATION	49

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	53

SIGNATURES		54

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions, except per share data)	2020			2019			2020			2019
Revenues
Premiums	$	1,135.4		$	1,124.1		$	3,373.4		$	3,330.2
Net investment income		67.6			68.8			194.9			208.6
Net realized and unrealized investment gains (losses):
Net realized gains from sales and other		8.2			0.6			12.1			1.0
Net change in fair value of equity securities		30.3			15.0			(44.4	)		75.3
Impairment losses on investments		(0.8	)		(0.8	)		(27.9	)		(1.2	)
Total net realized and unrealized investment gains (losses)		37.7			14.8			(60.2	)		75.1
Fees and other income		9.1			7.0			22.2			18.9
Total revenues		1,249.8			1,214.7			3,530.3			3,632.8
Losses and expenses
Losses and loss adjustment expenses		709.7			705.3			2,149.9			2,122.6
Amortization of deferred acquisition costs		237.7			232.8			711.9			692.8
Interest expense		9.8			9.4			28.6			28.1
Loss from repayment of debt		6.1			—			6.2			—
Other operating expenses		137.9			136.9			395.9			400.6
Total losses and expenses		1,101.2			1,084.4			3,292.5			3,244.1
Income from continuing operations before income taxes		148.6			130.3			237.8			388.7
Income tax expense (benefit):
Current		29.9			22.2			69.7			54.8
Deferred		(0.8	)		1.3			(28.0	)		13.9
Effect of new tax regulations on Chaucer gain on sale		—			(4.4	)		—			1.2
Total income tax expense		29.1			19.1			41.7			69.9
Income from continuing operations		119.5			111.2			196.1			318.8
Discontinued operations (net of taxes):
Sale of Chaucer business		—			6.4			—			(2.6	)
Income from Chaucer business		—			2.1			—			1.6
Loss from discontinued life businesses		(0.6	)		(0.8	)		(2.0	)		(2.5	)
Net income	$	118.9		$	118.9		$	194.1		$	315.3
Earnings per common share:
Basic:
Income from continuing operations	$	3.17		$	2.81		$	5.16		$	7.91
Discontinued operations (net of taxes):
Sale of Chaucer business		—			0.16			—			(0.06	)
Income from Chaucer business		—			0.05			—			0.03
Loss from discontinued life businesses		(0.02	)		(0.02	)		(0.05	)		(0.06	)
Net income per share	$	3.15		$	3.00		$	5.11		$	7.82
Weighted average shares outstanding		37.7			39.6			38.0			40.3
Diluted:
Income from continuing operations	$	3.14		$	2.77		$	5.11		$	7.80
Discontinued operations (net of taxes):
Sale of Chaucer business		—			0.16			—			(0.06	)
Income from Chaucer business		—			0.05			—			0.03
Loss from discontinued life businesses		(0.01	)		(0.02	)		(0.06	)		(0.06	)
Net income per share	$	3.13		$	2.96		$	5.05		$	7.71
Weighted average shares outstanding		38.0			40.2			38.4			40.9

The accompanying notes are an integral part of these interim consolidated financial statements.

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended					Nine Months Ended
	September 30,				September 30,
(In millions)	2020		2019			2020			2019
Net income	$	118.9	$	118.9		$	194.1		$	315.3
Other comprehensive income, net of tax:
Available-for-sale securities
Changes in net unrealized gains on investment securities:
Having no credit losses recognized in the Consolidated Statements of Income		27.5		42.3			198.4			258.4
Having credit losses recognized in the Consolidated Statements of Income		0.3		0.7			(2.1	)		2.6
Total available-for-sale securities		27.8		43.0			196.3			261.0
Pension and postretirement benefits:
Net change in net actuarial loss		1.1		2.3			3.5			6.8
Cumulative foreign currency translation adjustment:
Amount recognized as cumulative foreign currency translation during the period		—		—			—			0.7
Total other comprehensive income, net of tax		28.9		45.3			199.8			268.5
Comprehensive income	$	147.8	$	164.2		$	393.9		$	583.8

The accompanying notes are an integral part of these interim consolidated financial statements.

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30,			December 31,
(In millions, except share data)	2020			2019
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $6,984.7 and $6,452.2)	$	7,473.0		$	6,687.1
Equity securities, at fair value		490.5			575.7
Other investments		763.9			733.2
Total investments		8,727.4			7,996.0
Cash and cash equivalents		231.5			215.7
Accrued investment income		50.3			53.0
Premiums and accounts receivable, net		1,353.0			1,260.4
Reinsurance recoverable on paid and unpaid losses and unearned premiums		1,841.1			1,814.0
Deferred acquisition costs		482.5			467.4
Goodwill		178.8			178.8
Other assets		419.7			402.4
Assets of discontinued businesses		109.5			102.8
Total assets	$	13,393.8		$	12,490.5
Liabilities
Loss and loss adjustment expense reserves	$	5,945.7		$	5,654.4
Unearned premiums		2,537.1			2,416.7
Expenses and taxes payable		704.8			627.7
Deferred income tax liability		84.6			51.8
Reinsurance premiums payable		67.3			53.4
Debt		780.4			653.4
Liabilities of discontinued businesses		118.9			116.9
Total liabilities		10,238.8			9,574.3
Commitments and contingencies
Shareholders’ Equity
Preferred stock, par value $0.01 per share; 20.0 million shares authorized; none issued		—			—
Common stock, par value $0.01 per share; 300.0 million shares authorized; 60.5 million shares issued		0.6			0.6
Additional paid-in capital		1,871.5			1,837.3
Accumulated other comprehensive income		352.4			152.6
Retained earnings		2,529.2			2,410.9
Treasury stock at cost (23.1 million and 22.1 million shares)		(1,598.7	)		(1,485.2	)
Total shareholders’ equity		3,155.0			2,916.2
Total liabilities and shareholders’ equity	$	13,393.8		$	12,490.5

The accompanying notes are an integral part of these interim consolidated financial statements.

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2020			2019			2020			2019
Preferred Stock
Balance at beginning and end of period	$	—		$	—		$	—		$	—
Common Stock
Balance at beginning and end of period		0.6			0.6			0.6			0.6
Additional Paid-in Capital
Balance at beginning of period		1,866.6			1,833.1			1,837.3			1,871.8
Settlement and prepayment of accelerated share repurchases and other		4.9			3.9			34.2			(34.8	)
Balance at end of period		1,871.5			1,837.0			1,871.5			1,837.0
Accumulated Other Comprehensive Income, net of tax
Net Unrealized Appreciation (Depreciation) on Investments:
Balance at beginning of period		384.5			192.3			216.0			(27.2	)
Net appreciation on available-for-sale securities		27.8			43.0			196.3			261.0
Adoption of Accounting Standards Updates (No. 2017-08 in 2019)		—			—			—			1.5
Balance at end of period		412.3			235.3			412.3			235.3
Defined Benefit Pension and Postretirement Plans:
Balance at beginning of period		(61.0	)		(84.1	)		(63.4	)		(88.6	)
Net amount recognized as net periodic benefit cost		1.1			2.3			3.5			6.8
Balance at end of period		(59.9	)		(81.8	)		(59.9	)		(81.8	)
Cumulative Foreign Currency Translation Adjustment:
Balance at beginning of period		—			—			—			(0.7	)
Amount recognized as cumulative foreign currency translation during the period		—			—			—			0.7
Balance at end of period		—			—			—			—
Total accumulated other comprehensive income		352.4			153.5			352.4			153.5
Retained Earnings
Balance at beginning of period		2,435.1			2,328.1			2,410.9			2,182.3
Cumulative effect of accounting change, net of taxes		—			—			(0.9	)		(1.5	)
Balance at beginning of period, as adjusted		2,435.1			2,328.1			2,410.0			2,180.8
Net income		118.9			118.9			194.1			315.3
Dividends to shareholders		(24.8	)		(23.9	)		(74.9	)		(73.0	)
Balance at end of period		2,529.2			2,423.1			2,529.2			2,423.1
Treasury Stock
Balance at beginning of period		(1,554.1	)		(1,328.9	)		(1,485.2	)		(983.5	)
Shares purchased at cost		(45.0	)		—			(118.6	)		(355.1	)
Net shares reissued at cost under employee stock-based compensation plans		0.4			1.5			5.1			11.2
Balance at end of period		(1,598.7	)		(1,327.4	)		(1,598.7	)		(1,327.4	)
Total shareholders’ equity	$	3,155.0		$	3,086.8		$	3,155.0		$	3,086.8

The accompanying notes are an integral part of these interim consolidated financial statements.

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
	September 30,
(In millions)	2020			2019
Cash Flows From Operating Activities
Net income	$	194.1		$	315.3
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized investment losses (gains)		59.7			(74.9	)
Loss from repayment of debt		6.2		—
Sale of Chaucer business	—				2.6
Net amortization and depreciation		13.9			16.8
Stock-based compensation expense		14.4			12.7
Amortization of defined benefit plan costs		4.5			8.5
Deferred income tax expense (benefit)		(27.9	)		13.9
Change in deferred acquisition costs		(15.1	)		(22.1	)
Change in premiums receivable, net of reinsurance premiums payable		(78.7	)		(117.7	)
Change in loss, loss adjustment expense and unearned premium reserves		412.6			436.4
Change in reinsurance recoverable		(27.3	)		(99.1	)
Change in expenses and taxes payable		(9.0	)		(55.1	)
Other, net		(0.8	)		(13.4	)
Net cash provided by operating activities		546.6			423.9
Cash Flows From Investing Activities
Proceeds from disposals and maturities of fixed maturities		961.0			850.1
Proceeds from disposals of equity securities and other investments		153.5			65.8
Purchase of fixed maturities		(1,423.1	)		(1,281.9	)
Purchase of equity securities and other investments		(159.6	)		(163.7	)
Capital expenditures		(12.1	)		(10.2	)
Net cash proceeds from sale of Chaucer-related Irish and Australian entities, partially offset by cash transferred		—			34.7
Net cash used in investing activities		(480.3	)		(505.2	)
Cash Flows From Financing Activities
Proceeds from exercise of employee stock options		4.8			12.4
Proceeds from debt borrowings, net		296.4			14.5
Change in cash collateral related to securities lending program		—			11.1
Dividends paid to shareholders		(74.0	)		(265.3	)
Repurchases of common stock		(94.3	)		(400.0	)
Repayment of debt		(175.8	)		(151.1	)
Other financing activities		(7.6	)		(6.7	)
Net cash used in financing activities		(50.5	)		(785.1	)

Net change in cash and cash equivalents		15.8			(866.4	)
Net change in cash related to discontinued operations	—				3.3
Cash and cash equivalents, beginning of period		215.7			1,020.7
Cash and cash equivalents, end of period	$	231.5		$	157.6

The accompanying notes are an integral part of these interim consolidated financial statements.

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of The Hanover Insurance Group, Inc. and its subsidiaries (“THG” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the requirements of Form 10-Q. Certain financial information that is provided in annual financial statements, but is not required in interim reports, has been omitted.

The interim consolidated financial statements of THG include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America, THG’s principal property and casualty companies; and other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 9 – “Segment Information.” The interim consolidated financial statements also include the Company’s discontinued operations, consisting of the Company’s former accident and health and life insurance businesses, as well as the Company’s former Chaucer business. All intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the opinion of the Company’s management, the accompanying interim consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair presentation of the financial position and results of operations. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2020.

2. New Accounting Pronouncements

Recently Implemented Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASC Update No. 2016-13, (Topic 326) Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASC Update No. 2016-13”). This ASC update introduces new guidance for the accounting for credit losses on financial instruments within its scope. A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider both historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments. The estimated credit losses and subsequent adjustment to such loss estimates are recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings. ASC Update No. 2016-13 also modifies the impairment model for available-for-sale debt securities. The new model requires an estimate of expected credit losses only when the fair value is below the amortized cost of the asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost no longer affects the determination of whether a credit loss exists. In addition, credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASC Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which explicitly states that receivables arising from operating leases are not within the scope of Subtopic 326-20.

In 2019 and 2020, the FASB issued several updates to ASC Update No. 2016-13, including the issuance in April 2019 of ASC Update 2019-04, Codification Improvements to Topic 326, 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.

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In August 2018, the FASB issued ASC Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASC update requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract consistent with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting agreement, and apply impairment guidance consistent with long-lived assets. ASC Update No. 2018-15 also provides specific guidelines related to the presentation of these capitalized implementation costs and related expenses in the financial statements. The Company implemented this guidance prospectively, effective January 1, 2020, and it did not have a material impact on its financial position or results of operations.

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. The 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 January 2017, the FASB issued ASC Update No. 2017-04, (Topic 350) Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. This guidance eliminates step 2 from the goodwill impairment test. Instead, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, including any applicable income tax effects, and recognize an impairment for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. 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.

Recently Issued Standards

In August 2020, the FASB issued ASC Update No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This ASC update aims to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt – Debt with Conversion and Other Options, for convertible instruments. The update also simplifies the settlement conditions required to be met to qualify for equity classification for contracts that are settled in an entity’s own equity. ASC Update No. 2020-06 also requires that an entity use the if-converted method for convertible instruments in its earnings per share (“EPS”) calculations, requires the effect of potential share settlement to be included in the diluted EPS calculation when an instrument may be settled in cash or shares, eliminates the beneficial conversion features model, and clarifies the use of an average market price for calculating the diluted EPS denominator. The updated guidance is effective for annual and interim periods beginning after December 15, 2021. Early adoption is permitted no earlier than for annual and interim periods beginning after December 15, 2020. This ASC allows for either a modified retrospective method of transition or a fully retrospective method of transition. The Company does not expect the adoption of ASC Update No. 2020-06 to have a material impact on its financial position or results of operations.

In January 2020, the FASB issued ASC Update No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASC update clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when using the measurement alternative under ASC 321. This update also clarifies the accounting for certain forward contracts and purchased options accounted for under ASC 815. The updated guidance is effective for annual and interim periods beginning after December 15, 2020. The Company does not expect the adoption of ASC Update No. 2020-01 to have a material impact on its financial position or results of operations.

In December 2019, the FASB issued ASC Update No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. This ASC update removes certain exceptions to the general principles in ASC 740, Income Taxes, including intraperiod tax allocation when there is a loss from continuing operations, foreign subsidiary treatment under certain conditions and for calculating interim income taxes when the year-to-date loss exceeds the anticipated loss. This update also clarifies and amends existing guidance related to changes in tax laws, business combinations and employee stock plans, among others. The updated guidance is effective for interim and annual periods beginning after December 15, 2020. Early adoption is permitted, including interim periods. The Company does not expect the adoption of ASC Update No. 2019-12 to have a material effect on its financial position or results of operations.

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In August 2018, the 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 accumulated other comprehensive income 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 projected 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 does not expect the adoption of ASC Update No. 2018-14 to have a material effect on its financial position or results of operations as the update is disclosure related.

3. Investments

A. Fixed maturities

The amortized cost and fair value of available-for-sale fixed maturities were as follows:

	September 30, 2020
					Amortized Cost,
			Allowance		net of Allowance		Gross		Gross
	Amortized		for Credit		for Credit		Unrealized		Unrealized
(in millions)	Cost		Losses		Losses		Gains		Losses		Fair Value
U.S. Treasury and government agencies	$	353.9	$	—	$	353.9	$	20.0	$	0.3	$	373.6
Foreign government		4.2		—		4.2		0.5		—		4.7
Municipal		1,033.3		—		1,033.3		59.1		0.1		1,092.3
Corporate		3,808.7		1.6		3,807.1		316.3		1.7		4,121.7
Residential mortgage-backed		1,017.8		—		1,017.8		38.5		0.3		1,056.0
Commercial mortgage-backed		695.6		—		695.6		53.6		0.1		749.1
Asset-backed		72.8		—		72.8		2.8		—		75.6
Total fixed maturities	$	6,986.3	$	1.6	$	6,984.7	$	490.8	$	2.5	$	7,473.0

	December 31, 2019
			Gross		Gross				OTTI
	Amortized		Unrealized		Unrealized				Unrealized
(in millions)	Cost		Gains		Losses		Fair Value		Losses
U.S. Treasury and government agencies	$	342.0	$	9.1	$	1.3	$	349.8	$	—
Foreign government		15.7		0.4		—		16.1		—
Municipal		807.1		27.6		1.2		833.5		—
Corporate		3,653.5		161.6		3.9		3,811.2		3.0
Residential mortgage-backed		905.4		17.1		1.1		921.4		—
Commercial mortgage-backed		666.4		25.6		0.1		691.9		—
Asset-backed		62.1		1.1		—		63.2		—
Total fixed maturities	$	6,452.2	$	242.5	$	7.6	$	6,687.1	$	3.0

As of December 31, 2019, other-than-temporary impairments (“OTTI”) unrealized losses in the table above represents OTTI recognized in accumulated other comprehensive income (“AOCI”). This amount excludes net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date of $4.2 million.

The Company deposits funds with various state and governmental authorities. For a discussion of the Company’s deposits with state and governmental authorities, see also Note 3 – “Investments” of the Notes to Consolidated Financial Statements in the Company’s 2019 Annual Report on Form 10-K.

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The amortized cost and fair value by maturity periods for fixed maturities are shown in the following table. 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 the Company may have the right to put or sell the obligations back to the issuers.

	September 30, 2020
	Amortized Cost, net
	of Allowance for		Fair
(in millions)	Credit Losses		Value
Due in one year or less	$	346.9	$	351.6
Due after one year through five years		1,844.7		1,976.0
Due after five years through ten years		2,279.9		2,506.0
Due after ten years		727.0		758.7
		5,198.5		5,592.3
Mortgage-backed and asset-backed securities		1,786.2		1,880.7
Total fixed maturities	$	6,984.7	$	7,473.0

B. Fixed maturity securities in an unrealized loss position

The following tables provide information about the Company’s available-for-sale fixed maturity securities that were in an unrealized loss position at September 30, 2020 and December 31, 2019, including the length of time the securities have been in an unrealized loss position:

	September 30, 2020
	12 months or less				Greater than 12 months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(in millions)	Losses		Value		Losses		Value		Losses		Value
Investment grade:
U.S. Treasury and government agencies	$	0.3	$	52.7	$	—	$	—	$	0.3	$	52.7
Municipal		0.1		28.3		—		—		0.1		28.3
Corporate		0.8		86.4		—		1.4		0.8		87.8
Residential mortgage-backed		0.3		88.1		—		0.2		0.3		88.3
Commercial mortgage-backed		0.1		31.7		—		—		0.1		31.7
Total investment grade		1.6		287.2		—		1.6		1.6		288.8
Below investment grade:
Corporate		0.9		40.7		—		—		0.9		40.7
Total fixed maturities	$	2.5	$	327.9	$	—	$	1.6	$	2.5	$	329.5

	December 31, 2019
	12 months or less				Greater than 12 months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(in millions)	Losses		Value		Losses		Value		Losses		Value
Investment grade:
U.S. Treasury and government agencies	$	1.3	$	73.0	$	—	$	9.3	$	1.3	$	82.3
Municipal		1.1		72.5		0.1		5.6		1.2		78.1
Corporate		0.7		86.5		0.1		4.7		0.8		91.2
Residential mortgage-backed		0.7		69.2		0.4		34.4		1.1		103.6
Commercial mortgage-backed		0.1		40.6		—		0.9		0.1		41.5
Asset-backed		—		—		—		1.7		—		1.7
Total investment grade		3.9		341.8		0.6		56.6		4.5		398.4
Below investment grade:
Corporate		2.2		27.1		0.9		9.0		3.1		36.1
Total fixed maturities	$	6.1	$	368.9	$	1.5	$	65.6	$	7.6	$	434.5

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The Company views gross unrealized losses on fixed maturities as non-credit related and through its assessment of unrealized losses has determined that these securities will recover, allowing the Company to realize the anticipated long-term economic value. The Company currently does not intend to sell, nor does it expect to be required to sell these securities before recovery of their amortized cost. The Company employs a systematic methodology to evaluate declines in fair value below amortized cost for fixed maturity securities. In determining impairments, the Company evaluates several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the degree to which the fair value of an issuer’s securities is below the Company’s amortized cost. The Company also considers any factors that might raise doubt about the issuer’s ability to make contractual payments as they come due and whether the Company expects to recover the entire amortized cost basis of the security.

C. Proceeds from sales

The proceeds from sales of available-for-sale fixed maturities and gross realized gains and gross realized losses on those sales were as follows:

	Three Months Ended September 30,
	2020						2019
	Proceeds from		Gross		Gross		Proceeds from		Gross		Gross
(in millions)	Sales		Gains		Losses		Sales		Gains		Losses
Fixed maturities	$	37.5	$	3.4	$	0.2	$	86.9	$	1.6	$	2.4

	Nine Months Ended September 30,
	2020						2019
	Proceeds from		Gross		Gross		Proceeds from		Gross		Gross
(in millions)	Sales		Gains		Losses		Sales		Gains		Losses
Fixed maturities, excluding held-for-sale (Chaucer)	$	195.0	$	8.4	$	2.9	$	309.5	$	4.2	$	5.0
Fixed maturities, held-for-sale		—		—		—		0.3		—		—
Total fixed maturities	$	195.0	$	8.4	$	2.9	$	309.8	$	4.2	$	5.0

D. Impairments

For the three months ended September 30, 2020, the Company recognized $0.8 million of impairments, consisting primarily of additional credit losses on mortgage loans, partially offset by net recoveries of credit losses on fixed maturities, primarily resulting from increased market values during the quarter on credit losses recognized in prior quarters. For the nine months ended September 30, 2020, the Company recognized $27.9 million of impairment losses, consisting primarily of $19.1 million on fixed maturities and $6.6 million on mortgage loans. Impairments on fixed maturities included $16.5 million categorized as intend-to-sell and $2.6 million of credit-related losses. For the three and nine months ended September 30, 2019, total impairments on fixed maturities recognized in earnings were $0.8 million and $1.2 million, respectively.

See Note 2, “New Accounting Pronouncements — Recently Implemented Standards”, for a discussion of new guidance effective January 1, 2020, which impacts 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 September 30, 2020 and December 31, 2019, the allowance for credit losses on mortgage loans was $7.8 million and $1.3 million, respectively. The allowance for credit losses on available-for-sale securities was $1.6 million at September 30, 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, 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 market data relevant to the realizability of contractual cash flows may be considered, including current conditions and reasonable and supportable forecasts.

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Mortgage loans – the Company utilized a model that estimates expected losses based on mortgage risk rating and risk factors based on property type, such as office, retail, lodging, multi-family and industrial. Expected loss ratios are based on historical data provided by an independent third-party rating agency. The risk factors, based on property characteristics and metrics including the geographic market, are predominantly driven by loan-to-value and debt service coverage ratios. An adjustment to ratings may be made to reflect current conditions and to incorporate reasonable and supportable forecasts, such as volatility of cash flows and valuation.

E. Equity securities

Equity securities are carried at fair value and all increases or decreases in fair value are reported in net realized and unrealized investment gains (losses) on the Consolidated Statements of Income. The following table provides pre-tax net realized and unrealized gains (losses) on equity securities:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)		2020			2019			2020			2019
Net gains (losses) recognized during the period	$	30.3		$	15.0		$	(44.4	)	$	75.3
Less: net gains (losses) recognized on equity securities sold during the period		(3.5	)		(0.2	)		(19.9	)		1.0
Net unrealized gains (losses) recognized during the period on equity securities still held	$	33.8		$	15.2		$	(24.5	)	$	74.3

4. Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants. The Company emphasizes the use of observable market data whenever available in determining fair value. Fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation. A hierarchy of the three broad levels of fair value is as follows, with the highest priority given to Level 1 as these are the most observable, and the lowest priority given to Level 3:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.

Level 3 – Unobservable inputs that are supported by little or no market activity.

When more than one level of input is used to determine fair value, the financial instrument is classified as Level 2 or 3 according to the lowest level input that has a significant impact on the fair value measurement.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments and have not changed since last year.

Fixed Maturities

Level 1 securities generally include U.S. Treasury issues and other securities that are highly liquid, and for which quoted market prices are available. Level 2 securities are valued using pricing for similar securities and pricing models that incorporate observable inputs including, but not limited to yield curves and issuer spreads. Level 3 securities include issues for which little observable data can be obtained, primarily due to the illiquid nature of the securities, and for which significant inputs used to determine fair value are based on the Company’s own assumptions.

The Company utilizes a third-party pricing service for the valuation of the majority of its fixed maturity securities and receives one quote per 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. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value for those securities using pricing techniques based on a market approach. Inputs into the fair value pricing common to all asset classes include: benchmark U.S. Treasury security yield curves; reported trades of identical or similar fixed maturity securities; broker/dealer quotes of identical or similar fixed maturity securities and structural characteristics such as maturity date, coupon, mandatory principal payment dates, frequency of interest and principal payments, and optional redemption features. Inputs into the fair value applications that are unique by asset class include, but are not limited to:

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•

U.S. government agencies – determination of direct versus indirect government support and whether any contingencies exist with respect to the timely payment of principal and interest.

•

Foreign government – estimates of appropriate market spread versus underlying related sovereign treasury curve(s) dependent on liquidity and direct or contingent support.

•

Municipals – overall credit quality, including assessments of the level and variability of: sources of payment such as income, sales or property taxes, levies or user fees; credit support such as insurance; state or local economic and political base; natural resource availability; and susceptibility to natural or man-made catastrophic events such as hurricanes, earthquakes or acts of terrorism.

•

Corporate fixed maturities – overall credit quality, including assessments of the level and variability of: economic sensitivity; liquidity; corporate financial policies; management quality; regulatory environment; competitive position; ownership; restrictive covenants; and security or collateral.

•

Residential mortgage-backed securities – estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; government or monetary authority support programs; tax policies; and delinquency/default trends.

•

Commercial mortgage-backed securities – overall credit quality, including assessments of the value and supply/demand characteristics of: collateral type such as office, retail, residential, lodging, or other; geographic concentration by region, state, metropolitan statistical area and locale; vintage year; historical collateral performance including defeasance, delinquency, default and special servicer trends; and capital structure support features.

•

Asset-backed securities – overall credit quality, including assessments of the underlying collateral type such as credit card receivables, automobile loan receivables and equipment lease receivables; geographic diversification; vintage year; historical collateral performance including delinquency, default and casualty trends; economic conditions influencing use rates and resale values; and contract structural support features.

Generally, all prices provided by the pricing service, except actively traded securities with quoted market prices, are reported as Level 2.

The Company holds privately placed fixed maturity securities and certain other fixed maturity securities that do not have an active market and for which the pricing service cannot provide fair values. The Company determines fair values for these securities using either matrix pricing utilizing the market approach or broker quotes. The Company will use observable market data as inputs into the fair value techniques, as discussed in the determination of Level 2 fair values, to the extent it is available, but is also required to use a certain amount of unobservable judgment due to the illiquid nature of the securities involved. Unobservable judgment reflected in the Company’s matrix model accounts for estimates of additional spread required by market participants for factors such as issue size, credit stress, structural complexity, high bond coupon or other unique features. These matrix-priced securities are reported as Level 2 or Level 3, depending on the significance of the impact of unobservable judgment on the security’s value. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.

Equity Securities

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.

Other Investments

Other investments primarily include mortgage participations and limited partnerships not subject to the equity method of accounting. The fair values of limited partnerships not subject to the equity method of accounting are based on the net asset value (“NAV”) provided by the general partner adjusted for recent financial information and are excluded from the fair value hierarchy.

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The estimated fair values of the financial instruments were as follows:

	September 30, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
(in millions)	Value		Value		Value		Value
Financial Assets carried at:
Fair Value through AOCI:
Fixed maturities	$	7,473.0	$	7,473.0	$	6,687.1	$	6,687.1
Fair Value through Net Income:
Equity securities		490.5		490.5		575.7		575.7
Other investments		177.8		177.8		187.1		187.1
Amortized Cost/Cost:
Other investments		459.8		492.3		443.3		463.7
Cash and cash equivalents		231.5		231.5		215.7		215.7
Total financial instruments	$	8,832.6	$	8,865.1	$	8,108.9	$	8,129.3

Financial Liabilities carried at:
Amortized Cost:
Debt	$	780.4	$	872.7	$	653.4	$	722.1

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 the first nine months of 2020 and 2019, the Company did not adjust any prices received from its pricing service.

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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.

The following tables provide, for each hierarchy level, the Company’s investment assets that were measured at fair value on a recurring basis.

	September 30, 2020
(in millions)	Total		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Treasury and government agencies	$	373.6	$	161.2	$	212.4	$	—
Foreign government		4.7		—		4.7		—
Municipal		1,092.3		—		1,085.0		7.3
Corporate		4,121.7		—		4,121.2		0.5
Residential mortgage-backed		1,056.0		—		1,056.0		—
Commercial mortgage-backed		749.1		—		737.2		11.9
Asset-backed		75.6		—		75.6		—
Total fixed maturities		7,473.0		161.2		7,292.1		19.7
Equity securities		490.5		488.0		—		2.5
Other investments		3.5		—		—		3.5
Total investment assets at fair value	$	7,967.0	$	649.2	$	7,292.1	$	25.7

	December 31, 2019
(in millions)	Total		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Treasury and government agencies	$	349.8	$	157.9	$	191.9	$	—
Foreign government		16.1		—		16.1		—
Municipal		833.5		—		821.4		12.1
Corporate		3,811.2		—		3,810.6		0.6
Residential mortgage-backed		921.4		—		921.4		—
Commercial mortgage-backed		691.9		—		679.2		12.7
Asset-backed		63.2		—		63.2		—
Total fixed maturities		6,687.1		157.9		6,503.8		25.4
Equity securities		575.7		573.6		—		2.1
Other investments		3.5		—		—		3.5
Total investment assets at fair value	$	7,266.3	$	731.5	$	6,503.8	$	31.0

Limited partnerships measured at fair value using NAV based on an ownership interest in partners’ capital have not been included in the hierarchy tables. At September 30, 2020 and December 31, 2019, the fair values of these investments were $174.3 million and $183.6 million, respectively, approximately 2% of total investment assets.

The following tables provide, for each hierarchy level, the Company’s estimated fair values of financial instruments that were not carried at fair value:

	September 30, 2020
(in millions)	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	231.5	$	231.5	$	—	$	—
Other investments		492.3		—		2.6		489.7
Total financial instruments	$	723.8	$	231.5	$	2.6	$	489.7

Liabilities:
Debt	$	872.7	$	—	$	872.7	$	—

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	December 31, 2019
(in millions)	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	215.7	$	215.7	$	—	$	—
Other investments		463.7		—		2.1		461.6
Total financial instruments	$	679.4	$	215.7	$	2.1	$	461.6

Liabilities:
Debt	$	722.1	$	—	$	722.1	$	—

The tables below provide reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

	Fixed Maturities
(in millions)	Municipal			Corporate		Commercial mortgage- backed			Total			Equity and Other		Total Assets
Three Months Ended
September 30, 2020
Balance July 1, 2020	$	7.4		$	0.5	$	11.8		$	19.7		$	5.8	$	25.5
Total gains:
Included in total net realized and unrealized investment gains		—			—		—			—			0.2		0.2
Included in other comprehensive income-net appreciation on available-for-sale securities		—			—		0.3			0.3			—		0.3
Sales		(0.1	)		—		(0.2	)		(0.3	)		—		(0.3	)
Balance September 30, 2020	$	7.3		$	0.5	$	11.9		$	19.7		$	6.0	$	25.7
Change in unrealized gains for the period included in other comprehensive income for assets held at the end of the period	$	—		$	—	$	0.3		$	0.3		$	—	$	0.3

Three Months Ended
September 30, 2019
Balance July 1, 2019	$	12.9		$	0.7	$	13.0		$	26.6		$	5.6	$	32.2
Total gains:
Included in other comprehensive income-net appreciation on available-for-sale securities		0.1			—		0.2			0.3			—		0.3
Sales		(0.4	)		—		(0.2	)		(0.6	)		—		(0.6	)
Balance September 30, 2019	$	12.6		$	0.7	$	13.0		$	26.3		$	5.6	$	31.9

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	Fixed Maturities
(in millions)	Municipal			Corporate			Commercial mortgage- backed			Total			Equity and Other		Total Assets
Nine Months Ended
September 30, 2020
Balance January 1, 2020	$	12.1		$	0.6		$	12.7		$	25.4		$	5.6	$	31.0
Transfers out of Level 3		(3.5	)		—			—			(3.5	)		—		(3.5	)
Total gains:
Included in total net realized and unrealized investment gains		—			—			—			—			0.4		0.4
Included in other comprehensive income-net appreciation on available-for-sale securities		0.1			—			0.1			0.2			—		0.2
Sales		(1.4	)		(0.1	)		(0.9	)		(2.4	)		—		(2.4	)
Balance September 30, 2020	$	7.3		$	0.5		$	11.9		$	19.7		$	6.0	$	25.7
Change in unrealized gains for the period included in other comprehensive income for assets held at the end of the period	$	0.2		$	—		$	0.1		$	0.3		$	—	$	0.3

Nine Months Ended
September 30, 2019
Balance January 1, 2019	$	21.1		$	0.8		$	13.1		$	35.0		$	4.6	$	39.6
Total gains:
Included in other comprehensive income-net appreciation on available-for-sale securities		0.9			—			0.7			1.6			—		1.6
Purchases and sales:
Purchases		—			—			—			—			1.0		1.0
Sales		(9.4	)		(0.1	)		(0.8	)		(10.3	)		—		(10.3	)
Balance September 30, 2019	$	12.6		$	0.7		$	13.0		$	26.3		$	5.6	$	31.9

There were no transfers between Level 2 and Level 3 during the three months ended September 30, 2020 and 2019. During the nine months ended September 30, 2020, a fixed maturity security was transferred from Level 3 to Level 2, primarily as a result of assessing the significance of unobservable inputs on the fair value measurement. There were no transfers between Level 2 and Level 3 for the nine months ended September 30, 2019. There were no Level 3 liabilities held by the Company for the three and nine months ended September 30, 2020 and 2019.

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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.

September 30, 2020

December 31, 2019

Valuation

Significant

Fair

Range

Fair

Range

(in millions)

Technique

Unobservable Inputs

Value

(Wtd Average)

Value

(Wtd Average)

Fixed maturities:

Municipal

Discounted

cash flow

Discount for:

Small issue size

Credit stress

Above-market coupon

7.3

0.7 - 6.8% (5.1%)

0.6% (0.6%)

—

12.1

0.7 - 6.8% (4.3%)

—

0.5% (0.5%)

Corporate

Discounted

cash flow

Discount for:

Small issue size

Credit stress

Above-market coupon

0.5

2.5% (2.5%)

1.5% (1.5%)

0.3% (0.3%)

0.6

2.5% (2.5%)

—

0.3% (0.3%)

Commercial

mortgage-backed

Discounted

cash flow

Discount for:

Small issue size

Credit stress

Above-market coupon

Lease structure

11.9

1.9 - 3.1% (2.7%)

0.5 - 3.5% (1.2%)

0.5% (0.5%)

0.3% (0.3%)

12.7

1.9 - 3.1% (2.7%)

—

0.5% (0.5%)

0.3% (0.3%)

Equity securities

Market

comparables

Net tangible asset

market multiples

2.5

1.0X (1.0X)

2.1

1.0X (1.0X)

Other

Discounted

cash flow

Discount rate

3.5

18.0% (18.0%)

3.5

18.0% (18.0%)

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.

5. Debt and Credit Arrangements

Debt consists of the following:

(in millions)	September 30, 2020			December 31, 2019
Senior debentures maturing April 15, 2026	$	375.0		$	375.0
Senior debentures maturing September 1, 2030		300.0			—
Senior debentures maturing October 15, 2025		61.8			62.6
Subordinated debentures maturing March 30, 2053		—			175.0
Subordinated debentures maturing February 3, 2027		50.1			50.1
Total principal debt		786.9			662.7
Unamortized debt issuance costs		(6.5	)		(9.3	)
Total	$	780.4		$	653.4

On August 24, 2020, the Company issued $300.0 million aggregate principal amount of 2.50% unsecured senior debentures maturing in 2030. This debt is subject to certain restrictive covenants, including limitations on the issuance or disposition of stock of restricted subsidiaries and limitations on liens, and pays interest semi-annually.

On September 19, 2020, the Company used a portion of the net proceeds of its August 2020 debt issuance to redeem its outstanding $175.0 million principal amount of 6.35% subordinated debentures due 2053. The Company recognized $6.1 million of unamortized debt issuance costs associated with this debt.

At September 30, 2020, the Company was in compliance with the covenants associated with its debt indentures and credit arrangements.

6. Income Taxes

Income tax expense for the nine months ended September 30, 2020 and 2019 has been computed using estimated annual effective tax rates. These rates are revised, if necessary, at the end of each successive interim period to reflect current estimates of the annual effective tax rates.

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The tax provision was comprised of a U.S. federal income tax expense of $41.7 million and $69.9 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company and its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions, and have previously filed in 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.

7. Pension Plans

The components of net periodic pension cost for the defined benefit pension plans included in the Company’s results of operations are as follows:

	Three Months Ended September 30,
	2020			2019
(in millions)	Pension Plans
Interest cost	$	4.5		$	5.3
Expected return on plan assets		(5.6	)		(5.8	)
Recognized net actuarial loss		1.5			2.8
Net periodic pension cost	$	0.4		$	2.3

	Nine Months Ended September 30,
	2020			2019
(in millions)	Pension Plans
Interest cost	$	13.7		$	15.9
Expected return on plan assets		(16.7	)		(17.5	)
Recognized net actuarial loss		4.4			8.5
Net periodic pension cost	$	1.4		$	6.9

8. Other Comprehensive Income

The following tables provide changes in other comprehensive income.

	Three Months Ended September 30,
	2020									2019
				Tax									Tax
				Benefit			Net of						Benefit			Net of
(in millions)	Pre-Tax			(Expense)			Tax			Pre-Tax			(Expense)			Tax
Changes in net unrealized gains (losses) on investment securities:
Net unrealized gains arising during period for those having no credit losses in Consolidated Statement of Income	$	42.2		$	(8.7	)	$	33.5		$	58.3		$	(12.3	)	$	46.0
Net unrealized gains arising during period for those having credit losses in Consolidated Statement of Income		3.0			(0.9	)		2.1			0.1			—			0.1
Amount of gains realized from sales and other recognized in Consolidated Statement of Income		(4.9	)		(1.4	)		(6.3	)		(0.6	)		(3.1	)		(3.7	)
Amount of credit losses (recoveries) recognized in the Consolidated Statement of Income		(2.2	)		0.6			(1.6	)		0.8			(0.2	)		0.6
Amount of additional impairment losses recognized in the Consolidated Statement of Income		0.2			(0.1	)		0.1			—			—			—
Net unrealized gains		38.3			(10.5	)		27.8			58.6			(15.6	)		43.0
Pension and postretirement benefits:
Amortization of net actuarial losses recognized as net periodic benefit cost		1.4			(0.3	)		1.1			2.8			(0.5	)		2.3
Other comprehensive income	$	39.7		$	(10.8	)	$	28.9		$	61.4		$	(16.1	)	$	45.3

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	Nine Months Ended September 30,
	2020									2019
				Tax									Tax
				Benefit			Net of						Benefit			Net of
(in millions)	Pre-Tax			(Expense)			Tax			Pre-Tax			(Expense)			Tax
Changes in net unrealized gains (losses) on investment securities:
Net unrealized gains arising during period for those having no credit losses in Consolidated Statement of Income	$	251.6		$	(52.8	)	$	198.8		$	341.5		$	(71.8	)	$	269.7
Net unrealized gains (losses) arising during period for those having credit losses in Consolidated Statement of Income		(4.9	)		0.9			(4.0	)		2.1			(0.4	)		1.7
Amount of gains realized from sales and other recognized in Consolidated Statement of Income		(8.9	)		(5.0	)		(13.9	)		(1.1	)		(10.2	)		(11.3	)
Amount of credit losses recognized in the Consolidated Statement of Income		2.8			(0.5	)		2.3			1.2			(0.3	)		0.9
Amount of additional impairment losses recognized in the Consolidated Statement of Income		16.6			(3.5	)		13.1			—			—			—
Net unrealized gains		257.2			(60.9	)		196.3			343.7			(82.7	)		261.0
Pension and postretirement benefits:
Amortization of net actuarial losses recognized as net periodic benefit cost		4.4			(0.9	)		3.5			8.5			(1.7	)		6.8
Cumulative foreign currency translation adjustment:
Foreign currency translation recognized during the period		—			—			—			0.9			(0.2	)		0.7
Other comprehensive income	$	261.6		$	(61.8	)	$	199.8		$	353.1		$	(84.6	)	$	268.5

Reclassifications out of accumulated other comprehensive income were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in millions)	2020			2019			2020				2019
	Amount Reclassified from
Details about Accumulated Other	Accumulated Other														Affected Line Item in the Statement
Comprehensive Income Components	Comprehensive Income														Where Net Income (Loss) is Presented
Net unrealized gains on investment securities	$	5.0		$	0.6			$	8.9			$	1.1		Net realized gains from sales and other
		1.7			(0.8	)			(19.1	)			(1.2	)	Impairment (losses) recoveries on investments
		6.7			(0.2	)			(10.2	)			(0.1	)	Total before tax
		1.0			3.3				9.0				10.5		Tax benefit
		7.7			3.1				(1.2	)			10.4		Continuing operations; net of tax
		0.1			—				(0.3	)			—		Discontinued operations - life businesses
		7.8			3.1				(1.5	)			10.4		Net of tax
Amortization of defined benefit pension and postretirement actuarial losses		(1.4	)		(2.8	)			(4.4	)			(8.5	)	Loss adjustment expenses and other operating expenses ⁽¹⁾
		0.3			0.5				0.9				1.7		Tax benefit
		(1.1	)		(2.3	)			(3.5	)			(6.8	)	Continuing operations; net of tax
Total reclassifications for the period	$	6.7		$	0.8			$	(5.0	)		$	3.6		Benefit (expense) reflected in income, net of tax

(1)	The amount reclassified from accumulated other comprehensive income for the pension and postretirement benefits was allocated approximately 40% to loss adjustment expenses and 60% to other operating expenses for the three and nine months ended September 30, 2020 and 2019.

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9. Segment Information

The Company’s primary business operations include insurance products and services provided through three operating segments: Commercial Lines, Personal Lines and Other. Commercial Lines includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial coverages, such as management and professional liability, marine, Hanover Programs, specialty industrial and commercial property, monoline general liability and surety. Personal Lines includes personal automobile, homeowners and other personal coverages. Included in the Other segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to the Company’s former life insurance employees and agents; and a run-off voluntary property and casualty pools business. The separate financial information is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company reports interest expense related to debt separately from the earnings of its operating segments. This consists primarily of interest on the Company’s senior and subordinated debentures.

Management evaluates the results of the aforementioned segments based on operating income before taxes, excluding interest expense on debt. Operating income before taxes excludes certain items which are included in net income, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before taxes may be important components in understanding and assessing the Company’s overall financial performance, management believes that the presentation of operating income before taxes enhances an investor’s understanding of the Company’s results of operations by highlighting net income attributable to the core operations of the business. However, operating income before taxes should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.

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Summarized below is financial information with respect to the Company’s business segments.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in millions)	2020			2019			2020			2019
Operating revenues:
Commercial Lines	$	713.3		$	710.3		$	2,136.9		$	2,114.2
Personal Lines		493.3			483.3			1,438.1			1,423.1
Other		5.5			6.3			15.5			20.4
Total		1,212.1			1,199.9			3,590.5			3,557.7
Net realized and unrealized investment gains (losses)		37.7			14.8			(60.2	)		75.1
Total revenues	$	1,249.8		$	1,214.7		$	3,530.3		$	3,632.8
Operating income (loss) before interest expense and income taxes:
Commercial Lines:
Underwriting income	$	18.7		$	30.4		$	50.4		$	96.2
Net investment income		44.4			44.1			128.7			132.8
Other expense		(0.8	)		(0.4	)		(6.9	)		(1.9	)
Commercial Lines operating income		62.3			74.1			172.2			227.1
Personal Lines:
Underwriting income		43.0			28.8			104.5			45.4
Net investment income		19.5			19.6			56.3			59.0
Other income		1.7			1.8			0.9			4.3
Personal Lines operating income		64.2			50.2			161.7			108.7
Other:
Underwriting loss		(0.3	)		(0.4	)		(4.0	)		(1.0	)
Net investment income		3.7			5.1			9.9			16.8
Other expense		(1.5	)		(2.7	)		(5.4	)		(8.5	)
Other operating income		1.9			2.0			0.5			7.3
Operating income before interest expense and income taxes		128.4			126.3			334.4			343.1
Interest on debt		(9.8	)		(9.4	)		(28.6	)		(28.1	)
Operating income before income taxes		118.6			116.9			305.8			315.0
Non-operating items:
Net realized and unrealized investment gains (losses)		37.7			14.8			(60.2	)		75.1
Loss from repayment of debt		(6.1	)		—			(6.2	)		—
Other non-operating		(1.6	)		(1.4	)		(1.6	)		(1.4	)
Income from continuing operations before income taxes	$	148.6		$	130.3		$	237.8		$	388.7

The following table provides identifiable assets for the Company’s business segments and discontinued operations:

(in millions)	September 30, 2020		December 31, 2019
Property and Casualty Companies	$	13,284.3	$	12,387.7
Assets of discontinued businesses		109.5		102.8
Total	$	13,393.8	$	12,490.5

The Company reviews the assets of its Property and Casualty Companies collectively and does not allocate them between the Commercial Lines, Personal Lines and Other segments.

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10. Stock-based Compensation

As of September 30, 2020, there were 2,764,629 shares and 2,341,331 shares available for grant under The Hanover Insurance Group 2014 Long-Term Incentive Plan and The Hanover Insurance Group 2014 Employee Stock Purchase Plan, respectively.

Compensation cost for the Company’s stock-based awards and the related tax benefits were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2020			2019			2020			2019
Stock-based compensation expense	$	4.9		$	4.1		$	14.4		$	12.7
Tax benefit		(1.0	)		(0.8	)		(3.0	)		(2.6	)
Stock-based compensation expense, net of taxes	$	3.9		$	3.3		$	11.4		$	10.1

Stock Options

Information on the Company’s stock option activity for the nine months ended September 30, 2020 and 2019 is summarized below.

	Nine Months Ended September 30,
	2020					2019
(in whole shares and dollars)	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, beginning of period		1,121,559		$	87.88		1,099,076		$	85.75
Granted		242,598			118.34		232,568			95.05
Exercised		(48,877	)		76.68		(172,551	)		70.40
Forfeited or cancelled		(27,158	)		112.18		(38,729	)		107.34
Outstanding, end of period		1,288,122			93.53		1,120,364			89.30

Restricted Stock Units

The Company currently issues time-based, market-based and performance-based restricted stock units to eligible employees, all of which generally vest after 3 years of continued employment.

The following tables summarize activity information about employee restricted stock units:

	Nine Months Ended September 30,
	2020					2019
(in whole shares and dollars)	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Time-based restricted stock units:
Outstanding, beginning of period		335,166		$	109.55		332,481		$	97.28
Granted		142,582			117.72		146,715			117.71
Vested		(87,963	)		92.61		(107,829	)		84.17
Forfeited		(26,024	)		116.00		(33,156	)		104.80
Outstanding, end of period		363,761			116.38		338,211			109.59
Performance-based and market-based restricted stock units:
Outstanding, beginning of period		86,252		$	110.70		69,838		$	95.58
Granted		54,415			105.10		42,119			117.09
Vested		(40,601	)		80.92		(14,118	)		84.39
Forfeited		(3,023	)		124.78		(2,670	)		135.92
Outstanding, end of period		97,043			119.59		95,169			105.63

In the first nine months of 2020 and 2019, the Company granted market-based awards totaling 34,911 and 23,924, respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity. The vesting of these stock units is based on the relative total shareholder return (“TSR”) of the Company. This metric is generally based on relative TSR for a three-year period as compared to a pre-selected group of property and casualty companies. The fair value of market-based awards was estimated at the date of grant using a valuation model. These units have the potential to range from 0% to 150% of the shares disclosed. Included in the amount granted above in 2020 and 2019 are 13,532 shares and 5,820 shares, respectively, related to market-based awards that achieved a payout in excess of 100%. These awards vested in the first quarters of 2020 and 2019, respectively.

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The Company also granted performance-based restricted stock units in 2020 and 2019, totaling 19,504 and 18,195, respectively, which are based upon the Company’s achievement of return on equity objectives. These units have the potential to range from 0% to 150% of the shares disclosed, which varies based on grant year and individual participation level. Increases above the 100% target level are reflected as granted in the period in which performance-based stock unit goals are achieved. Decreases below the 100% target level are reflected as forfeited. There were no performance-based awards that vested in 2020 or 2019.

11. Earnings Per Share and Shareholders’ Equity Transactions

The following table provides weighted average share information used in the calculation of the Company’s basic and diluted earnings per share:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in millions, except per share data)	2020			2019			2020			2019
Basic shares used in the calculation of earnings per share		37.7			39.6			38.0			40.3
Dilutive effect of securities:
Employee stock options		0.1			0.3			0.2			0.3
Non-vested stock grants		0.2			0.3			0.2			0.3
Diluted shares used in the calculation of earnings per share		38.0			40.2			38.4			40.9
Per share effect of dilutive securities on income from continuing operations	$	(0.03	)	$	(0.04	)	$	(0.05	)	$	(0.11	)
Per share effect of dilutive securities on net income	$	(0.02	)	$	(0.04	)	$	(0.06	)	$	(0.11	)

Diluted earnings per share for the three months ended September 30, 2020 and 2019 excludes 0.8 million and 0.2 million shares, respectively, issuable under the Company’s stock compensation plans because their effect would be antidilutive. Diluted earnings per share for the nine months ended September 30, 2020 and 2019 excludes 0.6 million and 0.2 million, respectively, of common shares issuable under the Company’s stock compensation plans because their effect would be antidilutive.

The Board of Directors authorized a stock repurchase program which provides for aggregate repurchases of up to $900 million. Under the repurchase authorization, the Company may repurchase, from time to time, common stock in amounts, at prices and at such times as the Company deems appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. The Company is not required to purchase any specific number of shares or to make purchases by any certain date under this program. On December 9, 2019, pursuant to the terms of an accelerated share repurchase (“ASR”) agreement (the “December 2019 ASR”) the Company paid $150.0 million in exchange for an initial delivery of approximately 0.9 million shares of common stock. On February 26, 2020, the Company received approximately 0.2 million of its common stock shares as final settlement of shares repurchased under the December 2019 ASR. As discussed further in Note 14 - "Subsequent Events", the Company entered into a new ASR agreement on October 27, 2020.

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12. Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses

Reserve Rollforward and Prior Year Development

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 loss adjustment expenses (“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 “prior years’ loss reserves”. 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, unless otherwise indicated.

The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.

	Nine Months Ended
	September 30,
(in millions)	2020			2019
Gross loss and LAE reserves, beginning of period	$	5,654.4		$	5,304.1
Reinsurance recoverable on unpaid losses		1,574.8			1,472.6
Net loss and LAE reserves, beginning of period		4,079.6			3,831.5
Net incurred losses and LAE in respect of losses occurring in:
Current year		2,176.0			2,142.9
Prior years		(26.1	)		(20.3	)
Total incurred losses and LAE		2,149.9			2,122.6
Net payments of losses and LAE in respect of losses occurring in:
Current year		863.5			889.2
Prior years		1,028.7			1,043.4
Total payments		1,892.2			1,932.6
Net reserve for losses and LAE, end of period		4,337.3			4,021.5
Reinsurance recoverable on unpaid losses		1,608.4			1,529.0
Gross reserve for losses and LAE, end of period	$	5,945.7		$	5,550.5

As a result of continuing trends in the Company’s business, reserves including catastrophes have been re-estimated for all prior accident years and were decreased by $26.1 million and $20.3 million in 2020 and 2019, respectively.

2020

For the nine months ended September 30, 2020, net favorable loss and LAE development was $26.1 million primarily as a result of net favorable Commercial Lines development of $30.9 million, partially offset by unfavorable development in the Other Segment. Commercial Lines favorable development was primarily due to lower than expected losses of $25.6 million within the workers’ compensation line in accident years 2016 through 2019 and, within other commercial lines, $15.3 million within the marine line primarily in accident years 2017 through 2019, partially offset by higher than expected losses of $10.6 million in the commercial automobile line driven by higher bodily injury and personal injury protection losses, primarily in accident years 2017 through 2019. In addition, Other Segment unfavorable development was due to the Company’s run-off voluntary assumed property and casualty reinsurance pools business primarily based on an updated third-party actuarial study received in the first quarter of 2020 for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool that consists of asbestos and environmental exposures.

2019

For the nine months ended September 30, 2019, net favorable loss and LAE development was $20.3 million, primarily as a result of favorable catastrophe development due to lower than expected losses related to the 2017 and 2018 California wildfires, including the sale of subrogation rights on certain California wildfire losses, and lower than expected losses related to the 2018 hurricanes. For non-catastrophe loss and LAE development, lower than expected losses of $15.7 million in the workers’ compensation line were substantially offset by higher than expected losses of $13.7 million in the personal automobile line. Within other commercial lines, lower than expected losses in the marine and commercial miscellaneous property lines were partially offset by higher than expected losses in the general liability lines.

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13. Commitments and Contingencies

Legal Proceedings

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, examination or investigation, and its ultimate liability, if any, from such actions 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.

Residual Markets

The Company is required to participate in residual markets in various states, which generally pertain to high risk insureds, disrupted markets or lines of business or geographic areas where rates are regarded as excessive. The results of the residual markets are not subject to the predictability associated with the Company’s own managed business, and are significant to both the personal and commercial automobile lines of business.

14. Subsequent Events

On October 27, 2020, the Company entered into a new ASR agreement (the “October 2020 ASR”), pursuant to which THG will pay $100.0 million in exchange for shares of its common stock. Initial share delivery, of approximately 80% of the total number of shares expected to be received under this agreement, is scheduled for October 29, 2020. Final settlement of the October 2020 ASR is expected to occur not later than February 3, 2021.

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PART I

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Introduction		28
Executive Overview		28
Description of Operating Segments		29
Results of Operations - Consolidated		29
Results of Operations - Segments		31
Investments		38
Other Items		42
Income Taxes		43
Critical Accounting Estimates		44
Statutory Surplus of Insurance Subsidiaries		45
Liquidity and Capital Resources		45
Off - Balance Sheet Arrangements		47
Contingencies and Regulatory Matters		47
Risks and Forward - Looking Statements		47

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Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist readers in understanding the interim consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and its subsidiaries (“THG”). Consolidated results of operations and financial condition are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2020.

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 other insurance and non-insurance subsidiaries. Our results of operations also include the results of our discontinued operations, consisting of our former accident and health and life insurance businesses, as well as our former Chaucer business.

Executive Overview

Business operations consist of three operating segments: Commercial Lines, Personal Lines and Other.

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 nine months ended September 30, 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 September of 2020. However, we continue to believe that the Pandemic’s economic impacts on our 2020 results should be manageable. 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).

During the nine months ended September 30, 2020, our net income was $194.1 million, compared to $315.3 million for the nine months ended September 30, 2019, a decrease of $121.2 million, primarily due to changes in the fair value of equity securities and, to a lesser extent, impairment losses on fixed income securities.

Operating income before interest expense and income taxes (a non-GAAP financial measure; see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $334.4 million for the nine months ended September 30, 2020, compared to $343.1 million for the nine months ended September 30, 2019, a decrease of $8.7 million. This decrease was primarily due to higher catastrophe losses and, to a lesser extent, lower net investment income. These items were partially offset by lower non-catastrophe current accident year losses, primarily in our personal and commercial automobile lines, and a non-recurring premium tax benefit of $13.8 million due to a Michigan refund related to tax years 2014 through 2016. The lower current accident year losses were primarily due to a reduced level of economic activity as a result of the Pandemic.

Pre-tax catastrophe losses were $251.6 million for the nine months ended September 30, 2020, compared to $134.2 million during the same period of 2019. The increase of $117.4 million was primarily due to $38.2 million in property damages related to riots and civil unrest in several major cities across the country, as well as wind and hail storms throughout the Midwest and Southeast, and Hurricane Isaias. Net favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”) was $9.5 million for the nine months ended September 30, 2020, while development was insignificant overall for the nine months ended September 30, 2019.

Commercial Lines

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 continued investment in industry segmentation. Net premiums written increased 0.7% in the first nine months of 2020, compared to the same period in 2019. The modest premium growth during 2020 reflects a reduction in insured business activity as a result of the Pandemic.

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Underwriting results declined in the first nine months of 2020, primarily due to higher catastrophe losses, partially offset by lower non-catastrophe current accident year losses. The lower non-catastrophe current accident year losses in our specialty industrial property, commercial automobile, and marine lines were partially offset by reserve provisions for exposures related to the Pandemic and higher property losses in our commercial multiple peril line. The lower current accident year losses were primarily due to 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 the Pandemic, and the resulting economic downturn affecting our Commercial Lines businesses, there is an increased level of uncertainty in our ability to grow our business and maintain or improve our underwriting profitability in this environment.

Personal Lines

Personal Lines focuses on partnering with high quality, value-oriented agencies that deliver consultative selling to customers and stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and additional coverages, to address customers’ broader objectives). Approximately 85% of our policies in force have been issued to customers with multiple policies and/or coverages with us. We are focused on seeking profitable growth opportunities, building a distinctive position in the market in order to meet our customers’ needs and diversifying geographically. We continue to seek appropriate rate increases that meet or exceed underlying loss cost trends, subject to regulatory and competitive considerations. Due to the Pandemic, and the resulting economic downturn affecting our Personal Lines businesses, there is an increased level of uncertainty in our ability to grow our business and maintain or improve our underwriting profitability in this environment.

Net premiums written decreased by 0.5% in the first nine months of 2020, compared to the same period in 2019. During the second quarter of 2020, we returned approximately $30 million of premiums to our eligible personal automobile customers in all of our markets, providing financial relief during the Pandemic. Excluding the impact of the premium refund, net written premiums increased 1.6%. Underwriting results improved in the first nine months of 2020, primarily due to lower non-catastrophe current accident year losses in our personal automobile line, a favorable change in development of prior years’ loss reserves and a non-recurring premium tax benefit, partially offset by higher catastrophe losses. The lower personal automobile losses were due to fewer accidents and decreased claim activity resulting from fewer miles driven as a result of the Pandemic.

Description of Operating Segments

Primary business operations include insurance products and services currently provided through three operating segments: Commercial Lines, Personal Lines and Other. Commercial Lines includes commercial multiple peril, commercial automobile, workers’ compensation and other commercial coverages, such as management and professional liability, marine, Hanover Programs, specialty industrial and commercial property, monoline general liability and surety. Personal Lines includes personal automobile, homeowners and other personal coverages, such as umbrella. Included in the “Other” segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds, and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to our former life insurance employees and agents; and a run-off voluntary property and casualty pools business. We present the separate financial information of each segment consistent with the manner in which our chief operating decision maker evaluates results in deciding how to allocate resources and in assessing performance.

We report interest expense on debt separately from the earnings of our operating segments. This consists primarily of interest on our senior and subordinated debentures.

Results of Operations – Consolidated

Consolidated net income for both the three months ended September 30, 2020 and the three months ended September 30, 2019 was $118.9 million. Net income remained flat year-over-year primarily due to consistent operating income combined with offsetting fluctuations in non-operating and discontinued items. After-tax net realized and unrealized investment gains increased $17.2 million in the third quarter of 2020 as compared to the third quarter of 2019. This was offset by the net loss from repayment of debt of $6.1 million in the third quarter of 2020, as well as the absence, in 2020, of Chaucer related earnings and tax benefits totaling $12.9 million.

Consolidated net income for the nine months ended September 30, 2020 was $194.1 million, compared to $315.3 million for the nine months ended September 30, 2019, a decrease of $121.2 million. The year-over-year comparison of consolidated net income was primarily affected by an increase in after-tax net realized and unrealized investment losses of approximately $110.4 million, primarily related to the change in fair value of equity securities and, to a lesser extent, an increase in impairment losses on investments. In addition, lower operating income in 2020 as compared to 2019 and the aforementioned loss on the repayment of debt contributed to the change. Operating income decreased primarily as a result of higher catastrophe losses and, to a lesser extent, lower net investment income. These decreases in operating income were partially offset by lower non-catastrophe current accident year losses, as well as a non-recurring premium tax benefit received in the second quarter of 2020.

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The following table reflects operating income before interest expense and income taxes for each operating segment and a reconciliation to consolidated net income from operating income before interest expense and income taxes (a non-GAAP measure).

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in millions)	2020			2019				2020			2019
Operating income before interest expense and income taxes:
Commercial Lines	$	62.3		$	74.1			$	172.2		$	227.1
Personal Lines		64.2			50.2				161.7			108.7
Other		1.9			2.0				0.5			7.3
Operating income before interest expense and income taxes		128.4			126.3				334.4			343.1
Interest expense on debt		(9.8	)		(9.4	)			(28.6	)		(28.1	)
Operating income before income taxes		118.6			116.9				305.8			315.0
Income tax expense on operating income		(25.1	)		(23.9	)			(62.8	)		(63.6	)
Operating income		93.5			93.0				243.0			251.4
Non-operating items:
Net realized and unrealized investment gains (losses)		37.7			14.8				(60.2	)		75.1
Net loss from repayment of debt		(6.1	)		—				(6.2	)		—
Effect of new tax regulations on Chaucer gain on sale		—			4.4				—			(1.2	)
Other non-operating		(1.6	)		(1.4	)			(1.6	)		(1.4	)
Income tax benefit (expense) on non-operating items		(4.0	)		0.4				21.1			(5.1	)
Income from continuing operations, net of taxes		119.5			111.2				196.1			318.8
Discontinued operations (net of taxes):
Sale of Chaucer business		—			6.4				—			(2.6	)
Income from Chaucer business		—			2.1				—			1.6
Loss from discontinued life businesses		(0.6	)		(0.8	)			(2.0	)		(2.5	)
Net income	$	118.9		$	118.9			$	194.1		$	315.3

Non-GAAP Financial Measures

In addition to consolidated net income, discussed above, we assess our financial performance based upon pre-tax “operating income,” and we assess the operating performance of each of our three operating segments based upon the pre-tax operating income (loss) generated by each segment. As reflected in the table above, operating income before interest and taxes excludes interest expense on debt and certain other items which we believe are not indicative of our core operations, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before interest and taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before interest and taxes are important components in understanding and assessing our overall financial performance, we believe a discussion of operating income before interest and taxes enhances an investor’s understanding of our results of operations by highlighting net income attributable to the core operations of the business. However, operating income before interest and taxes, which is a non-GAAP measure, should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.

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.

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Results of Operations – Segments

The following is our discussion and analysis of the results of operations by business segment. The operating results are presented before interest expense, 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.

The following table summarizes the results of operations for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2020		2019		2020		2019
Operating revenues
Net premiums written	$	1,268.5	$	1,242.9	$	3,486.4	$	3,478.7
Net premiums earned		1,135.4	$	1,124.1		3,373.4	$	3,330.2
Net investment income		67.6		68.8		194.9		208.6
Other income		9.1		7.0		22.2		18.9
Total operating revenues		1,212.1		1,199.9		3,590.5		3,557.7
Losses and operating expenses
Losses and LAE		709.0		705.3		2,149.2		2,122.6
Amortization of deferred acquisition costs		237.7		232.8		711.9		692.8
Other operating expenses		137.0		135.5		395.0		399.2
Total losses and operating expenses		1,083.7		1,073.6		3,256.1		3,214.6
Operating income before interest expense and income taxes	$	128.4	$	126.3	$	334.4	$	343.1

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Operating income before interest expense and income taxes was $128.4 million in the three months ended September 30, 2020, compared to $126.3 million in the three months ended September 30, 2019, an increase of $2.1 million. This increase was primarily due to lower non-catastrophe current accident year losses in our personal automobile line, partially offset by higher catastrophe losses.

Net premiums written increased $25.6 million in the three months ended September 30, 2020, compared to the three months ended September 30, 2019, due to growth in both our Commercial and Personal Lines segments.

Production and Underwriting Results

The following tables summarize premiums written on a gross and net basis, net premiums earned and loss (including catastrophe losses), LAE, expense and combined ratios for the Commercial Lines and Personal Lines segments. Loss, LAE, catastrophe loss and combined ratios shown below include prior year reserve development. These items are not meaningful for our Other segment.

	Three Months Ended September 30, 2020
(dollars in millions)	Gross Premiums Written		Net Premiums Written		Net Premiums Earned		Catastrophe Loss Ratios		Loss & LAE Ratios		Expense Ratios		Combined Ratios
Commercial Lines	$	884.7	$	760.5	$	665.1		5.1		62.4		34.5		96.9
Personal Lines		521.4		508.0		470.3		6.9		62.5		27.9		90.4
Total	$	1,406.1	$	1,268.5	$	1,135.4		5.8		62.4		31.8		94.2

	Three Months Ended September 30, 2019
(dollars in millions)	Gross Premiums Written		Net Premiums Written		Net Premiums Earned		Catastrophe Loss Ratios		Loss & LAE Ratios		Expense Ratios		Combined Ratios
Commercial Lines	$	858.2	$	746.4	$	663.5		3.3		60.5		34.7		95.2
Personal Lines		527.6		496.5		460.6		2.9		65.9		27.4		93.3
Total	$	1,385.8	$	1,242.9	$	1,124.1		3.1		62.7		31.7		94.4

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The following table summarizes 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.

	Three Months Ended September 30,
	2020						2019
(dollars in millions)	Net Premiums Written		Loss & LAE Ratios		Catastrophe Loss Ratios		Net Premiums Written		Loss & LAE Ratios		Catastrophe Loss Ratios
Commercial Lines:
Commercial multiple peril	$	273.4		68.5		6.6	$	265.2		63.7		7.4
Commercial automobile		88.8		67.5		0.7		92.4		69.2		0.4
Workers’ compensation		79.0		48.4		—		82.7		54.9		—
Other commercial		319.3		59.7		6.5		306.1		56.9		1.9
Total Commercial Lines	$	760.5		62.4		5.1	$	746.4		60.5		3.3
Personal Lines:
Personal automobile	$	311.6		61.2		1.1	$	308.2		71.9		0.5
Homeowners		179.7		67.8		18.0		174.3		56.5		7.1
Other personal		16.7		29.1		1.4		14.0		42.0		5.0
Total Personal Lines	$	508.0		62.5		6.9	$	496.5		65.9		2.9

The following table summarizes GAAP underwriting results for the Commercial Lines, Personal Lines and Other segments and reconciles them to operating income before interest expense and income taxes.

	Three Months Ended September 30,
	2020												2019
(in millions)	Commercial Lines			Personal Lines			Other			Total			Commercial Lines			Personal Lines			Other			Total
Underwriting profit (loss), excluding prior year reserve development and catastrophes	$	48.4		$	76.3		$	—		$	124.7		$	46.8		$	47.6		$	(0.1	)	$	94.3
Prior year favorable (unfavorable) loss and LAE reserve development on non-catastrophe losses		3.9			(1.0	)		(0.3	)		2.6			5.6			(5.6	)		(0.3	)		(0.3	)
Prior year favorable (unfavorable) catastrophe development		8.9			0.7			—			9.6			(0.7	)		0.7			—			—
Current year catastrophe losses		(42.5	)		(33.0	)		—			(75.5	)		(21.3	)		(13.9	)		—			(35.2	)
Underwriting profit (loss)		18.7			43.0			(0.3	)		61.4			30.4			28.8			(0.4	)		58.8
Net investment income		44.4			19.5			3.7			67.6			44.1			19.6			5.1			68.8
Fees and other income		3.8			3.5			1.8			9.1			2.7			3.1			1.2			7.0
Other operating expenses		(4.6	)		(1.8	)		(3.3	)		(9.7	)		(3.1	)		(1.3	)		(3.9	)		(8.3	)
Operating income before interest expense and income taxes	$	62.3		$	64.2		$	1.9		$	128.4		$	74.1		$	50.2		$	2.0		$	126.3

Commercial Lines

Commercial Lines net premiums written were $760.5 million in the three months ended September 30, 2020, compared to $746.4 million in the three months ended September 30, 2019. This $14.1 million increase was primarily driven by pricing increases and strong retention.

Commercial Lines underwriting profit for the three months ended September 30, 2020 was $18.7 million, compared to $30.4 million for the three months ended September 30, 2019, a decrease of $11.7 million. Catastrophe losses for the three months ended September 30, 2020 were $33.6 million, compared to $22.0 million for the three months ended September 30, 2019. The $11.6 million increase was primarily due to wildfires on the West Coast and Hurricane Isaias. Favorable development on prior year’s loss reserves for the three months ended September 30, 2020 was $3.9 million, compared to $5.6 million for the three months ended September 30, 2019, an unfavorable change of $1.7 million.

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Commercial Lines current accident year underwriting profit, excluding catastrophes, was $48.4 million for the three months ended September 30, 2020, compared to $46.8 million for the three months ended September 30, 2019. This $1.6 million increase was primarily driven by lower non-catastrophe current accident year losses. The lower non-catastrophe current accident year losses were due to lower property loss activity in our other commercial and commercial automobile lines, partially offset by higher property losses in our commercial multiple peril line.

We continue to manage underwriting performance through increased rates, pricing segmentation, specific underwriting actions and targeted new business growth. Our ability to achieve overall rate increases is affected by many factors, including regulatory activity and the current competitive pricing environment, particularly within the workers’ compensation line. Due to the Pandemic and the resulting economic downturn affecting our Commercial Lines segment, there is an increased level of uncertainty in our ability to grow our business and 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 continued moderation in claims volumes due to a substantial reduction in business activity. For example, less traffic and congestion on the roads may result in fewer accidents involving our insureds in our commercial automobile line. In addition, a reduction in our insureds’ underlying business activity, as well as the inability of certain businesses to fully restart operations and recover from the economic impacts of the prolonged stay-at-home orders, may result in a significant reduction in our future commercial multiple peril, workers' compensation and general liability premium levels.

Personal Lines

Personal Lines net premiums written were $508.0 million in the three months ended September 30, 2020, compared to $496.5 million in the three months ended September 30, 2019, an increase of $11.5 million, primarily driven by pricing increases.

Net premiums written in the personal automobile line of business for the three months ended September 30, 2020 were $311.6 million, compared to $308.2 million for the three months ended September 30, 2019, an increase of $3.4 million. Personal automobile policies in force decreased by 1.7%. Net premiums written in the homeowners line of business for the three months ended September 30, 2020 were $179.7 million, compared to $174.3 million for the three months ended September 30, 2019, an increase of $5.4 million. Homeowners policies in force decreased by 0.2%.

Personal Lines underwriting profit for the three months ended September 30, 2020 was $43.0 million, compared to $28.8 million for the three months ended September 30, 2019, an increase of $14.2 million. Catastrophe losses for the three months ended September 30, 2020 were $32.3 million, compared to $13.2 million for the three months ended September 30, 2019, an increase of $19.1 million, primarily due to Hurricane Isaias. Unfavorable development on prior year’s loss reserves for the three months ended September 30, 2020 was $1.0 million, compared to $5.6 million for the three months ended September 30, 2019, a favorable change of $4.6 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $76.3 million for the three months ended September 30, 2020, compared to $47.6 million for the three months ended September 30, 2019. This $28.7 million increase was primarily due to lower current accident year losses in our personal automobile line. The lower personal automobile losses were due to fewer accidents and decreased claim activity resulting from fewer miles driven 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 and legal activity and 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 the Pandemic and the resulting economic downturn affecting our Personal Lines segment, there is an increased level of uncertainty in our ability to retain or grow our business and 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.

In addition, in 2019, Michigan enacted major reforms of its current system governing personal and commercial automobile insurance, especially related to automobile Personal Injury Protection (“PIP”) coverage. We believe that we are effectively executing the transition and will be able to navigate this market successfully. As of September 30, 2020, the net impact of these reforms was not significant to our total net premiums written and underwriting profit. For the full year 2019, net premiums written that were attributable to PIP coverage in Michigan were $159.7 million, or 3.5% of our total full year 2019 net premiums written, while Michigan personal automobile net premiums written represented 12% of THG’s total full year 2019 net premiums written. For more information, please refer to “Risk Factors – Michigan PIP Reform” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.

Other

Our Other segment had operating income of $1.9 million for the three months ended September 30, 2020, consistent with $2.0 million for the three months ended September 30, 2019.

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Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Operating income before interest expense and income taxes was $334.4 million in the nine months ended September 30, 2020, compared to $343.1 million in the nine months ended September 30, 2019, a decrease of $8.7 million. This decrease was primarily due to higher catastrophe losses and lower net investment income. These items were partially offset by lower non-catastrophe current accident year losses primarily in our personal and commercial automobile lines and a non-recurring premium tax benefit. The lower current accident year losses were primarily due to a reduced level of economic activity as a result of the Pandemic. The increase in catastrophe losses was primarily due to property damages related to riots and civil unrest in several major cities across the country, wind and hailstorms throughout the Midwest and Southeast, and Hurricane Isaias.

Net premiums written increased by $7.7 million in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. Premiums grew during the period in both our Commercial and Personal Line segments, partially offset by the personal automobile premium refund of approximately $30 million in the second quarter.

Production and Underwriting Results

	Nine Months Ended September 30, 2020
(dollars in millions)	Gross Premiums Written		Net Premiums Written		Net Premiums Earned		Catastrophe Loss Ratios		Loss & LAE Ratios		Expense Ratios		Combined Ratios
Commercial Lines	$	2,441.6	$	2,083.0	$	1,999.6		6.1		62.9		34.3		97.2
Personal Lines		1,477.4		1,403.4		1,373.8		9.4		64.6		27.4		92.0
Total	$	3,919.0	$	3,486.4	$	3,373.4		7.5		63.7		31.5		95.2

	Nine Months Ended September 30, 2019
(dollars in millions)	Gross Premiums Written		Net Premiums Written		Net Premiums Earned		Catastrophe Loss Ratios		Loss & LAE Ratios		Expense Ratios		Combined Ratios
Commercial Lines	$	2,387.2	$	2,068.5	$	1,974.7		2.8		60.3		34.7		95.0
Personal Lines		1,496.4		1,410.2		1,355.5		5.8		68.7		27.4		96.1
Total	$	3,883.6	$	3,478.7	$	3,330.2		4.0		63.7		31.7		95.4

	Nine Months Ended September 30,
	2020						2019
(dollars in millions)	Net Premiums Written		Loss & LAE Ratios		Catastrophe Loss Ratios		Net Premiums Written		Loss & LAE Ratios		Catastrophe Loss Ratios
Commercial Lines:
Commercial multiple peril	$	712.6		72.1		12.0	$	699.5		61.6		6.3
Commercial automobile		256.4		68.3		0.6		256.1		71.5		0.5
Workers’ compensation		241.1		50.1		—		254.7		54.1		—
Other commercial		872.9		57.4		4.7		858.2		57.5		1.5
Total Commercial Lines	$	2,083.0		62.9		6.1	$	2,068.5		60.3		2.8
Personal Lines:
Personal automobile	$	867.8		60.9		1.2	$	895.3		71.9		0.5
Homeowners		491.0		74.1		24.6		477.0		64.7		15.8
Other personal		44.6		29.4		2.7		37.9		43.4		3.5
Total Personal Lines	$	1,403.4		64.6		9.4	$	1,410.2		68.7		5.8

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The following table summarizes GAAP underwriting results for the Commercial Lines, Personal Lines and Other segments and reconciles them to operating income before interest expense and income taxes.

	Nine Months Ended September 30,
	2020												2019
(in millions)	Commercial Lines			Personal Lines			Other			Total			Commercial Lines			Personal Lines			Other			Total
Underwriting profit (loss), excluding prior year reserve development and catastrophes	$	159.9		$	233.2		$	(0.1	)	$	393.0		$	134.5		$	140.6		$	(0.1	)	$	275.0
Prior year favorable (unfavorable) loss and LAE reserve development on non-catastrophe losses		12.7			0.7			(3.9	)		9.5			17.1			(16.4	)		(0.9	)		(0.2	)
Prior year favorable (unfavorable) catastrophe development		18.2			(1.6	)		—			16.6			18.1			2.4			—			20.5
Current year catastrophe losses		(140.4	)		(127.8	)		—			(268.2	)		(73.5	)		(81.2	)		—			(154.7	)
Underwriting profit (loss)		50.4			104.5			(4.0	)		150.9			96.2			45.4			(1.0	)		140.6
Net investment income		128.7			56.3			9.9			194.9			132.8			59.0			16.8			208.6
Fees and other income		8.6			8.0			5.6			22.2			6.7			8.6			3.6			18.9
Other operating expenses		(15.5	)		(7.1	)		(11.0	)		(33.6	)		(8.6	)		(4.3	)		(12.1	)		(25.0	)
Operating income before interest expense and income taxes	$	172.2		$	161.7		$	0.5		$	334.4		$	227.1		$	108.7		$	7.3		$	343.1

Commercial Lines

Commercial Lines net premiums written were $2,083.0 million in the nine months ended September 30, 2020, compared to $2,068.5 million in the nine months ended September 30, 2019. The modest premium growth during 2020 reflects a reduction in insured business activity as a result of the Pandemic.

Commercial Lines underwriting profit for the nine months ended September 30, 2020 was $50.4 million, compared to $96.2 million for the nine months ended September 30, 2019, a decrease of $45.8 million. Catastrophe losses for the nine months ended September 30, 2020 were $122.2 million, compared to $55.4 million for the nine months ended September 30, 2019. The $66.8 million increase was due to property damages related to the riots and civil unrest in several major cities across the country, wildfires on the West Coast, and Hurricane Isaias. Favorable development on prior years’ loss reserves for the nine months ended September 30, 2020 was $12.7 million, compared to $17.1 million for the nine months ended September 30, 2019, an unfavorable change of $4.4 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $159.9 million for the nine months ended September 30, 2020, compared to $134.5 million for the nine months ended September 30, 2019, an increase of $25.4 million, primarily due to lower non-catastrophe current accident year losses. The lower current year non-catastrophe losses were primarily due to lower large property loss activity in our specialty industrial property and marine lines, and lower losses in our commercial automobile line, partially offset by reserve provisions for exposures due to the Pandemic and higher property losses in our commercial multiple peril line. The reserve provisions for exposures due to the Pandemic of approximately $19 million were primarily reflected in our workers’ compensation, healthcare, commercial multiple peril, management and professional liability, and surety lines. The lower current accident year losses were primarily due to a reduced level of economic activity as a result of the Pandemic.

Personal Lines

Personal Lines net premiums written were $1,403.4 million in the nine months ended September 30, 2020, compared to $1,410.2 million in the nine months ended September 30, 2019, a decrease of $6.8 million. During the second quarter of 2020, we returned approximately $30 million of premiums to our eligible Personal Lines customers in all of our markets, providing financial relief during the Pandemic. Excluding the impact of the premium refund, net written premiums would have increased 1.6%.

Personal Lines underwriting profit for the nine months ended September 30, 2020 was $104.5 million, compared to $45.4 million for the nine months ended September 30, 2019, an increase of $59.1 million. Catastrophe losses for the nine months ended September 30, 2020 were $129.4 million, compared to $78.8 million for the nine months ended September 30, 2019. The increase of $50.6 million was primarily due to several wind and hailstorms throughout the Midwest and Southeast and Hurricane Isaias. Favorable development on prior years’ loss reserves for the nine months ended September 30, 2020 was $0.7 million, compared to unfavorable development of $16.4 million for the nine months ended September 30, 2019, a favorable change of $17.1 million.

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Personal Lines current accident year underwriting profit, excluding catastrophes, was $233.2 million in the nine months ended September 30, 2020, compared to $140.6 million in the nine months ended September 30, 2019. This $92.6 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.

Other

Our Other segment had operating income of $0.5 million for the nine months ended September 30, 2020, compared to $7.3 million for the nine months ended September 30, 2019. The decline of $6.8 million was primarily due to lower net investment income as a result of the deployment of cash in the prior year.

Reserve for Losses and Loss Adjustment Expenses

The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.

	Nine Months Ended
	September 30,
(in millions)	2020			2019
Gross loss and LAE reserves, beginning of period	$	5,654.4		$	5,304.1
Reinsurance recoverable on unpaid losses		1,574.8			1,472.6
Net loss and LAE reserves, beginning of period		4,079.6			3,831.5
Net incurred losses and LAE in respect of losses occurring in:
Current year (1)		2,176.0			2,142.9
Prior year non-catastrophe loss development		(9.5	)		0.2
Prior year catastrophe development		(16.6	)		(20.5	)
Total incurred losses and LAE		2,149.9			2,122.6
Net payments of losses and LAE in respect of losses occurring in:
Current year		863.5			889.2
Prior years		1,028.7			1,043.4
Total payments		1,892.2			1,932.6
Net reserve for losses and LAE, end of period		4,337.3			4,021.5
Reinsurance recoverable on unpaid losses		1,608.4			1,529.0
Gross reserve for losses and LAE, end of period	$	5,945.7		$	5,550.5

(1)	The nine months ended September 30, 2020 includes $0.7 million of non-operating expense.

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The table below summarizes the gross reserve for losses and LAE by line of business.

	September 30,		December 31,
(in millions)	2020		2019
Commercial multiple peril	$	1,220.3	$	1,122.0
Workers’ compensation		696.1		698.2
Commercial automobile		443.2		427.0
Other commercial lines:
Hanover Programs		544.1		512.9
Management and professional liability		325.6		281.5
Monoline general liability		275.9		265.5
Umbrella		207.6		197.9
Marine		96.8		95.9
Surety		91.0		76.9
Specialty industrial and commercial property		83.9		71.1
Other lines		33.1		28.4
Total other commercial lines		1,658.0		1,530.1
Total Commercial Lines		4,017.6		3,777.3
Personal automobile		1,644.4		1,645.1
Homeowners and other personal		243.2		194.3
Total Personal Lines		1,887.6		1,839.4
Total Other Segment		40.5		37.7
Total loss and LAE reserves	$	5,945.7	$	5,654.4

“Other commercial lines – Other lines” in the table above is primarily comprised of fidelity and crime lines of business. Loss and LAE reserves in our “Total Other Segment” relate to our run-off voluntary assumed property and casualty reinsurance pools business.

The following table summarizes prior year (favorable) unfavorable development for the periods indicated:

	Nine Months Ended September 30,
	2020									2019
(in millions)	Loss & LAE			Catastrophe			Total			Loss & LAE			Catastrophe			Total
Commercial Lines	$	(12.7	)	$	(18.2	)	$	(30.9	)	$	(17.1	)	$	(18.1	)	$	(35.2	)
Personal Lines		(0.7	)		1.6			0.9			16.4			(2.4	)		14.0
Other Segment		3.9		—				3.9			0.9		—				0.9
Total prior year (favorable) unfavorable development	$	(9.5	)	$	(16.6	)	$	(26.1	)	$	0.2		$	(20.5	)	$	(20.3	)

It is not possible to know whether the factors that affected loss reserves in the first nine months of 2020 will also occur in future periods. We encourage you to read our 2019 Annual Report on Form 10-K for more information about our reserving process and the judgments, uncertainties and risks associated therewith.

Catastrophe Loss Development

In the nine months ended September 30, 2020 and 2019, favorable catastrophe development was $16.6 million and $20.5 million, respectively. The favorable catastrophe development during the nine months ended September 30, 2020 was primarily due to lower than expected losses related to certain 2017, 2018, and 2019 windstorms, winter storms and hurricanes and the 2017 and 2018 California wildfires. The favorable catastrophe development during the nine months ended September 30, 2019 was primarily due to lower than expected losses related to the 2017 and 2018 California wildfires, including the sale of subrogation rights on certain California wildfire losses, and lower than expected losses related to the 2018 hurricanes.

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2020 Loss and LAE Development, excluding catastrophes

For the nine months ended September 30, 2020, net favorable loss and LAE development, excluding catastrophes, was $9.5 million. Lower than expected losses in the workers’ compensation line of $25.6 million in accident years 2016 through 2019 and other commercial lines of $11.1 million were partially offset by higher than expected losses in the commercial multiple peril line of $13.3 million, in accident years 2016, 2017 and 2019, and the commercial automobile line of $10.7 million, driven by higher bodily injury and personal injury protection losses, primarily in accident years 2017 through 2019. Within other commercial lines, lower than expected losses in our marine line of $13.1 million, in accident years 2017 through 2019, and specialty industrial property and commercial miscellaneous property lines were partially offset by higher than expected losses in the general liability lines. The adverse prior year development for our Other Segment was due to our run-off voluntary assumed property and casualty reinsurance pools business primarily based on an updated third-party actuarial study received in the first quarter of 2020 for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool that consists of asbestos and environmental exposures.

2019 Loss and LAE Development, excluding catastrophes

For the nine months ended September 30, 2019, net unfavorable loss and LAE development, excluding catastrophes, was $0.2 million. Higher than expected losses in the personal automobile line of $13.9 million, primarily in accident years 2016 and 2017, and the commercial automobile line were substantially offset by lower than expected losses in the workers’ compensation line of $15.7 million, primarily in accident years 2016 through 2018. Within other commercial lines, lower than expected losses in the marine and commercial miscellaneous property lines were partially offset by higher than expected losses in the general liability lines. In addition, Other Segment unfavorable development of $0.9 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.

Reinsurance Recoverables

Reinsurance recoverables were $1,841.1 million and $1,814.0 million at September 30, 2020 and December 31, 2019, respectively, of which $76.0 million and $89.8 million represent billed recoverables. A reinsurance recoverable is billed after an eligible reinsured claim is paid by an insurer. Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $33.7 million and $29.2 million at September 30, 2020 and December 31, 2019, respectively, and billed non-MCCA reinsurance recoverables totaled $42.3 million and $60.6 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, $2.2 million of the billed non-MCCA recoverables were outstanding greater than 90 days, whereas at December 31, 2019, there were no balances outstanding greater than 90 days.

Investments

Investment Results

Net investment income before income taxes was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2020			2019			2020			2019
Fixed maturities	$	55.3		$	58.1		$	167.7		$	173.9
Mortgage loans		4.5			4.1			13.1			12.0
Equity securities		3.4			4.0			10.8			11.6
Limited partnerships		6.0			3.8			8.0			13.1
Other investments		0.7			1.0			2.4			4.2
Investment expenses		(2.3	)		(2.2	)		(7.1	)		(6.2	)
Net investment income	$	67.6		$	68.8		$	194.9		$	208.6
Earned yield, fixed maturities		3.26	%		3.55	%		3.38	%		3.57	%
Earned yield, total portfolio		3.37	%		3.57	%		3.32	%		3.62	%

The decrease in net investment income for the three months ended September 30, 2020 was primarily due to the impact of lower new money yields and the deployment of cash during 2019 for accelerated share repurchases and special dividends. These decreases were partially offset by higher partnership income and the continued investment of operational cash flows. The decrease in net investment income for the nine months ended September 30, 2020 was primarily due to the deployment of cash during 2019 for accelerated share repurchases and special dividends, the impact of lower new money yields and lower partnership income. These decreases were partially offset by the continued investment of operational cash flows. We expect average fixed income yields to continue to decline as new money rates remain lower than our embedded book yield.

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Investment Portfolio

We held cash and investment assets diversified across several asset classes, as follows:

	September 30, 2020					December 31, 2019
(dollars in millions)	Carrying Value		% of Total Carrying Value			Carrying Value		% of Total Carrying Value
Fixed maturities, at fair value	$	7,473.0		83.4	%	$	6,687.1		81.4	%
Equity securities, at fair value		490.5		5.5			575.7		7.0
Mortgage and other loans		457.2		5.1			441.2		5.4
Other investments		306.7		3.4			292.0		3.6
Cash and cash equivalents		231.5		2.6			215.7		2.6
Total cash and investments	$	8,958.9		100.0	%	$	8,211.7		100.0	%

Cash and Investments

Total cash and investments increased $747.2 million, or 9.1%, for the nine months ended September 30, 2020, as compared to December 31, 2019, primarily due to operational cashflows, market value appreciation and the net proceeds from our senior debt issuance in August 2020. These increases were partially offset by the funding of financing activities, including our debt retirement, stock repurchases and dividend payments.

The following table provides information about the investment types of our fixed maturities portfolio:

	September 30, 2020
(in millions) Investment Type	Amortized Cost, net of Allowance for Credit Losses		Fair Value		Net Unrealized Gains		Change in Net Unrealized For the Year
U.S. Treasury and government agencies	$	353.9	$	373.6	$	19.7	$	11.9
Foreign government		4.2		4.7		0.5		0.1
Municipals:
Taxable		993.5		1,050.9		57.4		32.2
Tax-exempt		39.8		41.4		1.6		0.4
Corporate		3,807.1		4,121.7		314.6		156.9
Asset-backed:
Residential mortgage-backed		1,017.8		1,056.0		38.2		22.2
Commercial mortgage-backed		695.6		749.1		53.5		28.0
Asset-backed		72.8		75.6		2.8		1.7
Total fixed maturities	$	6,984.7	$	7,473.0	$	488.3	$	253.4

The increase in net unrealized gains on fixed maturities was primarily due to lower prevailing interest rates partially offset by wider credit spreads.

Amortized cost and fair value by rating category were as follows:

		September 30, 2020							December 31, 2019
(dollars in millions) NAIC Designation	Rating Agency Equivalent Designation	Amortized Cost, net of Allowance for Credit Losses		Fair Value		% of Total Fair Value			Amortized Cost		Fair Value		% of Total Fair Value
1	Aaa/Aa/A	$	4,656.1	$	4,966.1		66.4	%	$	4,373.0	$	4,522.7		67.6	%
2	Baa		2,043.7		2,209.1		29.6			1,785.2		1,857.6		27.8
3	Ba		157.0		163.3		2.2			160.2		167.6		2.6
4	B		120.4		125.9		1.7			130.2		135.2		2.0
5	Caa and lower		7.1		7.1		0.1			2.0		2.2		—
6	In or near default		0.4		1.5		—			1.6		1.8		—
Total fixed maturities		$	6,984.7	$	7,473.0		100.0	%	$	6,452.2	$	6,687.1		100.0	%

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Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 96% and 95% of the fixed maturity portfolio consisted of investment grade securities at September 30, 2020 and December 31, 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 investment portfolio primarily consists of fixed maturity securities whose fair value is susceptible to market risk, including interest rate changes. See also “Quantitative and Qualitative Disclosures about Market Risk” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2019 Annual Report on Form 10-K. Duration is a measurement used to quantify our inherent interest rate risk and analyze invested assets relative to our reserve liabilities.

The duration of our fixed maturity portfolio was as follows:

	September 30, 2020							December 31, 2019
(dollars in millions) Duration	Amortized Cost, net of Allowance for Credit Losses		Fair Value		% of Total Fair Value			Amortized Cost		Fair Value		% of Total Fair Value
0-2 years	$	1,595.8	$	1,650.2		22.1	%	$	1,253.1	$	1,276.0		19.1	%
2-4 years		1,624.9		1,733.8		23.2			1,811.9		1,872.9		28.0
4-6 years		1,701.5		1,867.6		25.0			1,841.2		1,917.0		28.7
6-8 years		1,060.7		1,174.2		15.7			1,113.9		1,177.2		17.6
8-10 years		743.7		773.4		10.3			316.2		322.2		4.8
10+ years		258.1		273.8		3.7			115.9		121.8		1.8
Total fixed maturities	$	6,984.7	$	7,473.0		100.0	%	$	6,452.2	$	6,687.1		100.0	%
Weighted average duration				4.7						4.3

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 4 – “Fair Value” in the Notes to Interim Consolidated Financial Statements.

Equity securities primarily consist of U.S. income-oriented large capitalization common stocks and developed market equity index exchange-traded funds.

Mortgage and other loans consist primarily of commercial mortgage loan participations which represent our interest in commercial mortgage loans originated by a third party. We share, on a pro-rata basis, in all related cash flows of the underlying mortgage loans, which are investment-grade quality and diversified by geographic area and property type.

Other investments consist primarily of our interest in corporate middle market and real estate limited partnerships. Corporate middle market limited partnerships may invest in senior or subordinated debt, preferred or common equity or a combination thereof, of middle market businesses. Real estate limited partnerships hold equity ownership positions in real properties and invest in debt secured by real properties. Our limited partnerships are generally accounted for under the equity method, or as a practical expedient using the fund’s net asset value, with financial information provided by the partnership on a two or three month lag.

Although we expect to invest new funds primarily in investment grade fixed maturities, we have invested, and expect to continue to invest, a portion of funds in limited partnerships, common equity securities, below investment grade fixed maturities and other investment assets.

Impairments

For the three months ended September 30, 2020, we recognized $0.8 million of impairments, consisting primarily of additional credit losses on mortgage loans partially offset by recoveries of credit losses on fixed maturities, primarily resulting from increased market values during the quarter. For the nine months ended September 30, 2020, we recognized $27.9 million of impairments, consisting primarily of $19.1 million on fixed maturities and $6.6 million on mortgage loans. Impairments on fixed maturities included $16.5 million categorized as intend-to-sell and $2.6 million of credit-related losses, primarily in the energy sector, and to a lesser degree, consumer non-cyclical and consumer cyclical sectors. For the three and nine months ended September 30, 2019, we recognized $0.8 million and $1.2 million, respectively, of other-than-temporary impairments on corporate fixed maturity securities. At September 30, 2020 and December 31, 2019, the allowance for credit losses on mortgage loans was $7.8 million and $1.3 million, respectively. The allowance for credit losses on available-for-sale securities was $1.6 million at September 30, 2020. There was no allowance for credit losses on available-for-sale securities at December 31, 2019.

The carrying values of fixed maturity securities on non-accrual status at September 30, 2020 and December 31, 2019 were not material. The effects of non-accruals for the nine months ended September 30, 2020 and 2019, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were also not material. Any defaults in the fixed maturities portfolio in future periods may negatively affect investment income.

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Unrealized Losses

Gross unrealized losses on fixed maturities at September 30, 2020 were $2.5 million, a decrease of $5.1 million compared to December 31, 2019, primarily attributable to lower interest rates, partially offset by wider credit spreads. At September 30, 2020, gross unrealized losses consisted primarily of $1.7 million on corporate fixed maturities, $0.3 million on U. S. government securities and $0.3 million on residential mortgage-backed securities. See Note 3 – “Investments” in the Notes to Interim Consolidated Financial Statements.

We view gross unrealized losses on fixed maturities as non-credit related since it is our assessment that these securities will recover, allowing us to realize their anticipated long-term economic value. Further, we do not intend to sell, nor is it more likely than not we will be required to sell, such debt securities before this expected recovery of amortized cost (See also “Liquidity and Capital Resources”). Inherent in our assessment are the risks that market factors may differ from our expectations; the global economic downturn resulting from the Pandemic is longer and more severe than current expectations; we may decide to subsequently sell a security for unforeseen business needs; or changes in the credit assessment from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, an impairment would be recognized as a realized loss. Although unrealized losses on fixed maturities are not reflected in the results of financial operations until they are realized, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets.

The following table sets forth gross unrealized losses for fixed maturities by maturity period at September 30, 2020 and December 31, 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.

	September 30,		December 31,
(in millions)	2020		2019
Due after one year through five years	$	0.4	$	1.1
Due after five years through ten years		0.8		3.3
Due after ten years		0.9		2.0
		2.1		6.4
Mortgage-backed and asset-backed securities		0.4		1.2
Total fixed maturities	$	2.5	$	7.6

Our investment portfolio and shareholders’ equity can be significantly impacted by changes in market values of our securities. Market volatility could increase and defaults on fixed income securities could occur. As a result, we could incur additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations and/or financial position.

In the first nine months of 2020, the Pandemic resulted in widespread economic disruption due to various government-mandated emergency orders, consumer and business uncertainty, and forced business closures. Financial markets have substantially recovered from the significant declines experienced earlier in the year; however, the economic outlook remains uncertain as a resurgence of the infection rate is being experienced in many U.S. states. Unemployment rates remain elevated, many corporations have eliminated forward revenue and earnings guidance, several foreign countries have placed restrictions on travel by U.S. citizens and many small businesses remain closed. The U.S. government and its agencies have taken extraordinary measures to stabilize the economy through fiscal policy actions, such as passage of the CARES Act and other bills that will provide roughly $3 trillion in economic support. These actions have muted the recessionary dynamics that occur in a downturn and have supported a strong but incomplete recovery of the labor markets. It is unclear whether such actions will be sufficient to minimize the economic recession in the near and intermediate term, and what effect such unprecedented events will ultimately have on our investment portfolio.

Due to the Pandemic, global monetary policies have become 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. Additionally, lending facilities have been established to support the flow of credit to households, businesses and state and local governments. However, because the Pandemic still poses considerable downside risks to economic activity and labor markets over the medium term, U.S. government officials are working toward another round of fiscal policy actions to support the economy and the flow of credit to households and businesses experiencing the greatest financial impact from the Pandemic.

Fundamental conditions in certain corporate sectors are particularly tenuous, especially in the energy sector where the decline in global demand has driven meaningful declines in the value of our holdings of related fixed maturities. Further, the lodging, restaurant and transportation services subsectors are severely impacted by the Pandemic. 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.

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Other Items

Net income also included the following items:

	Three Months Ended September 30,
(in millions)	Commercial Lines		Personal Lines		Other			Discontinued Operations			Total
2020
Net realized and unrealized investment gains	$	25.3	$	12.2	$	0.2		$	—		$	37.7
Loss from repayment of debt		—		—		(6.1	)		—			(6.1	)
Discontinued life businesses		—		—		—			(0.6	)		(0.6	)

2019
Net realized and unrealized investment gains	$	10.1	$	4.5	$	0.2		$	—		$	14.8
Discontinued operations - Chaucer business, including sale, net of taxes		—		—		—			8.5			8.5
Discontinued life businesses		—		—		—			(0.8	)		(0.8	)

	Nine Months Ended September 30,
(in millions)	Commercial Lines			Personal Lines			Other			Discontinued Operations			Total
2020
Net realized and unrealized investment losses	$	(40.1	)	$	(15.9	)	$	(4.2	)	$	—		$	(60.2	)
Loss from repayment of debt		—			—			(6.2	)		—			(6.2	)
Discontinued life businesses		—			—			—			(2.0	)		(2.0	)

2019
Net realized and unrealized investment gains (losses)	$	52.3		$	23.3		$	(0.5	)	$	—		$	75.1
Discontinued operations - Chaucer business, including sale, net of taxes		—			—			—			(1.0	)		(1.0	)
Discontinued life businesses		—			—			—			(2.5	)		(2.5	)

We manage investment assets for our Commercial Lines, Personal Lines and Other segments based on the requirements of our combined property and casualty companies. We allocate the investment income, expenses and realized gains and losses to our Commercial Lines, Personal Lines and Other segments based on actuarial information related to the underlying businesses. We managed investment assets separately for our former Chaucer business.

Net realized and unrealized gains on investment were $37.7 million for the three months ended September 30, 2020, compared to $14.8 million for the three months ended September 30, 2019. Net realized and unrealized gains in both 2020 and 2019 were primarily due to changes in the fair value of equity securities.

Net realized and unrealized losses on investment were $60.2 million for the nine months ended September 30, 2020, compared to net realized and unrealized gains of $75.1 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, net realized and unrealized losses were primarily due to changes in the fair value of equity securities and, to a lesser extent, from impairment losses on investments. For the nine months ended September 30, 2019, net realized and unrealized gains were primarily due to changes in the fair value of equity securities.

On September 19, 2020, we redeemed our outstanding $175.0 million principal amount of 6.35% subordinated debentures due 2053. We recognized the remaining $6.1 million of unamortized debt issuance costs associated with this debt.

Discontinued operations in 2020 include our discontinued accident and health and life businesses. In 2019, our discontinued operations primarily included our former Chaucer business and, to a lesser extent, our discontinued life business. For the three months and nine months ended September 30, 2019, results related to our discontinued Chaucer business, including the sale, net of taxes, primarily reflects a revision to our best estimate of Chaucer’s 2018 catastrophe losses, which reduced our estimate of pre-tax contingent proceeds by $13.5 million. This was partially offset by gains from the sale of the Chaucer-related Australian and Irish entities for the nine month period. Losses of $2.0 million and $2.5 million in the discontinued life businesses for the nine months ended September 30, 2020 and 2019, respectively, primarily reflect adverse loss trends related to the long-term care pool.

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Income Taxes

We are subject to the tax laws and regulations of the U.S. and foreign countries in which we operate. 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 U.S. operations. 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, are utilized to offset U.S. tax as permitted.

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

The provision for income taxes from continuing operations was an expense of $29.1 million and $19.1 million for the three months ended September 30, 2020 and 2019, respectively. These provisions resulted in consolidated effective federal tax rates of 19.6% and 14.7% for the three months ended September 30, 2020 and 2019, respectively. These provisions reflect benefits related to tax planning strategies implemented in prior years of $2.5 million and $3.2 million for the three months ended September 30, 2020 and 2019, respectively. In addition, these provisions also included excess tax benefits related to stock-based compensation of $0.1 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively. Lastly, the provision for 2019 includes a benefit of $4.4 million, which reflects the effect of changes in the tax law related to the 2018 sale of Chaucer. Absent these items, the provision for income taxes would have been an expense of $31.7 million, or 21.3%, and $27.2 million, or 20.9%, for the three months ended September 30, 2020 and 2019, respectively.

The income tax provision on operating income was an expense of $25.1 million and $23.9 million for the three months ended September 30, 2020 and 2019, respectively. These provisions resulted in effective tax rates for operating income of 21.2% and 20.4% for the three months ended September 30, 2020 and 2019, respectively. These provisions include excess tax benefits related to stock-based compensation of $0.1 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively. Absent this item, the provision for income taxes would have been an expense of $25.2 million, or 21.2%, and $24.4 million, or 20.9%, for the three months ended September 30, 2020 and 2019, respectively.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The provision for income taxes from continuing operations was an expense of $41.7 million and $69.9 million for the nine months ended September 30, 2020 and 2019, respectively. These provisions resulted in consolidated effective federal tax rates of 17.5% and 18.0% for the nine months ended September 30, 2020 and 2019, respectively. These provisions reflect benefits related to tax planning strategies implemented in prior years of $6.9 million and $10.4 million for the nine months ended September 30, 2020 and 2019, respectively. In addition, these provisions also included excess tax benefits related to stock-based compensation of $2.0 million and $2.6 million for the nine months ended September 30, 2020 and 2019, respectively. Finally, the provision for 2019 includes a charge of $1.2 million, which reflects the effect of changes in the tax law related to the 2018 sale of Chaucer. Absent these items, the provision for income taxes would have been an expense of $50.6 million, or 21.3%, and $81.7 million, or 21.0%, for the nine months ended September 30, 2020 and 2019, respectively.

The income tax provision on operating income was an expense of $62.8 million and $63.6 million for the nine months ended September 30, 2020 and 2019, respectively. These provisions resulted in effective tax rates for operating income of 20.5% and 20.2% for the nine months ended September 30, 2020 and 2019, respectively. These provisions include excess tax benefits related to stock-based compensation of $2.0 million and $2.6 million for the nine months ended September 30, 2020 and 2019, respectively. Absent this item, the provision for income taxes would have been an expense of $64.8 million, or 21.2%, and $66.2 million, or 21.0%, for the nine months ended September 30, 2020 and 2019, respectively.

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Critical Accounting Estimates

Interim consolidated financial statements have been prepared in conformity with U.S. GAAP and include certain accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of those policies. While we believe that the amounts included in our consolidated financial statements reflect our best judgment, the use of different assumptions could produce materially different accounting estimates. As disclosed in our 2019 Annual Report on Form 10-K, we believe the following accounting estimates are critical to our operations and require the most subjective and complex judgment:

•

Reserve for losses and loss expenses

•

Reinsurance recoverable balances

•

Pension benefit obligations

•

Deferred taxes

For a more detailed discussion of these critical accounting estimates, see our 2019 Annual Report on Form 10-K.

Additionally, as a result of the recent economic disruption to the financial markets and overall challenges to economic conditions worldwide as a result of the Pandemic, we experienced a higher level of impairments in the first nine months of 2020 than in recent years. Accordingly, the following critical accounting estimate has been added.

INVESTMENT CREDIT LOSSES

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.

For our impairment review of asset-backed fixed maturity securities, we forecast our best estimate of the prospective future cash flows of the security to determine if we expect to recover the entire amortized cost basis of the security. Our analysis includes estimates of underlying collateral default rates based on historical and projected delinquency rates and estimates of the amount and timing of potential recovery. We consider available information relevant to the collectability of cash flows, including information about the payment terms of the security, prepayment speeds, the financial condition of the underlying borrowers, collateral trustee reports, credit ratings analysis and other market data when developing our estimate of the expected cash flows.

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.

We estimate the amount of the credit impairment by comparing the amortized cost of the fixed maturity security with the net present value of the fixed maturity security’s projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment.

Declines in market value which are not credit loss related are recorded as unrealized losses, which do not affect net income and earnings per share, but reduce accumulated other comprehensive income, which is reflected in our Consolidated Balance Sheets. We cannot provide assurance that the impairments will be adequate to cover future losses or that we will not have substantial additional impairments in the future. See Note 3 — “Investments” in the Notes to Interim Consolidated Financial Statements for further discussion regarding impairments and securities in an unrealized loss position.

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Statutory Surplus of Insurance Subsidiaries

The following table reflects statutory surplus for our insurance subsidiaries:

	September 30,		December 31,
(in millions)	2020		2019
Total Statutory Capital and Surplus	$	2,422.3	$	2,470.2

The statutory capital and surplus for our insurance subsidiaries decreased $47.9 million during the first nine months of 2020. This decrease was primarily due to the payment of a $245 million dividend and from unrealized and realized net investment losses, primarily due to changes in the fair value of equity securities. These decreases were partially offset by underwriting profits.

The NAIC prescribes an annual calculation regarding risk-based capital (“RBC”). RBC ratios for regulatory purposes are expressed as a percentage of the capital required to be above the Authorized Control Level (the “Regulatory Scale”); however, in the insurance industry, RBC ratios are widely expressed as a percentage of the Company Action Level. The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other insurance subsidiaries), as of September 30, 2020, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):

(dollars in millions)

Company

Action Level

Authorized

Control Level

RBC Ratio

Industry Scale

RBC Ratio

Regulatory Scale

The Hanover Insurance Company

1,095.7

547.8

220

441

Liquidity and Capital Resources

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”). During the first nine months of 2020, Hanover Insurance paid $245.0 million in dividends to the holding company.

Sources of cash for our insurance subsidiaries primarily consist of premiums collected, investment income and maturing investments. Primary cash outflows are payments for losses and loss adjustment expenses, policy and contract acquisition expenses, other underwriting expenses and investment purchases. Cash outflows related to losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. We periodically adjust our investment policy to respond to changes in short-term and long-term cash requirements.

Net cash provided by operating activities was $546.6 million during the first nine months of 2020, as compared to $423.9 million during the first nine months of 2019. The $122.7 million increase in cash provided was primarily due to a decrease in loss payments, an increase in premiums received and, to a lesser extent, the result of lower federal income tax payments in the first nine months of 2020, compared to the first nine months of 2019.

Net cash used in investing activities was $480.3 million during the first nine months of 2020, as compared to $505.2 million during the first nine months of 2019. During the first nine months of 2020, cash used in investing activities primarily related to net purchases of fixed maturities. During the first nine months of 2019, cash used in investing activities primarily related to net purchases of fixed maturities and, to a lesser extent, equity securities and other investments, partially offset by net proceeds received from the sale of the Chaucer-related Irish and Australian entities.

Net cash used in financing activities was $50.5 million during the first nine months of 2020, as compared to $785.1 million during the first nine months of 2019. During the first nine months of 2020, cash used in financing activities primarily resulted from the repayment of debt, the repurchase of common stock and three quarterly dividend payments to shareholders, offset by net proceeds received from debt borrowings. During the first nine months of 2019, cash used in financing activities primarily resulted from repurchases of common stock through two accelerated share repurchase (“ASR”) agreements, the payments of a special dividend and three quarterly dividends to shareholders, and the repayment of the Federal Home Loan Bank (“FHLB”) advances.

Dividends to common shareholders are subject to quarterly board approval and declaration. During the first nine months of 2020, as declared by the Board, we paid three quarterly dividends of $0.65 per share to our shareholders totaling approximately $74 million. We believe that our holding company assets are sufficient to provide for future shareholder dividends should the Board of Directors declare them.

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At September 30, 2020, THG, as a holding company, held approximately $528.4 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 our debt. We do not expect that it will be necessary to dividend additional funds from our insurance subsidiaries in order to fund 2020 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. 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.

Our insurance subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term investments. We believe that the quality of the assets we hold will allow us to realize the long-term economic value of our portfolio, including securities that are currently in an unrealized loss position. We do not anticipate the need to sell these securities to meet our insurance subsidiaries’ cash requirements since we expect our insurance subsidiaries to generate sufficient operating cash to meet all short-term and long-term cash requirements relating to current operations. However, there can be no assurance that unforeseen business needs or other items, including any effects of the Pandemic or associated legislative, judicial or regulatory actions on our liquidity and investment portfolio, will not occur causing us to have to sell those securities in a loss position before their values fully recover, thereby causing us to recognize impairment charges in that time period.

The Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of our common stock of up to $900 million. Under the repurchase authorization, we may repurchase, from time to time, common stock in amounts, at prices and at such times as we deem appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. On December 9, 2019, pursuant to the terms of an ASR agreement (the “December 2019 ASR”) we paid $150.0 million in exchange for shares of our common stock. Under the terms of the December 2019 ASR, we received an initial delivery of approximately 0.9 million shares of our common stock. On February 26, 2020, we received approximately 0.2 million shares of our common stock as final settlement of shares repurchased under the December 2019 ASR. In addition to the shares repurchased under the December 2019 ASR, during the first nine months of 2020 we repurchased approximately 1.0 million shares at an aggregate cost of $94.3 million. As of September 30, 2020, we have repurchased 5.4 million shares under this $900 million program and have approximately $242 million available for additional repurchases.

On October 27, 2020, we entered into a new ASR agreement (the “October 2020 ASR”), pursuant to which we will pay $100.0 million in exchange for shares of our common stock. Initial share delivery, of approximately 80% of the total number of shares expected to be received under this agreement, is scheduled for October 29, 2020. Final settlement of the October 2020 ASR is expected to occur not later than February 3, 2021.

On August 24, 2020, we issued $300.0 million aggregate principal amount of 2.50% senior unsecured debentures due September 1, 2030. Net proceeds of the debt issuance were $297.7 million. A portion of the net proceeds was used to redeem $175.0 million outstanding 6.35% subordinated notes due 2053, resulting in a pre-tax loss of $6.1 million, related primarily to the accelerated amortization of debt issuance costs.

We maintain our membership in FHLB which provides us with access to additional liquidity based on our stock holdings and pledged collateral. At September 30, 2020, we had borrowing capacity of $108.0 million. There were no outstanding borrowings under this short-term facility at September 30, 2020; however, we have and may continue to borrow, from time to time, through this facility to provide short-term liquidity.

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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 and had no borrowings under this agreement during the first nine months of 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 September 30, 2020, we were in compliance with the covenants of our debt and credit agreements.

Off-Balance Sheet Arrangements

We currently do not have any material off-balance sheet arrangements that are reasonably likely to have an effect on our financial position, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contingencies and Regulatory Matters

REGULATORY AND INDUSTRY DEVELOPMENTS

In response to the Pandemic, regulators in many of the states in which we operate have issued orders or guidance pertaining to, among other things, (a) premium refunds, credits or reductions for personal automobile insurance premiums and premiums for other insurance lines that regulators have determined are disproportionately impacted by the Pandemic, including certain commercial lines, for the periods during which stay-at-home orders and other governmental restrictions were or remain in effect, with premium adjustments based on factors such as the ongoing frequency and severity of claims, inflation, repair costs and reinsurance pricing, among others; (b) premium payment grace periods, moratoriums on policy non-renewals and cancellations, and other measures that are similar to actions historically implemented in regions heavily impacted by catastrophes, which we anticipate to be manageable, depending on the duration of the regulatory orders and the degree to which policyholder payment patterns vary as a result; and (c) a reassessment of rates in light of current exposures, loss experience and economic conditions. Regulatory restrictions on rate increases, underwriting, policy terms, and the ability to non-renew business may, depending on their duration, limit THG’s ability to manage our mix of business and any potential exposures that emerge in our lines of business in the near term.

Draft legislation has been proposed in several state legislatures and/or in the United States Congress that seeks to require insurers to retroactively pay unfunded Pandemic business interruption claims that insurance policies do not currently cover, to impose presumptions on insurance policy interpretation, and/or to mandate prospective pandemic coverage. The impact of such legislation, were it to be adopted, would, according to a statement of the NAIC on March 25, 2020, “create substantial solvency risks” for the property and casualty insurance sector, “significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.” Industry trade groups further assert that any such legislation would be violative of basic contract law and well-founded principles of constitutional law. Federal stimulus plans such as the CARES Act providing financial support to individuals and businesses during the Pandemic may mitigate the political pressure to continue advancing such proposed legislation.

Proposals are also being considered at the federal level to establish government-funded pandemic insurance programs, possibly similar to the federal terrorism risk insurance program. Discussion on such competing proposals is ongoing and at a preliminary stage such that it is too early to estimate their potential impact, if any, on our business.

Information regarding litigation, legal contingencies and regulatory matters appears in Part I – Note 13 “Commitments and Contingencies” in the Notes to Interim Consolidated Financial Statements.

Risks and Forward-Looking Statements

Information regarding risk factors and forward-looking information appears in Part II – Item 1A of this Quarterly Report on Form 10-Q and in Part I – Item 1A of our 2019 Annual Report on Form 10-K. This Management’s Discussion and Analysis should be read and interpreted in light of such factors.

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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Our market risks, the ways we manage them, and sensitivity to changes in interest rates, and equity price risk are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes in the first nine months of 2020 to these risks or our management of them.

ITEM 4

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures Evaluation

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our “disclosure controls and procedures”, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Based on our controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting”, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as required by Rule 13a-15(d) of the Exchange Act, to determine whether any changes occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the quarter ended September 30, 2020, we completed an implementation of a new investment accounting system, which included appropriate design and testing of internal controls. Based on the aforementioned evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, except for the implementation of the new investment accounting system, there were no such changes during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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, examination or investigation, and its ultimate liability, if any, from such actions 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 the Company’s financial position, although they could have a material effect on the results of operations for a particular quarterly or annual period.

ITEM 1A – RISK FACTORS

This document contains, and management may make, certain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. When used in our Management’s Discussion and Analysis, words such as: “believes,” “anticipates,” “expects,” “projections,” “outlook,” “should,” “could,” “plan,” “guidance,” “likely,” “on track to,” “potential,” “continue,” “targeted,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. We caution readers that accuracy with respect to forward-looking projections is difficult and subject to risks and uncertainties. Those risks and uncertainties, in some cases, have affected, and in the future could affect, our actual results and could cause our actual results for the remainder of 2020 and beyond to differ materially from historical results and from those expressed in any of our forward-looking statements. We operate in a business environment that is continually changing, and as such, new risk factors may emerge over time. Additionally, our business is conducted in competitive markets and, therefore, involves a higher degree of risk. We cannot predict these new risk factors nor can we assess the impact, if any, that they may have on our business in the future.

We are providing the following risk factor to supplement the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.

The impact of the COVID-19 Pandemic and related general economic conditions could have a material adverse effect on our results of operations, financial condition or cash flows.

The Pandemic began significantly impacting the U.S. and global financial markets and economies during March 2020. Circumstances relating to the Pandemic are unprecedented in scope and impact, continue to evolve, and are complex and uncertain. We are continually monitoring and assessing the impact of the Pandemic due to such uncertainty and cannot estimate the full extent of its future impact on our business, financial condition or results of operations. A prolonged economic downturn or recession could impact the ability of our insureds to remain solvent, affect their ability to pay premiums or renew their existing insurance policies, or result in customers reducing or eliminating coverages. Prolonged disruptions related to the Pandemic may also affect our agent partners and their ability to operate their businesses and place business with us. Significant agent disruption could also lead consumers to choose our competitors that offer direct-to-consumer or other solutions. These changes may materially and adversely affect our ability to profitably grow our business or maintain our current premium levels, particularly if these conditions exist for a significant amount of time. Decreases in premiums from current levels could result in higher expense ratios. Additionally, it may be more difficult or more costly to obtain reinsurance for certain types of coverages or at retention levels appropriate for our business mix.

As a result of the Pandemic and related economic conditions, our investment portfolio has become volatile, impairments are higher than experienced in recent years and yields on our fixed income investments have declined. The severity and length of the Pandemic may continue to have a negative impact on our investment portfolio, investment income, liquidity and capital position, of which the impact could be material.

Due to government-mandated social distancing, public health guidance, lockdown and various stay-at-home and similar orders, the vast majority of our workforce is currently working remotely. The duration of this remote work environment may adversely impact our ability to perform in-person tasks like inspections and investigations for our underwriting and claims functions. Furthermore, if a significant percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with the Pandemic, or other disruptions, the quality or timeliness of our services and operations may be negatively impacted. In addition, with a large percentage of our workforce working remotely, we are highly reliant on the effective functioning of our business continuity plans and technology, and we are subject to ongoing cyber threats and vulnerabilities. We also outsource a variety of functions to third parties, including certain of our administrative operations. As a result, we rely upon the successful ongoing execution of the business continuity plans of such entities in the current environment. While we closely monitor the business continuity activities of these third parties, successful ongoing execution of their business continuity strategies are largely outside our control. If one or more of the third parties to whom we outsource certain critical business activities experience operational impacts, some of which could be significant, from the spread of COVID-19 and governmental reactions thereto, or claim that they cannot perform due to a force majeure, it could adversely impact our business, results of operations and/or financial condition.

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While we believe that our in-force commercial lines policies in large part do not cover business interruption losses related to the Pandemic, legislation has been discussed and introduced in various states and in the U.S. Congress to retroactively amend insurance contracts to provide business interruption coverage, to impose presumptions on insurance policy interpretation, and/or limit policy exclusions for losses allegedly related to the Pandemic. While we believe that many of those proposals, including retroactive legislation changing the terms of an insurance contract, would be unconstitutional and otherwise violative of well-established law, if such changes were to be enacted and upheld, we would be exposed to a significant unfunded liability. On the Federal level, there is also uncertainty around legislation to address insurance coverages for pandemics prospectively. State regulators may also continue to impose premium refund orders similar to those issued to date that call for premium refunds or credits across multiple lines of business, including both our Commercial and Personal Lines, mandate rate reductions for lines such as personal automobile and commercial automobile coverages due to a decrease in claims frequency as a result of less driving during the Pandemic, and/or mandate additional presumptions of compensability in workers’ compensation coverages. The uncertainties related to these various legislative and regulatory matters, and the potential that other such uncertainties will arise in reaction to the Pandemic, could adversely impact our ability to sustain adequate returns in certain lines of business or in some cases operate lines profitably.

Instances of riots and civil unrest may continue to negatively impact our business.

Due to ongoing economic, political and social conditions, we may continue to experience losses associated with insureds’ property damage arising from instances of riots and civil unrest, as occurred in the second and third quarters of 2020 in certain metropolitan areas where we have concentrations of business.

Additional factors that could cause actual results to differ include, but are not limited to, the following:

•

changes in the demand for our products;

•

risks and uncertainties with respect to our ability to retain profitable policies in force and attract profitable policies and to increase rates commensurate with, or in excess of, loss trends;

•

adverse claims experience or changes in our estimates of loss and loss adjustment expense reserves, including with respect to catastrophes, which may result in lower current year underwriting income or adverse loss development, and could impact our carried reserves;

•

uncertainties with respect to the long-term profitability of our products, including with respect to newer products such as our Hanover Platinum Personal Lines and excess and surplus lines, or longer-tail products covering casualty losses;

•

disruption in our distribution channels, including the loss or disruption of our independent agency channel, including the impact of competition and consolidation in the industry and among agents and brokers;

•

changes in frequency and loss severity trends;

•

changes in regulation, legislation, economic, market and political conditions, particularly with respect to rates, payment flexibility, and regions where we have geographical concentrations;

•

volatile and unpredictable developments, including severe weather and other natural physical events, catastrophes, pandemics, civil unrest, and terrorist actions, and the uncertainty in estimating the resulting losses;

•

changes in weather patterns, whether as a result of global climate change, or otherwise, causing a higher level of losses from weather events to persist;

•

limitations on the physical ability to adjust claims or the availability of sufficient information to accurately estimate a loss at a point in time and the limitations and assumptions used to model property and casualty losses in general;

•

risks and uncertainties with respect to our ability to collect all amounts due from reinsurers and to maintain current levels of reinsurance in the future at commercially reasonable rates, or at all;

•

heightened volatility, fluctuations in interest rates (which have a significant impact on the market value of our investment portfolio and thus our book value), inflationary pressures, default rates and other factors that affect investment returns from our investment portfolio;

•

risks and uncertainties associated with our participation in shared market mechanisms, mandatory reinsurance programs and mandatory and voluntary pooling arrangements, including the Michigan Catastrophic Claims Association;

•

an increase in mandatory assessments by state guaranty funds;

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•

risks and uncertainties associated with the Michigan legislation that took effect on July 2, 2020 and reformed the existing requirements that all personal and commercial automobile polices issued in the state include no-fault personal injury protection coverage without a cap on maximum benefits allowed and the resulting increase in litigation challenging or associated with this reform;

•

actions by our competitors, many of which are larger or have greater financial resources than we do;

•

loss, prolonged illness or retirement of key employees;

•

operating difficulties and other unintended consequences from the introduction of new products and related technology changes and applications, as well as new operating models;

•

changes in our claims-paying and financial strength ratings;

•

negative changes in our level of statutory surplus;

•

risks and uncertainties with respect to our growth or operating strategies, or with respect to our expense and strategic initiatives;

•

our ability to declare and pay dividends;

•

changes in accounting principles and related financial reporting requirements;

•

errors or omissions in connection with the administration of any of our products;

•

risks and uncertainties with our operations and technology, including cloud-based data information storage, data security, cyber-security attacks, remote working capabilities, and/or outsourcing relationships and third-party operations and data security that may negatively impact our ability to conduct business;

•

an inability to be compliant with recently implemented regulations or existing regulation such as those relating to Sarbanes-Oxley;

•

unfavorable developments as a result of the implementation of recently enacted legislation in Michigan described above, or litigation matters, social inflation and the possibility of adverse judicial decisions, including those which expand policy coverage beyond its intended scope or award “bad faith” or other non-contractual damages; and

•

other factors described in such forward-looking statements.

In addition, historical and future reported financial results include estimates with respect to premiums written and earned, reinsurance recoverables, current accident year “picks,” loss and loss adjustment reserves and development, fair values of certain investments, other assets and liabilities, tax, contingent and other liabilities, and other items. These estimates are subject to change as more information becomes available.

Readers should not place undue reliance on forward-looking statements, which speak only as of the date they are made. We do not undertake any responsibility to update or revise our forward-looking statements, except as required by law.

For a more detailed discussion of our risks and uncertainties, see also Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.

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ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Shares purchased in the third quarter of 2020 are as follows:


					Total Number of		Approximate Dollar Value of
					Shares Purchased as		Shares That May Yet
					Part of Publicly		be Purchased Under the
	Total Number of		Average Price		Announced Plans or		Plans or Programs
Period	Shares Purchased⁽¹⁾		Paid per Share		Programs		(in millions)
July 1 - 31, 2020		154,917	$	97.12		154,469	$	272
August 1 - 31, 2020		72,241		103.66		72,033		265
September 1 - 30, 2020		237,019		95.18		236,800		242
Total		464,177	$	97.15		463,302	$	242

(1)	Includes 448 shares, 208 shares and 219 shares withheld to satisfy tax withholding amounts due from employees related to the receipt of stock which resulted from the exercise or vesting of equity awards for the months ended July 31, August 31 and September 30, 2020, respectively.

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ITEM 6 – EXHIBITS

EX – 4.1	Second Supplemental Indenture dated as of August 24, 2020, between The Hanover Insurance Group, Inc. and U.S. Bank National Association, as trustee, supplementing the Base Indenture dated as of April 8, 2016, incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K, filed with the SEC on August 24, 2020.

EX – 4.2	Form of Security Certificate representing The Hanover Insurance Group, Inc.’s $300 million aggregate principal amount of 2.500% Notes due 2030 (included in Exhibit 4.2 and incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K, filed with the SEC on August 24, 2020).

EX – + 10.1	The Hanover Insurance Group, Inc. Second Amended and Restated 2014 Employee Stock Purchase Plan.

EX – 31.1	Certification of the Chief Executive Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

EX – 31.2	Certification of the Chief Financial Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

EX – 32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

EX – 32.2	Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

EX – 101	The following materials from The Hanover Insurance Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (i) Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019; (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019; (iii) Consolidated Balance Sheets at September 30, 2020 and December 31, 2019; (iv) Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2020 and 2019; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, and (vi) related notes to these financial statements.

EX – 104	The cover page from The Hanover Insurance Group Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in iXBRL (embedded within EX – 101).

+	Management contract or compensatory plan or arrangement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		The Hanover Insurance Group, Inc.
		Registrant

October 28, 2020		/s/ John C. Roche
Date		John C. Roche
		President, Chief Executive Officer and Director


October 28, 2020		/s/ Jeffrey M. Farber
Date		Jeffrey M. Farber
		Executive Vice President and Chief Financial Officer

Exhibit 10.1

THE HANOVER INSURANCE GROUP

SECOND AMENDED AND RESTATED

2014 EMPLOYEE STOCK PURCHASE PLAN

Section 1.

Defined Terms

Exhibit A, which is incorporated by reference, defines the terms used in the Plan and sets forth certain operational rules related to those terms.

Section 2.

Purpose of Plan

The Plan is intended to enable Eligible Employees of the Company and its Designated Subsidiaries to use payroll deductions to purchase shares of Stock, and thereby acquire an interest in the future of the Company. The Plan is intended to qualify as an “employee stock purchase plan” under Section 423 and to be exempt from the application and requirements of Section 409A of the Code, and is to be construed accordingly.

Section 3.

Options to Purchase Stock

Subject to adjustment pursuant to Section 17 of this Plan, the maximum aggregate number of shares of Stock available for purchase pursuant to the exercise of Options granted under the Plan to Eligible Employees will be 2,500,000 shares. The shares of Stock to be delivered upon exercise of Options under the Plan may be either shares of authorized but unissued Stock, treasury Stock, or Stock acquired in an open-market transaction, all as the Board may determine. If any Option granted under the Plan expires or terminates for any reason without having been exercised in full or ceases for any reason to be exercisable in whole or in part, the unpurchased shares of Stock subject to such Option will again be available for purchase pursuant to the exercise of Options under the Plan. If, on an Exercise Date, the total number of shares of Stock that would otherwise be subject to Options granted under the Plan exceeds the number of shares then available under the Plan (after deduction of all shares for which Options have been exercised or are then outstanding), the Administrator shall make a pro rata allocation of the shares remaining available for the Option grants in as uniform a manner as shall be practicable and as it shall determine to be equitable. In such event, the Administrator shall give written notice to each Participant of such reduction of the number of Options affected thereby and shall similarly reduce the rate of payroll deductions, if necessary.

Section 4.

Eligibility

Subject to Section 14, and any exceptions and limitations set forth in Section 6 or as permitted under Section 423, or as may be provided elsewhere in the Plan, each Employee who (a) customarily works twenty (20) hours or more per week and for more than five (5) months per calendar year, (b) is employed by the Company or a Designated Subsidiary, and (c) satisfies the requirements set forth in the Plan will be an “Eligible Employee”. Notwithstanding the above, an Employee who is a citizen or resident of a foreign jurisdiction (without regard to whether such Employee is also a citizen of the United States or resident alien in the United States) shall not be an Eligible Employee with respect to the Plan if the grant of an Option to such Employee is prohibited under the laws of the Employee’s foreign jurisdiction or compliance with the laws of the foreign jurisdiction would cause the Plan or an Option to violate the requirements of Section 423. In no event, however, may an Employee be granted an Option under the Plan if, immediately after the Option is granted, the Employee would own (or pursuant to Section 424(d) of the Code would be deemed to own) stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of its Parent or Subsidiaries, if any. The Administrator may, for Option Periods that have not yet commenced, establish additional eligibility requirements not inconsistent with Section 423.

Section 5.

Option Periods

The Plan will generally be implemented by a series of “Option Periods,” which may be sequential and/or overlapping. Unless otherwise determined by the Administrator, the Option Periods will be the six-month periods commencing January 1 and ending June 30 and commencing July 1 and ending December 31 of each year (each, a “Six-Month Option Period”). The Administrator may also designate other Option Periods. Each June 30 and December 31 and each other end of an Option Period designated by the Administrator will be an “Exercise Date”. The Administrator may change the Exercise Date and the commencement date, ending date and duration of the Option Periods to the extent permitted by Section 423.

Section 6.

Option Grant

Subject to the limitations set forth in Section 4, Section 8 and Section 10 and the Maximum Share Limit, on the first day of an Option Period, each Participant automatically will be granted an Option to purchase shares of Stock on the Exercise Date; provided, however, that no Participant will be granted an Option under the Plan that permits the Participant’s right to purchase shares of Stock under the Plan and under all other employee stock purchase plans of the Company and its Parent and Subsidiaries, if any, to accrue at a rate that exceeds $25,000 in Fair Market Value (or such other maximum as may be prescribed from time to time by the Code) for each calendar year during which any Option granted to such Participant is outstanding at any time, as determined in accordance with Section 423(b)(8) of the Code.

Section 7.

Method of Participation

To participate in an Option Period, an Eligible Employee must execute and deliver to the Administrator a participation election form in accordance with the procedures prescribed by and in a form acceptable to the Administrator and, in so doing, the Eligible Employee will thereby become a Participant as of the first day of such Option Period. With respect to Six-Month Option Periods, such Eligible Employee will remain a Participant with respect to subsequent Six-Month Option Periods until his or her participation in the Plan is terminated as provided herein. Such participation election must be delivered no later than 10 business days prior to the first day of an Option Period, or such other time as specified by the Administrator.

A Participant’s election, with respect to a Six-Month Option Period, will remain in effect for subsequent Six-Month Option Periods unless the Participant files a new election not less than 10 business days prior to the first day of a Six-Month Option Period (or such other time as specified by the Administrator) or the Participant’s Option is cancelled pursuant to Section 14 or Section 15. During an Option Period, elections and rates of contribution to the Plan may not be increased or decreased, except that a Participant may terminate his or her election by canceling his or her Option in accordance with Section 14.

Section 8.

Method of Payment

The Administrator will prescribe the method or methods of payment available for a Participant to pay for shares of Stock purchased upon the exercise of an Option, including by cash, check or with accumulated payroll deductions credited to the Participant’s Account. To use payroll deductions, if permitted, a Participant must execute and deliver to the Administrator a payroll deduction authorization form in accordance with the procedures prescribed by and in a form acceptable to the Administrator subject to complying with any minimum and maximum amounts that may be deducted per pay period in accordance with the terms of the Plan. With respect to Six-Month Option Periods, a Participant’s payroll deduction authorization, if any, will remain in effect for subsequent Six-Month Option Periods unless the Participant files a new payroll deduction authorization not less than 10 business days prior to the first day of a Six-Month Option Period (or such other time as specified by the Administrator) or the Participant’s Option is cancelled pursuant to Section 14 or Section 15. During an Option Period, payroll deductions may not be increased or decreased, except that a Participant may terminate his or her payroll deduction by canceling his or her Option in accordance with Section 14.

Each payroll deduction authorization will request payroll deductions in an amount equal to a percentage (expressed as a whole percentage) of the Participant’s total base compensation per payroll period, including base pay or base salary, overtime and shift differentials, or a fixed dollar amount, as determined by the Administrator. If the Administrator determines that another limit shall be imposed hereunder or that eligible compensation shall be defined in a different manner, determinations shall be made in a manner that satisfies the requirements of Treasury Regulation Section 1.423-2(f)(2).

All payroll deductions made pursuant to this 8 will be credited to the Participant’s Account. Amounts credited to a Participant’s Account will not be required to be set aside in trust or otherwise segregated from the Company’s general assets.

Section 9.

Purchase Price

The Purchase Price of shares of Stock issued pursuant to the exercise of an Option on each Exercise Date will be eighty-five percent (85%) (or such greater percentage specified by the Administrator to the extent permitted under Section 423) of a one of the following, as selected by the Administrator prior to the commencement of the relevant Option Period:

(a)the Fair Market Value of a share of Stock on the date on which the Option was granted pursuant to Section 6 (i.e., the first day of the Option Period);

(b)the Fair Market Value of a share of Stock on the date on which the Option is deemed exercised pursuant to Section 10 (i.e., the Exercise Date); or

(c)the lesser of (a) and (b).

Section 10.

Exercise of Options

Subject to the limitations set forth in Section 6, Section 8 and this Section 10, with respect to each Option Period, on the applicable Exercise Date, each Participant will be deemed to have exercised his or her Option and (a) if the Participant has an Account, the accumulated payroll deductions in the Participant’s Account will be applied to purchase the greatest number of whole shares of Stock (rounded down to the nearest whole share) that can be purchased with such Account balance at the applicable Purchase Price or (b) if the Purchase Price is paid by check or other means acceptable to the Administrator, the amount remitted by the Participant will be applied to purchase the greatest number of whole shares of Stock (rounded down to the nearest whole share) that can be purchased with such amount at the applicable Purchase Price; provided, however, in either case that no more than 1,000 shares of Stock may be purchased by a Participant on any Exercise Date, or such lesser number as the Administrator may prescribe in accordance with Section 423 (the “Maximum Share Limit”). As soon as practicable thereafter, shares of Stock so purchased will be placed, in book-entry form, into a record keeping account in the name of the Participant. No fractional shares will be purchased. Prior to the commencement of an Option Period, the Administrator shall determine whether any payroll deductions accumulated in a Participant’s Account or amounts paid by check or otherwise that are not sufficient to purchase a full share will be retained or deposited, as applicable, in the Participant’s Account for the subsequent Option Period, subject to earlier withdrawal by the Participant as provided in Section 14 hereof, or returned to the Participant or his or her designated beneficiary or legal representative, as applicable, without interest, as soon as administratively practicable after the Exercise Date or earlier withdrawal, as applicable.

Except as provided above with respect to fractional shares, any amount of payroll deductions in a Participant’s Account or amounts paid by check or otherwise that are not used for the purchase of shares of Stock, whether because of the Participant’s withdrawal from participation in an Option Period or for any other reason, will be returned to the Participant or his or her designated beneficiary or legal representative, as applicable, without interest, as soon as administratively practicable after such withdrawal or other event, as applicable.

If the Participant’s accumulated payroll deductions or amounts paid by check or otherwise on the Exercise Date would otherwise enable the Participant to purchase shares of Stock in excess of the Maximum Share Limit, the excess of such amount over the aggregate Purchase Price of the shares of Stock actually purchased will be returned to the Participant, without interest, as soon as administratively practicable after such Exercise Date.

Notwithstanding any provision of the Plan to the contrary, no Option may be exercised after 27 months from its grant date.

Section 11.

Restrictions on Transfer; Plan Accounts; Disqualifying Dispositions

By electing to participate in the Plan, each Participant agrees to be subject to the restrictions and covenants set forth in this Section 11.

Shares of Stock purchased under the Plan will be subject to a restriction prohibiting the transfer, sale, pledge or alienation of such shares of Stock by a Participant, other than by will or by the laws of descent and distribution, for a period of six (6) months (or such other period as may be determined by the Administrator) from the date on which such shares of Stock are purchased by the Participant hereunder.

In addition, and without limiting the foregoing, for such period determined by the Administrator, all shares of Stock purchased under the Plan by a Participant will be subject to a restriction prohibiting the transfer of such shares of Stock by the Participant from the account where such shares of Stock are initially held until such shares are sold through the Plan’s custodian and record keeper.

By electing to participate in the Plan, each Participant agrees to provide such information about any transfer of Stock acquired under the Plan that occurs within two years after the first day of the Option Period in which such Stock was acquired and within one year after the acquisition of such Stock as may be requested by the Company or any Designated Subsidiary in order to assist such entity in complying with applicable tax laws.

Section 12.

Interest

No interest will be payable on any amount held in the Account of any Participant.

Section 13.

Taxes

Payroll deductions will be made on an after-tax basis. The Administrator will have the right, as a condition to exercising an Option, to make such provision as it deems necessary to satisfy its obligations to withhold federal, state, local income or other taxes incurred by reason of the purchase or disposition of shares of Stock under the Plan. In the Administrator’s discretion and subject to applicable law, such tax obligations may be paid in whole or in part by delivery of shares of Stock to the Company, including shares of Stock purchased under the Plan, valued at Fair Market Value, but not in excess of the minimum statutory amounts required to be withheld.

Section 14.

Cancellation and Withdrawal

A Participant who holds an Option under the Plan may cancel all (but not less than all) of his or her Option and terminate his or her participation and/or payroll deduction authorization by revoking such authorization by written notice delivered to the Administrator, which, to be effective with respect to an upcoming Exercise Date, must be delivered not later than 10 business days prior to such Exercise Date (or such other time as specified by the Administrator). Upon such termination and cancellation, the balance in the Participant’s Account or any amounts paid by other means will be returned to the Participant, without interest, as soon as administratively practicable thereafter. If a Participant cancels or otherwise terminates an Option, in order to participate in future Option Periods, the Participant must affirmatively execute and deliver a new election to participate in accordance with Section 7.

Section 15.

Termination of Employment; Death of Participant

Upon the termination of a Participant’s employment with the Company (or a Designated Subsidiary, as applicable) for any reason or the death of a Participant during an Option Period prior to an Exercise Date or in the event the Participant ceases to qualify as an Eligible Employee, the Participant will cease to be a Participant, any Option held by him or her under the Plan will be deemed canceled, the balance in the Participant’s Account or amounts paid by other means will be returned to the Participant (or his or her estate or designated beneficiary in the event of the Participant’s death), without interest, as soon as administratively practicable thereafter, and the Participant will have no further rights under the Plan.

Section 16.

Equal Rights; Participant’s Rights Not Transferable

All Participants granted Options under the Plan will have the same rights and privileges consistent with the requirements set forth in Section 423. Any Option granted under the Plan will be exercisable during the Participant’s lifetime only by him or her and may not be sold, pledged, assigned, or transferred in any manner. In the event any Participant violates or attempts to violate the terms of this Section 16, as determined by the Administrator in its sole discretion, any Options held by him or her may be terminated by the Company and, upon the return to the Participant of the balance of his or her Account or any amounts paid by other means, without interest, all of the Participant’s rights under the Plan will terminate.

Section 17.

Change in Capitalization; Merger

In the event of any change in the outstanding Stock by reason of a stock dividend, split-up, recapitalization, merger, consolidation, reorganization, or other capital change, the aggregate number and type of shares of Stock available under the Plan, the number and type of shares of Stock granted under any outstanding Options, the maximum number and type of shares of Stock purchasable under any outstanding Option, and the purchase price per share of Stock under any outstanding Option will be appropriately adjusted; provided, that no such adjustment will be made unless the Administrator is satisfied that it will not constitute a modification of the rights granted under the Plan or otherwise disqualify the Plan as an employee stock purchase plan under the provisions of Section 423.

In the event of a sale of all or substantially all of the Stock or a sale of all or substantially all of the assets of the Company, or a merger or similar transaction in which the Company is not the surviving corporation or that results in the acquisition of the Company by another person, the Administrator may, in its discretion, (a) if the Company is merged with or acquired by another corporation, provide that each outstanding Option will be assumed or exchanged for a substitute Option granted by the acquiror or successor corporation or by a parent or subsidiary of the acquiror or successor corporation, (b) cancel each outstanding Option and return the balances in Participants’ Accounts or any amounts paid by other means to the Participants, and/or (c) pursuant to Section 19, terminate the Option Period on or before the date of the proposed sale, merger or similar transaction.

Section 18.

Administration of Plan

The Plan will be administered by the Administrator, which will have the right to determine any questions which may arise regarding the interpretation and application of the provisions of the Plan and to make, administer, and interpret such rules and regulations as it deems necessary or advisable. All determinations and decisions by the Administrator regarding the interpretation or application of the Plan will be final and binding on all Participants.

The Administrator may specify the manner in which Employees are to provide notices and payroll deduction authorizations. Notwithstanding any requirement of “written notice” herein, the Administrator may permit Employees to provide notices and payroll deduction authorizations electronically.

Section 19.

Amendment and Termination of Plan

The Board reserves the right at any time or times to amend the Plan to any extent and in any manner it may deem advisable, by action of the Board; provided, that any amendment that would be treated as the adoption of a new plan for purposes of Section 423 will have no force or effect unless approved by the shareholders of the Company within 12 months before or after its adoption.

The Plan may be suspended or terminated at any time by the Company, by action of the Board. In connection therewith, the Board may provide, in its sole discretion, either that outstanding Options will be exercisable either at the Exercise Date for the applicable Option Period or on such earlier date as the Board may specify (in which case such earlier date will be treated as the Exercise Date for the applicable Option Period), or that the balance of each Participant’s Account or any amounts paid by other means will be returned to the Participant, without interest.

Section 20.

Approvals

Notwithstanding anything herein to the contrary, the obligation of the Company to issue and deliver shares of Stock under the Plan will be subject to the approval required of any governmental authority in connection with the authorization, issuance, sale or transfer of said shares of Stock, to any requirements of any national securities exchange applicable thereto, and to compliance by the Company with other applicable legal requirements in effect from time to time.

Section 21.

Participants’ Rights as Shareholders and Employees

A Participant will have no rights or privileges as a shareholder of the Company and will not receive any dividends in respect of any shares of Stock covered by an Option granted hereunder until such Option has been exercised, full payment has been made for such shares of Stock, and the shares of Stock have been issued to the Participant.

Nothing contained in the provisions of the Plan will be construed as giving to any Employee the right to be retained in the employ of the Company or any Designated Subsidiary or as interfering with the right of the Company or any Designated Subsidiary to discharge, promote, demote or otherwise re-assign any Employee from one position to another within the Company any Designated Subsidiary at any time.

Section 22.

Governing Law

Subject to overriding federal law, the Plan will be governed by and interpreted consistently with the laws of the State of Delaware, except as may be necessary to comply with applicable requirements of federal law.

Section 23.

Effective Date and Term

The Company’s shareholders approved the Plan at the Company’s 2014 annual meeting on May 20, 2014 (the “Effective Date”) and no rights will be granted hereunder after the earliest to occur of (a) the Plan’s termination by the Company, (b) the issuance of all shares of Stock available for issuance under the Plan or (c) the day before the 10-year anniversary of the date the Company’s shareholders approve the Plan. The Plan was amended and restated on September 22, 2020.

EXHIBIT A

Definition of Terms

The following terms, when used in the Plan, will have the meanings and be subject to the provisions set forth below:

“401(k) Plan”: A savings plan qualifying under Section 401(k) of the Code that is sponsored by the Company or one of its Subsidiaries for the benefit of its employees.

“Account”: A payroll deduction account maintained in the Participant’s name on the books of the Company or a Designated Subsidiary.

“Administrator”: The Compensation Committee of the Board and its delegates, except that the Compensation Committee may delegate its authority under the Plan to a sub-committee comprised of one or more of its members, to members of the Board, or to officers or employees of the Company to the extent permitted by applicable law. In each case references herein to the Administrator refer, as applicable, to such persons or groups so delegated to the extent of such delegation.

“Board”: The Board of Directors of the Company.

“Code”: The U.S. Internal Revenue Code of 1986 as from time to time amended and in effect, or any successor statute as from time to time in effect.

“Company”: The Hanover Insurance Group, Inc.

“Designated Subsidiary”: A Subsidiary of the Company that has been designated by the Board or the Compensation Committee of the Board from time to time as eligible to participate in the Plan. Exhibit B sets forth the Designated Subsidiaries as of the Effective Date.

“Effective Date”: The date set forth in Section 23 of the Plan.

“Eligible Employee”: Any Employee who meets the eligibility requirements set forth in Section 4 of the Plan.

“Employee”: Any person who is employed by the Company or a Designated Subsidiary. For the avoidance of doubt, independent consultants and independent contractors are not “Employees.”

“Exercise Date”: The date set forth in Section 5 of the Plan or otherwise designated by the Administrator with respect to a particular Option Period on which a Participant will be deemed to have exercised the Option granted to him or her for such Option Period.

“Fair Market Value”:

(a) If the Stock is readily traded on an established national exchange or trading system (including the Nasdaq Global Market), the closing price of the Stock as reported by the principal exchange on which such Stock is traded; provided, however, that if such day is not a trading day, Fair Market Value will mean the reported closing price of the Stock for the immediately preceding day that is a trading day.

(b) If the Stock is not traded on an established national exchange or trading system, the average of the bid and ask prices for such Stock where the bid and ask prices are quoted.

(c) If the Stock cannot be valued pursuant to clauses (a) or (b), the value as determined in good faith by the Board in its sole discretion.

“Maximum Share Limit”: The meaning set forth in Section 10 of the Plan.

“Option”: An option granted pursuant to the Plan entitling the holder to acquire shares of Stock upon payment of the Purchase Price per share of Stock.

“Option Period”: An offering period established in accordance with Section 5 of the Plan.

“Parent”: A “parent corporation” as defined in Section 424(e) of the Code.

“Participant”: An Eligible Employee who elects to enroll in the Plan.

“Plan”: The Hanover Insurance Group Second Amended and Restated 2014 Employee Stock Purchase Plan, as from time to time amended and in effect.

“Purchase Price”: The price per share of Stock with respect to an Option Period determined in accordance with Section 9 of the Plan.

“Section 423”: Section 423 of the Code and the regulations thereunder.

“Stock”: Common stock of the Company, par value $0.01 per share.

“Subsidiary”: A “subsidiary corporation” as defined in Section 424(f) of the Code.

EXHIBIT B

Designated Subsidiaries

The Hanover Insurance Company

Exhibit 31.1

CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, John C. Roche, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of The Hanover Insurance Group, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 28, 2020

/s/ John C. Roche

John C. Roche

President, Chief Executive Officer and Director

Exhibit 31.2

CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey M. Farber, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of The Hanover Insurance Group, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 28, 2020

/s/ Jeffrey M. Farber

Jeffrey M. Farber

Executive Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as President, Chief Executive Officer and Director of The Hanover Insurance Group, Inc. (the “Company”), does hereby certify that to the undersigned’s knowledge:

the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

the information contained in the Company’s Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John C. Roche

John C. Roche

President, Chief Executive Officer and

Director

Dated: October 28, 2020

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Executive Vice President and Chief Financial Officer of The Hanover Insurance Group, Inc. (the “Company”), does hereby certify that to the undersigned’s knowledge:

the information contained in the Company’s Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jeffrey M. Farber

Jeffrey M. Farber

Executive Vice President and

Chief Financial Officer

Dated: October 28, 2020