HANOVER INSURANCE GROUP, INC. - Quarter Report: 2021 September (Form 10-Q)

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, 2021

☐	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 35,580,242 as of October 26, 2021.

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	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	45

PART II.	OTHER INFORMATION	46

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 6.	Exhibits	49

SIGNATURES		50

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)	2021			2020			2021			2020
Revenues
Premiums	$	1,186.0		$	1,135.4		$	3,527.6		$	3,373.4
Net investment income		78.8			67.6			231.2			194.9
Net realized and unrealized investment gains (losses):
Net realized gains from sales and other		3.6			8.2			6.8			12.1
Net change in fair value of equity securities		0.3			30.3			65.9			(44.4	)
Impairment recoveries (losses) on investments		0.1			(0.8	)		(0.1	)		(27.9	)
Total net realized and unrealized investment gains (losses)		4.0			37.7			72.6			(60.2	)
Fees and other income		7.6			9.1			21.7			22.2
Total revenues		1,276.4			1,249.8			3,853.1			3,530.3
Losses and expenses
Losses and loss adjustment expenses		844.0			709.7			2,370.4			2,149.9
Amortization of deferred acquisition costs		244.0			237.7			728.5			711.9
Interest expense		8.5			9.8			25.5			28.6
Loss from repayment of debt		—			6.1			—			6.2
Other operating expenses		137.4			137.9			412.2			395.9
Total losses and expenses		1,233.9			1,101.2			3,536.6			3,292.5
Income from continuing operations before income taxes		42.5			148.6			316.5			237.8
Income tax expense (benefit):
Current		9.9			29.9			47.1			69.7
Deferred		(2.2	)		(0.8	)		12.2			(28.0	)
Total income tax expense		7.7			29.1			59.3			41.7
Income from continuing operations		34.8			119.5			257.2			196.1
Discontinued operations (net of taxes):
Loss from discontinued life businesses		(0.8	)		(0.6	)		(2.0	)		(2.0	)
Net income	$	34.0		$	118.9		$	255.2		$	194.1
Earnings per common share:
Basic:
Income from continuing operations	$	0.98		$	3.17		$	7.14		$	5.16
Discontinued operations (net of taxes):
Loss from discontinued life businesses		(0.03	)		(0.02	)		(0.05	)		(0.05	)
Net income per share	$	0.95		$	3.15		$	7.09		$	5.11
Weighted average shares outstanding		35.7			37.7			36.0			38.0
Diluted:
Income from continuing operations	$	0.96		$	3.14		$	7.04		$	5.11
Discontinued operations (net of taxes):
Loss from discontinued life businesses		(0.02	)		(0.01	)		(0.06	)		(0.06	)
Net income per share	$	0.94		$	3.13		$	6.98		$	5.05
Weighted average shares outstanding		36.3			38.0			36.6			38.4

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 (LOSS) (UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,					September 30,
(In millions)	2021			2020			2021			2020
Net income	$	34.0		$	118.9		$	255.2		$	194.1
Other comprehensive income (loss), net of tax:
Available-for-sale securities:
Changes in net unrealized gains (losses) on investment securities:
Having no credit losses recognized in the Consolidated Statements of Income		(47.8	)		27.5			(171.4	)		198.4
Having credit losses recognized in the Consolidated Statements of Income		(0.1	)		0.3			0.1			(2.1	)
Total available-for-sale securities		(47.9	)		27.8			(171.3	)		196.3
Pension and postretirement benefits:
Net change in net actuarial loss		0.6			1.1			2.0			3.5
Total other comprehensive income (loss), net of tax		(47.3	)		28.9			(169.3	)		199.8
Comprehensive income (loss)	$	(13.3	)	$	147.8		$	85.9		$	393.9

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 BALANCE SHEETS (UNAUDITED)

	September 30,			December 31,
(In millions, except share data)	2021			2020
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $7,400.4 and $6,945.6)	$	7,699.2		$	7,454.4
Equity securities, at fair value		615.5			598.5
Other investments		788.3			793.2
Total investments		9,103.0			8,846.1
Cash and cash equivalents		171.2			120.6
Accrued investment income		48.2			51.2
Premiums and accounts receivable, net		1,503.0			1,339.3
Reinsurance recoverable on paid and unpaid losses and unearned premiums		2,002.8			1,874.3
Deferred acquisition costs		544.6			477.5
Goodwill		178.8			178.8
Other assets		446.3			445.7
Assets of discontinued businesses		107.4			110.2
Total assets	$	14,105.3		$	13,443.7
Liabilities
Loss and loss adjustment expense reserves	$	6,540.1		$	6,024.0
Unearned premiums		2,742.0			2,482.7
Expenses and taxes payable		679.8			687.5
Deferred income tax liability		69.6			97.3
Reinsurance premiums payable		68.1			48.4
Debt		781.4			780.8
Liabilities of discontinued businesses		122.0			120.8
Total liabilities		11,003.0			10,241.5
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		1,880.7			1,857.4
Accumulated other comprehensive income		203.2			372.5
Retained earnings		2,846.7			2,668.0
Treasury stock at cost (24.9 million and 24.1 million shares)		(1,828.9	)		(1,696.3	)
Total shareholders’ equity		3,102.3			3,202.2
Total liabilities and shareholders’ equity	$	14,105.3		$	13,443.7

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)	2021			2020			2021			2020
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		1,873.4			1,866.6			1,857.4			1,837.3
Settlement and prepayment of accelerated share repurchases and other		7.3			4.9			23.3			34.2
Balance at end of period		1,880.7			1,871.5			1,880.7			1,871.5
Accumulated Other Comprehensive Income, net of tax
Net Unrealized Appreciation (Depreciation) on Investments:
Balance at beginning of period		304.7			384.5			428.1			216.0
Net appreciation (depreciation) on available-for-sale securities		(47.9	)		27.8			(171.3	)		196.3
Balance at end of period		256.8			412.3			256.8			412.3
Defined Benefit Pension and Postretirement Plans:
Balance at beginning of period		(54.2	)		(61.0	)		(55.6	)		(63.4	)
Net amount recognized as net periodic benefit cost		0.6			1.1			2.0			3.5
Balance at end of period		(53.6	)		(59.9	)		(53.6	)		(59.9	)
Total accumulated other comprehensive income		203.2			352.4			203.2			352.4
Retained Earnings
Balance at beginning of period		2,837.9			2,435.1			2,668.0			2,410.9
Cumulative effect of accounting change, net of taxes		—			—			—			(0.9	)
Balance at beginning of period, as adjusted		2,837.9			2,435.1			2,668.0			2,410.0
Net income		34.0			118.9			255.2			194.1
Dividends to shareholders		(25.2	)		(24.8	)		(76.5	)		(74.9	)
Balance at end of period		2,846.7			2,529.2			2,846.7			2,529.2
Treasury Stock
Balance at beginning of period		(1,808.4	)		(1,554.1	)		(1,696.3	)		(1,485.2	)
Shares purchased at cost		(24.0	)		(45.0	)		(147.6	)		(118.6	)
Net shares reissued at cost under employee stock-based compensation plans		3.5			0.4			15.0			5.1
Balance at end of period		(1,828.9	)		(1,598.7	)		(1,828.9	)		(1,598.7	)
Total shareholders’ equity	$	3,102.3		$	3,155.0		$	3,102.3		$	3,155.0

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)	2021			2020
Cash Flows From Operating Activities
Net income	$	255.2		$	194.1
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized investment (gains) losses		(73.0	)		59.7
Loss from repayment of debt	—				6.2
Net amortization and depreciation		12.5			13.9
Stock-based compensation expense		16.8			14.4
Amortization of defined benefit plan costs		2.5			4.5
Deferred income tax expense (benefit)		12.4			(27.9	)
Change in deferred acquisition costs		(67.1	)		(15.1	)
Change in premiums receivable, net of reinsurance premiums payable		(144.0	)		(78.7	)
Change in loss, loss adjustment expense and unearned premium reserves		776.9			412.6
Change in reinsurance recoverable		(128.4	)		(27.3	)
Change in expenses and taxes payable		(51.0	)		(9.0	)
Other, net		(17.4	)		(0.8	)
Net cash provided by operating activities		595.4			546.6
Cash Flows From Investing Activities
Proceeds from disposals and maturities of fixed maturities		1,155.6			961.0
Proceeds from disposals of equity securities and other investments		209.6			153.5
Purchase of fixed maturities		(1,571.5	)		(1,423.1	)
Purchase of equity securities and other investments		(125.7	)		(159.6	)
Capital expenditures		(5.7	)		(12.1	)
Net cash used in investing activities		(337.7	)		(480.3	)
Cash Flows From Financing Activities
Proceeds from exercise of employee stock options		19.3			4.8
Proceeds from debt borrowings, net		—			296.4
Dividends paid to shareholders		(75.6	)		(74.0	)
Repurchases of common stock		(142.6	)		(94.3	)
Repayment of debt		—			(175.8	)
Other financing activities		(8.2	)		(7.6	)
Net cash used in financing activities		(207.1	)		(50.5	)
Net change in cash and cash equivalents		50.6			15.8
Cash and cash equivalents, beginning of period		120.6			215.7
Cash and cash equivalents, end of period	$	171.2		$	231.5

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

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

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 insurance companies; and other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 8 – “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. 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, 2021 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 on February 24, 2021.

2. New Accounting Pronouncements

Recently Implemented Standards

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Update No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. This guidance clarifies, for each reporting period, that an entity should reevaluate whether a callable debt security with multiple call dates is required to amortize any premium to the next call date. The updated guidance is effective for annual and interim periods beginning after December 15, 2020 and should be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company implemented this guidance effective January 1, 2021, and it did not 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 implemented this guidance effective January 1, 2021, and it did not 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. The Company implemented this guidance effective January 1, 2021, and it did not have a material impact on its financial position or results of operations.

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3. Investments

A. Fixed maturities

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

	September 30, 2021
						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	$	355.2	$	—		$	355.2	$	10.8	$	7.3	$	358.7
Foreign government		2.2		—			2.2		0.4		—		2.6
Municipal		1,104.7		—			1,104.7		39.5		5.3		1,138.9
Corporate		3,983.8		(0.2	)		3,983.6		226.6		11.4		4,198.8
Residential mortgage-backed		1,069.1		—			1,069.1		18.2		7.7		1,079.6
Commercial mortgage-backed		784.0		—			784.0		36.3		3.2		817.1
Asset-backed		101.6		—			101.6		2.2		0.3		103.5
Total fixed maturities	$	7,400.6	$	(0.2	)	$	7,400.4	$	334.0	$	35.2	$	7,699.2

	December 31, 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	$	376.4	$	—		$	376.4	$	17.6	$	2.0	$	392.0
Foreign government		2.2		—			2.2		0.5		—		2.7
Municipal		1,042.1		—			1,042.1		61.7		0.1		1,103.7
Corporate		3,770.0		(0.1	)		3,769.9		341.8		0.4		4,111.3
Residential mortgage-backed		978.2		—			978.2		33.1		0.6		1,010.7
Commercial mortgage-backed		705.4		—			705.4		54.8		0.2		760.0
Asset-backed		71.4		—			71.4		2.6		—		74.0
Total fixed maturities	$	6,945.7	$	(0.1	)	$	6,945.6	$	512.1	$	3.3	$	7,454.4

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” in the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report on Form 10-K.

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, 2021
	Amortized Cost, Net
	of Allowance for		Fair
(in millions)	Credit Losses		Value
Due in one year or less	$	311.4	$	315.9
Due after one year through five years		1,885.3		2,013.4
Due after five years through ten years		2,562.7		2,676.5
Due after ten years		686.3		693.2
		5,445.7		5,699.0
Mortgage-backed and asset-backed securities		1,954.7		2,000.2
Total fixed maturities	$	7,400.4	$	7,699.2

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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, 2021 and December 31, 2020, including the length of time the securities have been in an unrealized loss position:

	September 30, 2021
	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	$	5.7	$	148.9	$	1.6	$	21.5	$	7.3	$	170.4
Municipal		5.3		372.6		—		0.5		5.3		373.1
Corporate		10.5		485.8		0.1		1.9		10.6		487.7
Residential mortgage-backed		7.7		526.5		—		—		7.7		526.5
Commercial mortgage-backed		3.2		140.8		—		—		3.2		140.8
Asset-backed		0.3		33.5		—		—		0.3		33.5
Total investment grade		32.7		1,708.1		1.7		23.9		34.4		1,732.0
Below investment grade:
Corporate		0.8		49.2		—		—		0.8		49.2
Total fixed maturities	$	33.5	$	1,757.3	$	1.7	$	23.9	$	35.2	$	1,781.2

	December 31, 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	$	2.0	$	140.7	$	—	$	—	$	2.0	$	140.7
Municipal		0.1		19.3		—		0.7		0.1		20.0
Corporate		0.4		53.4		—		—		0.4		53.4
Residential mortgage-backed		0.6		94.4		—		—		0.6		94.4
Commercial mortgage-backed		0.2		33.2		—		—		0.2		33.2
Total investment grade		3.3		341.0		—		0.7		3.3		341.7
Below investment grade:
Corporate		—		4.6		—		—		—		4.6
Total fixed maturities	$	3.3	$	345.6	$	—	$	0.7	$	3.3	$	346.3

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.

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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,				Nine Months Ended September 30,
	2021		2020		2021		2020
(in millions)
Proceeds from sales	$	83.4	$	37.5	$	335.5	$	195.0
Gross gains		1.0		3.4		4.9		8.4
Gross losses		1.7		0.2		9.1		2.9

D. Impairments

For the three months ended September 30, 2021, we recognized net recoveries of $0.1 million, consisting of recoveries on mortgage loans of $0.7 million, partially offset by impairments on fixed maturities of $0.6 million. For the nine months ended September 30, 2021, we recognized net impairments of $0.1 million, consisting of impairments on fixed maturities of $0.8 million, partially offset by recoveries on mortgage loans of $0.7 million. 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 recoveries of credit losses on fixed maturities. For the nine months ended September 30, 2020, we 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.

At September 30, 2021 and December 31, 2020, the allowance for credit losses on mortgage loans was $7.1 and $7.9 million, respectively, and the allowance for credit losses on available-for-sale debt securities was $0.2 million and $0.1 million, respectively.

The methodology and significant inputs used to measure the amount of credit losses were as follows:

Fixed maturities, Corporate – the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating and asset duration, and loss-given-default factors based on security type. These factors are based on historical data provided by an independent third-party rating agency. In addition, other qualitative market data relevant to the realizability of contractual cash flows may be considered, including current conditions and reasonable and supportable forecasts.

Mortgage loans – the Company estimated losses by applying expected loss rates, which are based on historical data. Embedded in expected loss rates are mortgage risk ratings and risk factors associated with property type such as office, retail, lodging, multi-family and industrial. Risk ratings, based on property characteristics and metrics including the geographic market, are predominantly driven by estimates of loan-to-value and debt service coverage ratios. Ratings may be adjusted to reflect current conditions and to incorporate reasonable and supportable forecasts, such as volatility of cash flows and valuation.

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)		2021			2020			2021		2020
Net gains (losses) recognized during the period	$	0.3		$	30.3		$	65.9	$	(44.4	)
Less: net gains (losses) recognized on equity securities sold during the period		0.9			(3.5	)		1.4		(19.9	)
Net unrealized (losses) gains recognized during the period on equity securities still held	$	(0.6	)	$	33.8		$	64.5	$	(24.5	)

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

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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:

•

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.

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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.

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

	September 30, 2021				December 31, 2020
	Carrying		Fair		Carrying		Fair
(in millions)	Value		Value		Value		Value
Financial Assets carried at:
Fair Value through AOCI:
Fixed maturities	$	7,699.2	$	7,699.2	$	7,454.4	$	7,454.4
Fair Value through Net Income:
Equity securities		615.5		615.5		598.5		598.5
Other investments		158.1		158.1		176.8		176.8
Amortized Cost/Cost:
Other investments		465.2		496.4		470.3		504.8
Cash and cash equivalents		171.2		171.2		120.6		120.6
Total financial instruments	$	9,109.2	$	9,140.4	$	8,820.6	$	8,855.1

Financial Liabilities carried at:
Amortized Cost:
Debt	$	781.4	$	854.5	$	780.8	$	887.7

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 2021 and 2020, 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, 2021
(in millions)	Total		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Treasury and government agencies	$	358.7	$	180.7	$	178.0	$	—
Foreign government		2.6		—		2.6		—
Municipal		1,138.9		—		1,133.5		5.4
Corporate		4,198.8		—		4,198.7		0.1
Residential mortgage-backed		1,079.6		—		1,079.6		—
Commercial mortgage-backed		817.1		—		805.6		11.5
Asset-backed		103.5		—		103.5		—
Total fixed maturities		7,699.2		180.7		7,501.5		17.0
Equity securities		615.5		605.4		—		10.1
Other investments		4.0		—		—		4.0
Total investment assets at fair value	$	8,318.7	$	786.1	$	7,501.5	$	31.1

	December 31, 2020
(in millions)	Total		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Treasury and government agencies	$	392.0	$	155.8	$	236.2	$	—
Foreign government		2.7		—		2.7		—
Municipal		1,103.7		—		1,096.7		7.0
Corporate		4,111.3		—		4,110.8		0.5
Residential mortgage-backed		1,010.7		—		1,010.7		—
Commercial mortgage-backed		760.0		—		747.6		12.4
Asset-backed		74.0		—		74.0		—
Total fixed maturities		7,454.4		155.8		7,278.7		19.9
Equity securities		598.5		593.0		—		5.5
Other investments		4.0		—		—		4.0
Total investment assets at fair value	$	8,056.9	$	748.8	$	7,278.7	$	29.4

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, 2021 and December 31, 2020, the fair values of these investments were $154.1 million and $172.8 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, 2021
(in millions)	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	171.2	$	171.2	$	—	$	—
Other investments		496.4		—		2.8		493.6
Total financial instruments	$	667.6	$	171.2	$	2.8	$	493.6

Liabilities:
Debt	$	854.5	$	—	$	854.5	$	—

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	December 31, 2020
(in millions)	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	120.6	$	120.6	$	—	$	—
Other investments		504.8		—		2.7		502.1
Total financial instruments	$	625.4	$	120.6	$	2.7	$	502.1

Liabilities:
Debt	$	887.7	$	—	$	887.7	$	—

The following tables provide a 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, 2021
Balance July 1, 2021	$	5.5		$	0.4		$	11.7		$	17.6		$	9.6	$	27.2
Total gains:
Included in total net realized and unrealized investment gains		—			—			—			—			4.5		4.5
Sales		(0.1	)		(0.3	)		(0.2	)		(0.6	)		—		(0.6	)
Balance September 30, 2021	$	5.4		$	0.1		$	11.5		$	17.0		$	14.1	$	31.1
Change in unrealized losses for the period included in other comprehensive loss for assets held at the end of the period	$	—		$	—		$	—		$	—		$	—	$	—

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

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	Fixed Maturities
(in millions)	Municipal			Corporate			Commercial mortgage- backed			Total			Equity and Other		Total Assets
Nine Months Ended
September 30, 2021
Balance January 1, 2021	$	7.0		$	0.5		$	12.4		$	19.9		$	9.5	$	29.4
Total gains (losses):
Included in total net realized and unrealized investment gains		—			—			—			—			4.6		4.6
Included in other comprehensive loss-net depreciation on available-for-sale securities		—			—			(0.4	)		(0.4	)		—		(0.4	)
Sales		(1.6	)		(0.4	)		(0.5	)		(2.5	)		—		(2.5	)
Balance September 30, 2021	$	5.4		$	0.1		$	11.5		$	17.0		$	14.1	$	31.1
Change in unrealized losses for the period included in other comprehensive loss for assets held at the end of the period	$	—		$	—		$	(0.4	)	$	(0.4	)	$	—	$	(0.4	)

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

There were no transfers between Level 2 and Level 3 for the three months ended September 30, 2021 and 2020, or for the nine months ended September 30, 2021. 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 Level 3 liabilities held by the Company for the three and nine months ended September 30, 2021 and 2020.

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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, 2021			December 31, 2020
	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	$	5.4	0.7 - 6.8% (4.8%) 0.2% (0.2%)	$	7.0	0.7 - 6.8% (5.0%) 0.2% (0.2%)
Corporate	Discounted cash flow	Discount for: Small issue size Above-market coupon	0.1		2.5% (2.5%) 0.3% (0.3%)	0.5		2.5% (2.5%) 0.3% (0.3%)
Commercial mortgage-backed	Discounted cash flow	Discount for: Small issue size Above-market coupon Lease structure Credit stress	11.5		1.9 - 3.1% (2.7%) 0.5% (0.5%) 0.3% (0.3%) —	12.4		1.9 - 3.1% (2.7%) 0.5% (0.5%) 0.3% (0.3%) 0.2% (0.2%)
Equity securities	Market comparables	Net tangible asset market multiples	1.3		1.0X (1.0X)		1.1	1.0X (1.0X)
	Internal price	Unadjusted price from financing round	8.8		11.18 (11.18)		4.4	5.60 (5.60)
Other	Discounted cash flow	Discount rate	4.0		16.2% (16.2%)		4.0	16.2% (16.2%)

The weighted average of the unobservable inputs was weighted by the relative fair value of the 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. Income Taxes

Income tax expense for the nine months ended September 30, 2021 and 2020 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.

The tax provision was comprised of a U.S. federal income tax expense of $59.3 million and $41.7 million for the nine months ended September 30, 2021 and 2020, respectively.

The Company and its subsidiaries file 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. The audits of the Company’s Massachusetts Corporate Excise Tax for years 2017 and 2018 commenced in June 2021.

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6. Pension Plans

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

	Three Months Ended September 30,
	2021			2020
(in millions)	Pension Plans
Interest cost	$	3.8		$	4.5
Expected return on plan assets		(4.6	)		(5.6	)
Recognized net actuarial loss		0.8			1.5
Net periodic pension cost	$	—		$	0.4

	Nine Months Ended September 30,
	2021			2020
(in millions)	Pension Plans

Interest cost	$	11.2		$	13.7
Expected return on plan assets		(13.8	)		(16.7	)
Recognized net actuarial loss		2.4			4.4
Net periodic pension (benefit) cost	$	(0.2	)	$	1.4

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7. Other Comprehensive Income (Loss)

The following tables provide changes in other comprehensive income (loss).

	Three Months Ended September 30,
	2021									2020
				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 (losses) arising during period for those having no credit losses in Consolidated Statement of Income	$	(57.0	)	$	12.1		$	(44.9	)	$	42.2		$	(8.7	)	$	33.5
Net unrealized gains (losses) arising during period for those having credit losses in Consolidated Statement of Income		(0.1	)		—			(0.1	)		3.0			(0.9	)		2.1
Amount of gains realized from sales and other recognized in Consolidated Statement of Income		(2.5	)		(0.3	)		(2.8	)		(4.9	)		(1.4	)		(6.3	)
Amount of credit recoveries recognized in the Consolidated Statement of Income		—			—			—			(2.2	)		0.6			(1.6	)
Amount of additional impairment (recoveries) losses recognized in the Consolidated Statement of Income		(0.1	)		—			(0.1	)		0.2			(0.1	)		0.1
Net unrealized gains (losses)		(59.7	)		11.8			(47.9	)		38.3			(10.5	)		27.8
Pension and postretirement benefits:
Amortization of net actuarial losses recognized as net periodic benefit cost		0.8			(0.2	)		0.6			1.4			(0.3	)		1.1
Other comprehensive income (loss)	$	(58.9	)	$	11.6		$	(47.3	)	$	39.7		$	(10.8	)	$	28.9


	Nine Months Ended September 30,
	2021									2020
				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 (losses) arising during period for those having no credit losses in Consolidated Statement of Income	$	(206.8	)	$	43.5		$	(163.3	)	$	251.6		$	(52.8	)	$	198.8
Net unrealized gains (losses) arising during period for those having credit losses in Consolidated Statement of Income		0.2			(0.1	)		0.1			(4.9	)		0.9			(4.0	)
Amount of gains realized from sales and other recognized in Consolidated Statement of Income		(5.7	)		(2.5	)		(8.2	)		(8.9	)		(5.0	)		(13.9	)
Amount of credit losses recognized in the Consolidated Statement of Income		—			—			—			2.8			(0.5	)		2.3
Amount of additional impairment losses recognized in the Consolidated Statement of Income		0.1			—			0.1			16.6			(3.5	)		13.1
Net unrealized gains (losses)		(212.2	)		40.9			(171.3	)		257.2			(60.9	)		196.3
Pension and postretirement benefits:
Amortization of net actuarial losses recognized as net periodic benefit cost		2.5			(0.5	)		2.0			4.4			(0.9	)		3.5
Other comprehensive income (loss)	$	(209.7	)	$	40.4		$	(169.3	)	$	261.6		$	(61.8	)	$	199.8

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Reclassifications out of accumulated other comprehensive income were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in millions)	2021			2020			2021				2020
	Amount Reclassified from
Details about Accumulated Other	Accumulated Other														Affected Line Item in the Statement
Comprehensive Income Components	Comprehensive Income														Where Net Income is Presented
Net unrealized gains (losses) on investment securities	$	2.5		$	5.0			$	5.7			$	8.9		Net realized gains from sales and other
		0.1			1.7				(0.1	)			(19.1	)	Impairment recoveries (losses) on investments
		2.6			6.7				5.6				(10.2	)	Total before tax
		0.3			1.0				2.5				9.0		Tax benefit
		2.9			7.7				8.1				(1.2	)	Continuing operations; net of tax
		—			0.1				—				(0.3	)	Discontinued operations - life businesses
		2.9			7.8				8.1				(1.5	)	Net of tax
Amortization of defined benefit pension and postretirement actuarial losses		(0.8	)		(1.4	)			(2.5	)			(4.4	)	Loss adjustment expenses and other operating expenses ⁽¹⁾
		0.2			0.3				0.5				0.9		Tax benefit
		(0.6	)		(1.1	)			(2.0	)			(3.5	)	Continuing operations; net of tax
Total reclassifications for the period	$	2.3		$	6.7			$	6.1			$	(5.0	)	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, 2021 and 2020.

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

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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)	2021			2020			2021			2020
Operating revenues:
Commercial Lines	$	755.5		$	713.3		$	2,261.8		$	2,136.9
Personal Lines		512.6			493.3			1,506.3			1,438.1
Other		4.3			5.5			12.4			15.5
Total		1,272.4			1,212.1			3,780.5			3,590.5
Net realized and unrealized investment gains (losses)		4.0			37.7			72.6			(60.2	)
Total revenues	$	1,276.4		$	1,249.8		$	3,853.1		$	3,530.3
Operating income (loss) before interest expense and income taxes:
Commercial Lines:
Underwriting (loss) income	$	(10.2	)	$	18.7		$	(5.7	)	$	50.4
Net investment income		52.9			44.4			155.7			128.7
Other expense		(0.3	)		(0.8	)		(1.0	)		(6.9	)
Commercial Lines operating income		42.4			62.3			149.0			172.2
Personal Lines:
Underwriting (loss) income		(20.3	)		43.0			48.1			104.5
Net investment income		22.6			19.5			66.5			56.3
Other income		1.3			1.7			3.0			0.9
Personal Lines operating income		3.6			64.2			117.6			161.7
Other:
Underwriting loss		(0.4	)		(0.3	)		(1.0	)		(4.0	)
Net investment income		3.3			3.7			9.0			9.9
Other expense		(1.9	)		(1.5	)		(5.2	)		(5.4	)
Other operating income		1.0			1.9			2.8			0.5
Operating income before interest expense and income taxes		47.0			128.4			269.4			334.4
Interest on debt		(8.5	)		(9.8	)		(25.5	)		(28.6	)
Operating income before income taxes		38.5			118.6			243.9			305.8
Non-operating items:
Net realized and unrealized investment gains (losses)		4.0			37.7			72.6			(60.2	)
Loss from repayment of debt		—			(6.1	)		—			(6.2	)
Other non-operating		—			(1.6	)		—			(1.6	)
Income from continuing operations before income taxes	$	42.5		$	148.6		$	316.5		$	237.8

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

(in millions)	September 30, 2021		December 31, 2020
Property and Casualty Insurance Companies	$	13,997.9	$	13,333.5
Assets of discontinued businesses		107.4		110.2
Total	$	14,105.3	$	13,443.7

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

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9. Stock-based Compensation

As of September 30, 2021, there were 1,982,890 shares and 2,321,916 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)	2021			2020			2021			2020
Stock-based compensation expense	$	5.8		$	4.9		$	16.8		$	14.4
Tax benefit		(1.2	)		(1.0	)		(3.5	)		(3.0	)
Stock-based compensation expense, net of taxes	$	4.6		$	3.9		$	13.3		$	11.4

Stock Options

Information on the Company’s stock option activity for the nine months ended September 30, 2021 and 2020 is summarized below.

	Nine Months Ended September 30,
	2021					2020
(in whole shares and dollars)	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, beginning of period		1,282,278		$	93.64		1,121,559		$	87.88
Granted		178,040			115.35		242,598			118.34
Exercised		(223,426	)		80.46		(48,877	)		76.68
Forfeited or cancelled		(4,769	)		118.01		(27,158	)		112.18
Outstanding, end of period		1,232,123			99.07		1,288,122			93.53

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,
	2021					2020
(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		350,480		$	116.37		335,166		$	109.55
Granted		171,575			115.44		142,582			117.72
Vested		(116,739	)		111.06		(87,963	)		92.61
Forfeited		(20,846	)		117.18		(26,024	)		116.00
Outstanding, end of period		384,470			117.53		363,761			116.38
Performance-based and market-based restricted stock units:
Outstanding, beginning of period		97,043		$	119.59		86,252		$	110.70
Granted		62,143			114.66		54,415			105.10
Vested		(43,506	)		122.27		(40,601	)		80.92
Forfeited		(1,832	)		116.90		(3,023	)		124.78
Outstanding, end of period		113,848			115.92		97,043			119.59

In the first nine months of 2021 and 2020, the Company granted market-based awards totaling 37,348 and 34,911, 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 2021 and 2020 are 14,501 shares and 13,532 shares, respectively, related to market-based awards that achieved a payout in excess of 100%. These awards vested in the first quarters of 2021 and 2020, respectively.

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The Company also granted performance-based restricted stock units in 2021 and 2020, totaling 21,401 and 19,504, 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 2021.

10. 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)	2021			2020			2021			2020
Basic shares used in the calculation of earnings per share		35.7			37.7			36.0			38.0
Dilutive effect of securities:
Employee stock options		0.3			0.1			0.3			0.2
Non-vested stock grants		0.3			0.2			0.3			0.2
Diluted shares used in the calculation of earnings per share		36.3			38.0			36.6			38.4
Per share effect of dilutive securities on income from continuing operations	$	(0.02	)	$	(0.03	)	$	(0.10	)	$	(0.05	)
Per share effect of dilutive securities on net income	$	(0.01	)	$	(0.02	)	$	(0.11	)	$	(0.06	)

Diluted earnings per share for the three months ended September 30, 2020 excludes 0.8 million 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, 2021 and 2020, respectively, excludes 0.2 and 0.6 million issuable under the Company’s stock compensation plans because their effect would be antidilutive.

The Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of the Company’s common stock of up to $1.3 billion, including a $400 million increase to the program on May 11, 2021. Under this program the Company had approximately $381 million available at September 30, 2021. 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 October 29, 2020, pursuant to the terms of an accelerated share repurchase agreement (the “October 2020 ASR”) the Company paid $100.0 million and received an initial delivery of approximately 0.8 million shares of its common stock, which was approximately 80% of the total number of shares expected to be repurchased under the October 2020 ASR. On January 29, 2021, the Company received approximately 45,000 shares of its common stock shares as final settlement of shares repurchased under the October 2020 ASR.

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11. 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)	2021			2020
Gross reserve for losses and LAE, beginning of period	$	6,024.0		$	5,654.4
Reinsurance recoverable on unpaid losses		1,641.6			1,574.8
Net reserve for losses and LAE, beginning of period		4,382.4			4,079.6
Net incurred losses and LAE in respect of losses occurring in:
Current year		2,427.1			2,176.0
Prior years		(56.7	)		(26.1	)
Total incurred losses and LAE		2,370.4			2,149.9
Net payments of losses and LAE in respect of losses occurring in:
Current year		981.0			863.5
Prior years		1,036.5			1,028.7
Total payments		2,017.5			1,892.2
Net reserve for losses and LAE, end of period		4,735.3			4,337.3
Reinsurance recoverable on unpaid losses		1,804.8			1,608.4
Gross reserve for losses and LAE, end of period	$	6,540.1		$	5,945.7

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 $56.7 million and $26.1 million in 2021 and 2020, respectively.

2021

For the nine months ended September 30, 2021, net favorable loss and LAE development was $56.7 million, primarily as a result of net favorable Commercial Lines development of $34.6 million and favorable Personal Lines development of $23.1 million. Commercial Lines favorable development was primarily due to lower than expected losses of $13.1 million within the workers’ compensation line, primarily in accident years 2014 through 2019, and to lower than expected catastrophe losses of $12.0 million for hurricanes, tornadoes, and other storms in accident years 2018 through 2020. Personal Lines favorable development was primarily due to lower than expected losses of $20.1 million in the personal automobile line, driven by lower personal injury protection and bodily injury losses primarily in accident year 2020.

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 personal injury protection and bodily injury 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 primarily consists of asbestos and environmental exposures.

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12. 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 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.

13. Subsequent Events

There were no subsequent events requiring adjustment to the financial statements and no additional disclosure required in the notes to the consolidated financial statements.

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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		26
Executive Overview		26
Description of Operating Segments		27
Results of Operations - Consolidated		27
Results of Operations - Segments		29
Investments		36
Other Items		40
Income Taxes		41
Critical Accounting Estimates		41
Statutory Surplus of Insurance Subsidiaries		42
Liquidity and Capital Resources		42
Contingencies and Regulatory Matters		44
Risks and Forward - Looking Statements		44

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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 (the “SEC”) on February 24, 2021.

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

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 customers and 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 and meet the needs of our customers. Our goal is to grow responsibly in all of our businesses, while managing volatility.

The global pandemic (“Pandemic”) has significantly impacted the U.S. and global financial markets and economies since March 2020. Circumstances relating to the Pandemic are unprecedented in scope and impact, continue to evolve, are complex and uncertain, and are outside our control. Our investment portfolio was affected by the deterioration in investment markets during March 2020, as well as the 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 the period from March 2020 through September 2021. Several uncertainties persist related to the Pandemic, including, among others, return to work initiatives, virus variants, vaccination rates, driving patterns, court caseload backlogs, and inflationary pressures. We continue to believe that the Pandemic’s impacts on our near-term results should be manageable. However, the severity, duration and long-term impacts of the Pandemic may 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, 2021, our net income was $255.2 million, compared to $194.1 million for the nine months ended September 30, 2020, an increase of $61.1 million, primarily due to changes in the fair value of equity securities and, to a lesser extent, $27.9 million of impairments on fixed income securities in the prior year that did not recur in 2021, partially offset by lower operating income.

Operating income before interest expense and income taxes (a non-GAAP financial measure; see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $269.4 million for the nine months ended September 30, 2021, compared to $334.4 million for the nine months ended September 30, 2020, a decrease of $65.0 million. This decrease was primarily due to higher catastrophe losses and higher Personal Lines non-catastrophe losses, partially offset by higher net investment income, earned premium growth, and net favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”). The higher Personal Lines non-catastrophe losses were primarily due to higher personal automobile losses, compared to fewer accidents and decreased claim activity in 2020 that emerged from changes in driving patterns as a result of the Pandemic.

Pre-tax catastrophe losses were $363.6 million for the nine months ended September 30, 2021, compared to $251.6 million during the same period of 2020. The increase of $112.0 million was primarily due to Hurricane Ida and several wind events and hailstorms in the Midwest during the third quarter and the freeze events in Texas and surrounding states during the first quarter. Net favorable development on prior years’ loss reserves was $41.7 million for the nine months ended September 30, 2021, compared to $9.5 million for the nine months ended September 30, 2020, an increase of $32.2 million.

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 through continued investment in industry segmentation. Net premiums written increased 9.0% in the first nine months of 2021, compared to the same period in 2020, primarily due to pricing increases and a reduction in insured business activity in 2020 as a result of the Pandemic.

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Underwriting results declined in the first nine months of 2021, primarily due to higher catastrophe losses, partially offset by earned premium growth and favorable development of prior years’ loss reserves. 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.

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/or additional coverages, to address customers’ broader objectives). Approximately 86% 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.

Net premiums written increased by 7.4% in the first nine months of 2021, compared to the same period in 2020, which includes a return of approximately $30 million of premiums in 2020 to our eligible personal automobile customers in all our markets, providing financial relief during the Pandemic. Excluding the impact of the premium refund, net premiums written grew by 5.2%, primarily due to increased new business, retention and, to a lesser extent, renewal rate increases. Underwriting results decreased in the first nine months of 2021, primarily due to higher non-catastrophe losses, catastrophe losses, and expenses, partially offset by favorable development of prior years’ loss reserves and earned premium growth. The higher expenses were primarily due to the absence in 2021 of a non-recurring premium tax benefit of $13.8 million from a Michigan refund related to tax years 2014 through 2016 that was received in 2020.

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 the three months ended September 30, 2021 was $34.0 million, compared to $118.9 million for the three months ended September 30, 2020, a decrease of $84.9 million. The decrease in consolidated net income was primarily due to a decrease in operating income before interest expense and income taxes for the three months ended September 30, 2021, as well as by lower after-tax net realized and unrealized investment gains of approximately $28.1 million, primarily related to the change in the fair value of equity securities. Operating income before interest expense and income taxes decreased $81.4 million primarily due to higher catastrophe losses and increased Personal Lines non-catastrophe losses, partially offset by favorable development on prior years’ loss reserves, earned premium growth, and higher net investment income.

Consolidated net income for the nine months ended September 30, 2021 was $255.2 million, compared to $194.1 million for the nine months ended September 30, 2020, an increase of $61.1 million. The increase in consolidated net income was primarily a result of $61.0 million of after-tax net realized and unrealized investment gains in 2021 as compared to $40.7 million of after-tax net realized and unrealized investment losses in 2020, a change of $101.7 million, primarily related to the change in the fair value of equity securities and, to a lesser extent, a decrease in impairment losses on investments. Operating income before interest expense and income taxes decreased $65.0 million primarily due to higher catastrophe losses and higher Personal Lines non-catastrophe losses, partially offset by higher net investment income, earned premium growth, and net favorable development on prior years’ loss reserves.

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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)	2021			2020				2021			2020
Operating income before interest expense and income taxes:
Commercial Lines	$	42.4		$	62.3			$	149.0		$	172.2
Personal Lines		3.6			64.2				117.6			161.7
Other		1.0			1.9				2.8			0.5
Operating income before interest expense and income taxes		47.0			128.4				269.4			334.4
Interest expense on debt		(8.5	)		(9.8	)			(25.5	)		(28.6	)
Operating income before income taxes		38.5			118.6				243.9			305.8
Income tax expense on operating income		(7.7	)		(25.1	)			(47.7	)		(62.8	)
Operating income		30.8			93.5				196.2			243.0
Non-operating items:
Net realized and unrealized investment gains (losses)		4.0			37.7				72.6			(60.2	)
Net loss from repayment of debt		—			(6.1	)			—			(6.2	)
Other non-operating		—			(1.6	)			—			(1.6	)
Income tax (expense) benefit on non-operating items		—			(4.0	)			(11.6	)		21.1
Income from continuing operations, net of taxes		34.8			119.5				257.2			196.1
Discontinued operations (net of taxes):
Loss from discontinued life businesses		(0.8	)		(0.6	)			(2.0	)		(2.0	)
Net income	$	34.0		$	118.9			$	255.2		$	194.1

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

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, income taxes and other items, which management believes are not indicative of our core operations, including realized gains and losses, as well as unrealized gains and losses on equity securities, and the results of discontinued operations.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2021		2020		2021		2020
Operating revenues
Net premiums written	$	1,375.2	$	1,268.5	$	3,778.5	$	3,486.4
Net premiums earned	$	1,186.0	$	1,135.4	$	3,527.6	$	3,373.4
Net investment income		78.8		67.6		231.2		194.9
Other income		7.6		9.1		21.7		22.2
Total operating revenues		1,272.4		1,212.1		3,780.5		3,590.5
Losses and operating expenses
Losses and LAE		844.0		709.0		2,370.4		2,149.2
Amortization of deferred acquisition costs		244.0		237.7		728.5		711.9
Other operating expenses		137.4		137.0		412.2		395.0
Total losses and operating expenses		1,225.4		1,083.7		3,511.1		3,256.1
Operating income before interest expense and income taxes	$	47.0	$	128.4	$	269.4	$	334.4

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Operating income before interest expense and income taxes was $47.0 million for the three months ended September 30, 2021, compared to $128.4 million for the three months ended September 30, 2020, a decrease of $81.4 million. This decrease was primarily due to higher catastrophe losses and increased Personal Lines non-catastrophe losses, partially offset by favorable development on prior years’ loss reserves, earned premium growth, and higher net investment income.

Net premiums written increased $106.7 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to rate increases.

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, 2021
(dollars in millions)	Gross Premiums Written		Net Premiums Written		Net Premiums Earned		Catastrophe Loss Ratios		Loss & LAE Ratios		Expense Ratios		Combined Ratios
Commercial Lines	$	928.3	$	826.8	$	698.6		10.7		67.4		33.8		101.2
Personal Lines		564.9		548.4		487.4		16.1		76.5		27.3		103.8
Total	$	1,493.2	$	1,375.2	$	1,186.0		12.9		71.2		31.1		102.3

	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

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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,
	2021						2020
(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	$	289.5		87.5		24.1	$	273.4		68.5		6.6
Commercial automobile		94.7		65.3		0.3		88.8		67.5		0.7
Workers’ compensation		93.9		54.4		—		79.0		48.4		—
Other commercial		348.7		55.2		6.0		319.3		59.7		6.5
Total Commercial Lines	$	826.8		67.4		10.7	$	760.5		62.4		5.1
Personal Lines:
Personal automobile	$	330.8		68.0		2.4	$	311.6		61.2		1.1
Homeowners		196.7		93.8		41.9		179.7		67.8		18.0
Other personal		20.9		55.8		5.8		16.7		29.1		1.4
Total Personal Lines	$	548.4		76.5		16.1	$	508.0		62.5		6.9

The following table summarizes U.S. 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,
	2021												2020
(in millions)	Commercial Lines			Personal Lines			Other			Total			Commercial Lines			Personal Lines			Other			Total
Underwriting profit, excluding prior year reserve development and catastrophes	$	53.2		$	48.5		$	—		$	101.7		$	48.4		$	76.3		$	—		$	124.7
Prior year favorable (unfavorable) loss and LAE reserve development on non-catastrophe losses		11.4			9.9			(0.4	)		20.9			3.9			(1.0	)		(0.3	)		2.6
Prior year favorable catastrophe development		—			—			—			—			8.9			0.7			—			9.6
Current year catastrophe losses		(74.8	)		(78.7	)		—			(153.5	)		(42.5	)		(33.0	)		—			(75.5	)
Underwriting profit (loss)		(10.2	)		(20.3	)		(0.4	)		(30.9	)		18.7			43.0			(0.3	)		61.4
Net investment income		52.9			22.6			3.3			78.8			44.4			19.5			3.7			67.6
Fees and other income		4.0			2.6			1.0			7.6			3.8			3.5			1.8			9.1
Other operating expenses		(4.3	)		(1.3	)		(2.9	)		(8.5	)		(4.6	)		(1.8	)		(3.3	)		(9.7	)
Operating income before interest expense and income taxes	$	42.4		$	3.6		$	1.0		$	47.0		$	62.3		$	64.2		$	1.9		$	128.4

Commercial Lines

Commercial Lines net premiums written were $826.8 million for the three months ended September 30, 2021, compared to $760.5 million for the three months ended September 30, 2020. This $66.3 million increase was primarily driven by pricing increases and a more robust business environment in 2021.

Commercial Lines underwriting loss for the three months ended September 30, 2021 was $10.2 million, compared to an $18.7 million profit for the three months ended September 30, 2020, a decrease of $28.9 million. Catastrophe losses for the three months ended September 30, 2021 were $74.8 million, compared to $33.6 million for the three months ended September 30, 2020, an increase of $41.2 million. The higher catastrophe losses in 2021 were primarily due to Hurricane Ida and wind and hailstorms in the Midwest. Net favorable development on prior year’s loss reserves for the three months ended September 30, 2021 was $11.4 million, compared to $3.9 million for the three months ended September 30, 2020, an increase of $7.5 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $53.2 million for the three months ended September 30, 2021, compared to $48.4 million for the three months ended September 30, 2020. This $4.8 million increase was primarily driven by earned premium growth. Within non-catastrophe current accident year losses, higher large property loss activity in our commercial multiple peril line was partially offset by lower loss activity in our inland marine and surety lines.

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We continue to manage underwriting performance through rate actions, 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 uncertainty caused by the Pandemic, there is a 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 reduction in business activity and reduced premium levels.

Personal Lines

Personal Lines net premiums written were $548.4 million for the three months ended September 30, 2021, compared to $508.0 million for the three months ended September 30, 2020. The premium growth of $40.4 million was primarily driven by increased new business, retention and, to a lesser extent, renewal rate increases.

Net premiums written in the personal automobile line of business for the three months ended September 30, 2021 were $330.8 million, compared to $311.6 million for the three months ended September 30, 2020, an increase of $19.2 million. Personal automobile policies in force increased by 2.8%. Net premiums written in the homeowners line of business for the three months ended September 30, 2021 were $196.7 million, compared to $179.7 million for the three months ended September 30, 2020, an increase of $17.0 million. Homeowners policies in force increased by 3.4%.

Personal Lines underwriting loss for the three months ended September 30, 2021 was $20.3 million, compared to $43.0 million profit for the three months ended September 30, 2020, a decrease of $63.3 million. Catastrophe losses for the three months ended September 30, 2021 were $78.7 million, compared to $32.3 million for the three months ended September 30, 2020, an increase of $46.4 million. The higher catastrophe losses in 2021 were primarily due to Hurricane Ida and several wind and hailstorms throughout the Midwest. Net favorable development on prior year’s loss reserves for the three months ended September 30, 2021 was $9.9 million, compared to $1.0 million unfavorable development for the three months ended September 30, 2020, a favorable change of $10.9 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $48.5 million for the three months ended September 30, 2021, compared to $76.3 million for the three months ended September 30, 2020. This $27.8 million decrease was primarily due to higher current accident year losses in our personal automobile line due to fewer accidents and decreased claim activity in 2020 resulting from changes in driving patterns as a result of the Pandemic. Additionally, the personal automobile current accident year losses reflected an increase in property severity associated with supply chain issues and limited availability of new vehicles due to chip shortage, higher used vehicle prices and higher cost of parts.

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 uncertainty caused by the Pandemic, there is a level of uncertainty in our ability to retain or grow our business, and maintain or improve our underwriting profitability in this environment.

Other

Our Other segment had operating income of $1.0 million for the three months ended September 30, 2021, compared to $1.9 million for the three months ended September 30, 2020, a decrease of $0.9 million.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Operating income before interest expense and income taxes was $269.4 million for the nine months ended September 30, 2021, compared to $334.4 million for the nine months ended September 30, 2020, a decrease of $65.0 million. This decrease was primarily due to higher catastrophe losses and higher Personal Lines non-catastrophe losses, partially offset by higher net investment income, earned premium growth, and net favorable development on prior years’ loss reserves. The higher Personal Lines non-catastrophe losses was primarily due to higher personal automobile losses due to fewer accidents and decreased claim activity in 2020 resulting from changes in driving patterns as a result of the Pandemic.

Net premiums written increased by $292.1 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. This was primarily due to pricing increases, a reduction in insured business activity in 2020, and the aforementioned 2020 premium refund.

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Production and Underwriting Results

	Nine Months Ended September 30, 2021
(dollars in millions)	Gross Premiums Written		Net Premiums Written		Net Premiums Earned		Catastrophe Loss Ratios		Loss & LAE Ratios		Expense Ratios		Combined Ratios
Commercial Lines	$	2,618.0	$	2,271.0	$	2,094.9		10.1		66.3		33.7		100.0
Personal Lines		1,555.6		1,507.5		1,432.7		10.6		68.4		27.8		96.2
Total	$	4,173.6	$	3,778.5	$	3,527.6		10.3		67.2		31.3		98.5

	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,
	2021						2020
(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	$	756.1		81.7		22.4	$	712.6		72.1		12.0
Commercial automobile		269.8		63.0		0.2		256.4		68.3		0.6
Workers’ compensation		269.3		54.4		—		241.1		50.1		—
Other commercial		975.8		58.3		6.0		872.9		57.4		4.7
Total Commercial Lines	$	2,271.0		66.3		10.1	$	2,083.0		62.9		6.1
Personal Lines:
Personal automobile	$	930.1		63.4		1.9	$	867.8		60.9		1.2
Homeowners		522.2		79.6		27.0		491.0		74.1		24.6
Other personal		55.2		44.7		2.7		44.6		29.4		2.7
Total Personal Lines	$	1,507.5		68.4		10.6	$	1,403.4		64.6		9.4

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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 (loss) before interest expense and income taxes.

	Nine Months Ended September 30,
	2021												2020
(in millions)	Commercial Lines			Personal Lines			Other			Total			Commercial Lines			Personal Lines			Other			Total
Underwriting profit (loss), excluding prior year reserve development and catastrophes	$	183.5		$	179.8		$	—		$	363.3		$	159.9		$	233.2		$	(0.1	)	$	393.0
Prior year favorable (unfavorable) loss and LAE reserve development on non-catastrophe losses		22.6			20.1			(1.0	)		41.7			12.7			0.7			(3.9	)		9.5
Prior year favorable (unfavorable) catastrophe development		12.0			3.0			—			15.0			18.2			(1.6	)		—			16.6
Current year catastrophe losses		(223.8	)		(154.8	)		—			(378.6	)		(140.4	)		(127.8	)		—			(268.2	)
Underwriting profit (loss)		(5.7	)		48.1			(1.0	)		41.4			50.4			104.5			(4.0	)		150.9
Net investment income		155.7			66.5			9.0			231.2			128.7			56.3			9.9			194.9
Fees and other income		11.2			7.1			3.4			21.7			8.6			8.0			5.6			22.2
Other operating expenses		(12.2	)		(4.1	)		(8.6	)		(24.9	)		(15.5	)		(7.1	)		(11.0	)		(33.6	)
Operating income before interest expense and income taxes	$	149.0		$	117.6		$	2.8		$	269.4		$	172.2		$	161.7		$	0.5		$	334.4

Commercial Lines

Commercial Lines net premiums written were $2,271.0 million for the nine months ended September 30, 2021, compared to $2,083.0 million for the nine months ended September 30, 2020. This $188.0 million increase was primarily driven by pricing increases and a reduction in insured business activity in 2020 as a result of the Pandemic.

Commercial Lines underwriting loss for the nine months ended September 30, 2021 was $5.7 million, compared to $50.4 million profit for the nine months ended September 30, 2020, a decrease of $56.1 million. Catastrophe losses for the nine months ended September 30, 2021 were $211.8 million, compared to $122.2 million for the nine months ended September 30, 2020. The $89.6 million increase was primarily due to freeze events in Texas and surrounding states associated with record low temperatures in the first quarter and Hurricane Ida and several wind and hailstorms in the Midwest in the third quarter. Favorable development on prior years’ loss reserves for the nine months ended September 30, 2021 was $22.6 million, compared to $12.7 million for the nine months ended September 30, 2020, an increase of $9.9 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $183.5 million for the nine months ended September 30, 2021, compared to $159.9 million for the nine months ended September 30, 2020, an increase of $23.6 million, primarily due to earned premium growth. Within non-catastrophe current accident year losses, higher large property loss activity in our specialty and commercial multiple peril lines were partially offset by lower loss activity in our inland marine, miscellaneous property, commercial automobile and surety lines.

Personal Lines

Personal Lines net premiums written were $1,507.5 million for the nine months ended September 30, 2021, compared to $1,403.4 million for the nine months ended September 30, 2020, an increase of $104.1 million. During the second quarter of 2020, we returned approximately $30 million of automobile premiums to our eligible Personal Lines customers in all our markets, providing financial relief during the Pandemic. In addition, 2021 net premiums written grew due to increased new business, retention and, to a lesser extent, renewal rate increases.

Personal Lines underwriting profit for the nine months ended September 30, 2021 was $48.1 million, compared to $104.5 million for the nine months ended September 30, 2020, a decrease of $56.4 million. Catastrophe losses for the nine months ended September 30, 2021 were $151.8 million, compared to $126.2 million for the nine months ended September 30, 2020. The increase of $25.6 million was primarily due to several wind and hailstorms throughout the Midwest and Hurricane Ida during the third quarter. Favorable development on prior years’ loss reserves for the nine months ended September 30, 2021 was $20.1 million, compared to $0.7 million for the nine months ended September 30, 2020, an increase of $19.4 million.

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Personal Lines current accident year underwriting profit, excluding catastrophes, was $179.8 million for the nine months ended September 30, 2021, compared to $233.2 million for the nine months ended September 30, 2020. This $53.4 million decrease was primarily due to higher current accident year losses and higher expenses, primarily due to a 2020 non-recurring premium tax benefit, partially offset by earned premium growth. The higher current accident year losses were primarily due to fewer accidents and decreased claim activity for the personal automobile line in 2020 resulting from changes in driving patterns as a result of the Pandemic and increased weather-related losses in the homeowners line in 2021.

Other

Our Other segment had operating income of $2.8 million for the nine months ended September 30, 2021, compared to $0.5 million for the nine months ended September 30, 2020, an increase of $2.3 million. This increase was primarily due to prior year’s results including a $3.3 million reserve increase, based on the receipt of an updated third-party actuarial study for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool.

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)	2021			2020
Gross reserve for losses and LAE, beginning of period	$	6,024.0		$	5,654.4
Reinsurance recoverable on unpaid losses		1,641.6			1,574.8
Net reserve for losses and LAE, beginning of period		4,382.4			4,079.6
Net incurred losses and LAE in respect of losses occurring in:
Current year		2,427.1			2,176.0
Prior year non-catastrophe loss development		(41.7	)		(9.5	)
Prior year catastrophe development		(15.0	)		(16.6	)
Total incurred losses and LAE		2,370.4			2,149.9
Net payments of losses and LAE in respect of losses occurring in:
Current year		981.0			863.5
Prior years		1,036.5			1,028.7
Total payments		2,017.5			1,892.2
Net reserve for losses and LAE, end of period		4,735.3			4,337.3
Reinsurance recoverable on unpaid losses		1,804.8			1,608.4
Gross reserve for losses and LAE, end of period	$	6,540.1		$	5,945.7

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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)	2021		2020
Commercial multiple peril	$	1,377.5	$	1,211.0
Workers’ compensation		723.4		699.4
Commercial automobile		480.6		454.8
Other commercial lines:
Hanover Programs		595.9		565.3
Management and professional liability		379.2		340.8
Monoline general liability		299.4		280.3
Umbrella		258.5		230.2
Specialty industrial and commercial property		178.8		76.9
Surety		102.4		94.0
Marine		98.2		93.6
Other lines		27.4		29.5
Total other commercial lines		1,939.8		1,710.6
Total Commercial Lines		4,521.3		4,075.8
Personal automobile		1,689.4		1,670.3
Homeowners and other personal		289.2		237.5
Total Personal Lines		1,978.6		1,907.8
Total Other Segment		40.2		40.4
Total loss and LAE reserves	$	6,540.1	$	6,024.0

“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,
	2021									2020
(in millions)	Loss & LAE			Catastrophe			Total			Loss & LAE			Catastrophe			Total
Commercial Lines	$	(22.6	)	$	(12.0	)	$	(34.6	)	$	(12.7	)	$	(18.2	)	$	(30.9	)
Personal Lines		(20.1	)		(3.0	)		(23.1	)		(0.7	)		1.6			0.9
Other Segment		1.0		—				1.0			3.9		—				3.9
Total prior year favorable development	$	(41.7	)	$	(15.0	)	$	(56.7	)	$	(9.5	)	$	(16.6	)	$	(26.1	)

It is not possible to know whether the factors that affected loss reserves in the first nine months of 2021 will also occur in future periods. We encourage you to read our 2020 Annual Report on Form 10-K for more information about our reserving process and the judgments, uncertainties and risks associated therewith.

Catastrophe Loss Development

For the nine months ended September 30, 2021 and 2020, favorable catastrophe development was $15.0 and $16.6 million, respectively. The favorable catastrophe development during the nine months ended September 30, 2021 was primarily due to lower than expected losses related to certain 2018 through 2020 hurricanes, tornadoes, and other storms. 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.

2021 Loss and LAE Development, excluding catastrophes

For the nine months ended September 30, 2021, net favorable loss and LAE development, excluding catastrophes, was $41.7 million, primarily due to lower than expected losses in the personal automobile line of $19.1 million, driven by lower personal injury protection and bodily injury losses, primarily in accident year 2020, lower than expected losses in the workers’ compensation line of $13.1 million, primarily in accident years 2014 through 2019, and lower than expected losses in other commercial lines. Within other commercial lines, lower than expected losses in our commercial miscellaneous property, marine, surety, and specialty industrial property lines were partially offset by higher than expected losses in our general liability lines.

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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.

Reinsurance Recoverables

Reinsurance recoverables were $2,002.8 million and $1,874.3 million at September 30, 2021 and December 31, 2020, respectively, of which $84.1 million and $88.4 million, respectively, represent billed recoverables. A reinsurance recoverable is billed after an eligible reinsured claim is paid by an insurer. Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $45.3 million and $35.5 million at September 30, 2021 and December 31, 2020, respectively, and billed non-MCCA reinsurance recoverables totaled $38.8 million and $52.9 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, $1.1 million of the billed non-MCCA recoverables were outstanding greater than 90 days, whereas at December 31, 2020, 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)	2021			2020			2021			2020
Fixed maturities	$	54.2		$	55.3		$	162.6		$	167.7
Limited partnerships		18.9			6.0			49.5			8.0
Mortgage loans		4.0			4.5			13.6			13.1
Equity securities		3.7			3.4			11.3			10.8
Other investments		0.7			0.7			2.3			2.4
Investment expenses		(2.7	)		(2.3	)		(8.1	)		(7.1	)
Net investment income	$	78.8		$	67.6		$	231.2		$	194.9
Earned yield, fixed maturities		2.96	%		3.26	%		3.03	%		3.38	%
Earned yield, total portfolio		3.72	%		3.37	%		3.70	%		3.32	%

The increase in net investment income for the three months and nine months ended September 30, 2021 was primarily due to higher limited partnership income and, to a lesser degree, the continued investment of operational cash flows, partially offset by the impact of lower new money yields. Higher income from our limited partnerships primarily reflects increased market valuation due to positive valuation changes in the funds’ equity holdings. In addition, limited partnership results for the nine months ended September 30, 2020 include low valuations, particularly in the second quarter, due to Pandemic-related business and financial market disruptions. Income from partnerships can vary significantly from period to period and neither the elevated results during 2021, nor the weak results in 2020, reflect expected returns for this asset class. 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, 2021					December 31, 2020
(dollars in millions)	Carrying Value		% of Total Carrying Value			Carrying Value		% of Total Carrying Value
Fixed maturities, at fair value	$	7,699.2		83.0	%	$	7,454.4		83.2	%
Equity securities, at fair value		615.5		6.6			598.5		6.7
Mortgage and other loans		448.1		4.8			467.6		5.2
Other investments		340.2		3.7			325.6		3.6
Cash and cash equivalents		171.2		1.9			120.6		1.3
Total cash and investments	$	9,274.2		100.0	%	$	8,966.7		100.0	%

Cash and Investments

Total cash and investments increased $307.5 million, or 3.4%, for the nine months ended September 30, 2021 as compared to December 31, 2020. This increase was primarily due to the continued investment of operational cash flows, partially offset by the funding of financing activities, including our stock repurchases and dividend payments, and by net market value depreciation.

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

	September 30, 2021
(in millions) Investment Type	Amortized Cost, Net of Allowance for Credit Losses		Fair Value		Net Unrealized Gain		Change in Net Unrealized For the Year
U.S. Treasury and government agencies	$	355.2	$	358.7	$	3.5	$	(12.1	)
Foreign government		2.2		2.6		0.4		(0.1	)
Municipals:
Taxable		1,076.2		1,109.6		33.4		(26.5	)
Tax-exempt		28.5		29.3		0.8		(0.9	)
Corporate		3,983.6		4,198.8		215.2		(126.2	)
Asset-backed:
Residential mortgage-backed		1,069.1		1,079.6		10.5		(22.0	)
Commercial mortgage-backed		784.0		817.1		33.1		(21.5	)
Asset-backed		101.6		103.5		1.9		(0.7	)
Total fixed maturities	$	7,400.4	$	7,699.2	$	298.8	$	(210.0	)

The decrease in net unrealized gains on fixed maturities was primarily due to higher prevailing interest rates, partially offset by tighter credit spreads.

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

		September 30, 2021							December 31, 2020
(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, Net of Allowance for Credit Losses		Fair Value		% of Total Fair Value
1	Aaa/Aa/A	$	4,767.1	$	4,937.4		64.1	%	$	4,590.6	$	4,894.2		65.7	%
2	Baa		2,328.7		2,442.5		31.7			2,075.6		2,258.9		30.3
3	Ba		201.2		211.0		2.8			162.3		173.6		2.3
4	B		98.3		102.6		1.3			109.3		118.3		1.6
5	Caa and lower		5.1		5.7		0.1			7.3		7.7		0.1
6	In or near default		—		—		—			0.5		1.7		—
Total fixed maturities		$	7,400.4	$	7,699.2		100.0	%	$	6,945.6	$	7,454.4		100.0	%

Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 96% of the fixed maturity portfolio consisted of investment grade securities at September 30, 2021 and December 31, 2020. 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.

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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 2020 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, 2021							December 31, 2020
(dollars in millions) Duration	Amortized Cost, Net of Allowance for Credit Losses		Fair Value		% of Total Fair Value			Amortized Cost, Net of Allowance for Credit Losses		Fair Value		% of Total Fair Value
0-2 years	$	1,078.9	$	1,112.7		14.5	%	$	1,460.6	$	1,510.5		20.3	%
2-4 years		1,644.1		1,750.1		22.7			1,738.4		1,872.5		25.1
4-6 years		2,072.7		2,194.3		28.5			1,570.0		1,734.0		23.3
6-8 years		1,226.7		1,269.8		16.5			1,016.6		1,134.0		15.2
8-10 years		1,179.5		1,168.7		15.2			812.2		837.8		11.2
10+ years		198.5		203.6		2.6			347.8		365.6		4.9
Total fixed maturities	$	7,400.4	$	7,699.2		100.0	%	$	6,945.6	$	7,454.4		100.0	%
Weighted average duration				5.0						4.8

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 primarily 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 privately-held middle market businesses. Real estate limited partnerships hold equity ownership positions in real properties and invest in debt secured by real properties. Our limited partnerships are generally accounted for under the equity method, or as a practical expedient using the fund’s net asset value, with financial information provided by the partnership on a two or three month lag.

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, 2021, we recognized net recoveries of $0.1 million, consisting of recoveries of $0.7 million of credit losses on mortgage loans, partially offset by $0.6 million of intend-to-sell impairments on corporate fixed maturities. For the nine months ended September 30, 2021, we recognized net impairments of $0.1 million, consisting of $0.8 million of impairments on corporate fixed maturities, partially offset by recoveries of $0.7 million of credit losses on mortgage loans. 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. 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.

At September 30, 2021 and December 31, 2020, the allowance for credit losses on mortgage loans was $7.1 million and $7.9 million, respectively, and the allowance for credit losses on available-for-sale debt securities was $0.2 million and $0.1 million, respectively.

At September 30, 2021, we held no fixed maturities on non-accrual status. At December 31, 2020, the carrying values of fixed maturities on non-accrual status were not material. The effects of non-accruals for the nine months ended September 30, 2021 and 2020, 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.

Unrealized Losses

Gross unrealized losses on fixed maturities at September 30, 2021 were $35.2 million, an increase of $31.9 million compared to December 31, 2020, primarily attributable to higher interest rates, partially offset by tighter credit spreads. At September 30, 2021, gross unrealized losses consisted primarily of $11.4 million on corporate fixed maturities, $7.7 million on residential mortgage-backed

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securities, $7.3 million on U. S. government securities and $5.3 million on municipals. 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 recovery following the Pandemic takes longer 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, 2021 and December 31, 2020. 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)	2021		2020
Due after one year through five years	$	0.1	$	—
Due after five years through ten years		13.3		0.5
Due after ten years		10.6		2.0
		24.0		2.5
Mortgage-backed and asset-backed securities		11.2		0.8
Total fixed maturities	$	35.2	$	3.3

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.

Positive economic growth in the U.S. continues as the vaccination roll-out has reduced the spread and severity of COVID-19. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the Pandemic, such as lodging and hospitality, have shown improvement, but remain below pre-Pandemic levels of economic activity. Inflation has risen and overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Unemployment rates remain somewhat elevated and while the U.S. government and its agencies have taken extraordinary measures to stabilize the economy through fiscal and monetary policy actions, the recovery in the labor market has been uneven. It is unclear how such actions and inflationary pressures will affect the continued economic recovery and our investment portfolio.

If the economic recovery continues as expected, an adjustment to monetary policy may be warranted as early as later this year, likely beginning with a moderation in the Fed’s pace of asset purchases. The Fed’s asset purchase program represents a significant source of demand for certain sectors of the fixed income market and even a well-telegraphed, gradual winding down of the program may result in market disruption. In addition, the Fed’s most recent projections released in September signaled the greatest likelihood to begin raising interest rates would be in 2023, assuming forecasts for growth, unemployment and inflation are achieved. Regarding fiscal policy in the U.S., failure to reach a long-term agreement to raise the federal borrowing limit could have negative implications for certain issuers, sectors, or the economy at large.

Fundamental conditions in certain corporate sectors remain challenging, such as the lodging and hospitality sectors, which still face lower than pre-Pandemic levels of demand. 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
2021
Net realized and unrealized investment gains	$	3.0	$	0.8	$	0.2		$	—		$	4.0
Discontinued life businesses		—		—		—			(0.8	)		(0.8	)

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	)

	Nine Months Ended September 30,
(in millions)	Commercial Lines			Personal Lines			Other			Discontinued Operations			Total
2021
Net realized and unrealized investment gains (losses)	$	54.4		$	22.8		$	(4.6	)	$	—		$	72.6
Discontinued life businesses		—			—			—			(2.0	)		(2.0	)

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	)

We manage investment assets for our Commercial Lines, Personal Lines and Other segments based on the requirements of our combined property and casualty insurance 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.

Net realized and unrealized investment gains were $4.0 million for the three months ended September 30, 2021, compared to $37.7 million for the three months ended September 30, 2020. For the three months ended September 30, 2021 and 2020, net realized and unrealized investment gains were primarily due to changes in the fair value of equity securities.

Net realized and unrealized investment gains were $72.6 million for the nine months ended September 30, 2021, compared to $60.2 million of net realized and unrealized investment losses for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, net realized and unrealized investment gains were primarily due to changes in the fair value of equity securities. For the nine months ended September 30, 2020, net realized and unrealized investment losses were primarily due to changes in the fair value of equity securities and, to a lesser extent, from impairment losses on investments.

Discontinued operations include our discontinued accident and health and life businesses. Losses of $2.0 million for both the nine months ended September 30, 2021 and 2020, primarily reflect adverse loss trends related to the long-term care pool.

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Income Taxes

We file a consolidated U.S. federal income tax return that includes our holding company and its domestic subsidiaries (including non-insurance operations).

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

The provision for income taxes from continuing operations was an expense of $7.7 million and $29.1 million for the three months ended September 30, 2021 and 2020, respectively. These provisions resulted in consolidated effective federal tax rates of 18.1% and 19.6% for the three months ended September 30, 2021 and 2020, respectively. These provisions reflect benefits related to tax planning strategies implemented in prior years of $0.8 million and $2.5 million in the three months ended September 30, 2021 and 2020, respectively. In addition, these provisions also include excess tax benefits related to stock-based compensation of $0.8 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively. Absent these items, the provision for income taxes would have been an expense of $9.3 million, or 21.9%, and $31.7 million, or 21.3%, for the three months ended September 30, 2021 and 2020, respectively. The increase in 2021 is due to lower underwriting income.

The income tax provision on operating income was an expense of $7.7 million and $25.1 million for the three months ended September 30, 2021 and 2020, respectively. These provisions resulted in effective tax rates for operating income of 20.0% and 21.2% for the three months ended September 30, 2021 and 2020, respectively. These provisions include excess tax benefits related to stock-based compensation of $0.8 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively. Absent this item, the provisions for income taxes would have been an expense of $8.5 million, or 22.1%, and $25.2 million, or 21.2%, for the three months ended September 30, 2021 and 2020, respectively. The increase in 2021 is due to lower underwriting income.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

The provision for income taxes from continuing operations was an expense of $59.3 million and $41.7 million for the nine months ended September 30, 2021 and 2020, respectively. These provisions resulted in consolidated effective federal tax rates of 18.7% and 17.5% for the nine months ended September 30, 2021 and 2020, respectively. The provision for 2021 includes a net benefit related to prior years’ federal tax credits of $1.7 million. In addition, these provisions reflect benefits related to tax planning strategies implemented in prior years of $3.7 million and $6.9 million for the nine months ended September 30, 2021 and 2020, respectively. Finally, these provisions also include excess tax benefits related to stock-based compensation of $2.6 million and $2.0 million for the nine months ended September 30, 2021 and 2020, respectively. Absent these items, the provision for income taxes would have been an expense of $67.3 million and $50.6 million for the nine months ended September 30, 2021 and 2020, respectively, or 21.3% for both periods.

The income tax provision on operating income was an expense of $47.7 million and $62.8 million for the nine months ended September 30, 2021 and 2020, respectively. These provisions resulted in effective tax rates for operating income of 19.6% and 20.5% for the nine months ended September 30, 2021 and 2020, respectively. The provision for 2021 includes a net benefit related to prior years’ federal tax credits of $1.7 million. In addition, these provisions include excess tax benefits related to stock-based compensation of $2.6 million and $2.0 million for the nine months ended September 30, 2021 and 2020, respectively. Absent these items, the provision for income taxes would have been an expense of $52.0 million, or 21.3%, and $64.8 million, or 21.2%, for the nine months ended September 30, 2021 and 2020, respectively.

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 2020 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

•

Investment credit losses

•

Deferred taxes

For a more detailed discussion of these critical accounting estimates, see our 2020 Annual Report on Form 10-K.

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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)	2021		2020
Total Statutory Capital and Surplus	$	2,548.4	$	2,588.5

The statutory capital and surplus for our insurance subsidiaries decreased $40.1 million during the first nine months of 2021. This decrease was primarily due the payment of a $255 million dividend, primarily offset by an increase in underwriting profits and from net realized and unrealized investment gains, primarily due to changes in the fair value of equity securities.

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, 2021, 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

1,191.9

596.0

213

426

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 third quarter of 2021, Hanover Insurance paid $255.0 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 $595.4 million during the first nine months of 2021, as compared to $546.6 million during the first nine months of 2020. The $48.8 million increase in cash provided was primarily due to an increase in premiums received, partially offset by an increase in loss payments.

Net cash used in investing activities was $337.7 million during the first nine months of 2021, as compared to $480.3 million during the first nine months of 2020. During the first nine months of 2021 and 2020, cash used in investing activities primarily related to net purchases of fixed maturities.

Net cash used in financing activities was $207.1 million during the first nine months of 2021, as compared to $50.5 million during the first nine months of 2020. During the first nine months of 2021, cash used in financing activities primarily resulted from the repurchase of common stock and, to a lesser extent, from three quarterly dividend payments to our shareholders. 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, partially offset by net proceeds received from debt borrowings.

Dividends to common shareholders are subject to quarterly board approval and declaration. During the first nine months of 2021, as declared by the Board, we paid three quarterly dividends, each for $0.70 per share, to our shareholders totaling approximately $75.6 million. We believe that our holding company assets are sufficient to provide for future shareholder dividends should the Board of Directors declare them.

At September 30, 2021, THG, as a holding company, held approximately $371.7 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 2021 holding company obligations; however, we may decide to do so.

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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 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 $1.3 billion, including a $400 million increase to the program on May 11, 2021. 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 October 29, 2020, pursuant to the terms of an accelerated share repurchase (“ASR”) agreement (the “October 2020 ASR”), we paid $100.0 million in exchange for shares of our common stock. We received an initial share delivery, of approximately 0.8 million shares of common stock, which was approximately 80% of the total number of shares expected to be repurchased under the October 2020 ASR agreement. On January 29, 2021, we received approximately 45,000 shares of our common stock as final settlement of shares repurchased under the October 2020 ASR. In addition to the shares repurchased under the October 2020 ASR, during the first nine months of 2021 we repurchased approximately 1.1 million shares at an aggregate cost of $142.6 million. As of September 30, 2021, we had repurchased 7.5 million shares under this $1.3 billion program and had approximately $381 million available for additional repurchases.

We maintain our membership in the Federal Home Loan Bank (“FHLB”) to provide access to additional liquidity based on our holdings of FHLB stock and pledged collateral. At September 30, 2021, we had borrowing capacity of $109.6 million. There were no outstanding borrowings under this short-term facility at September 30, 2021; however, we have and may continue to borrow, from time to time, through this facility to provide short-term liquidity.

On April 30, 2019, we entered into a 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 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 2021. 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, 2021, we were in compliance with the covenants of our debt and credit agreements.

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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 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 and the American Rescue Plan Act of 2021 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 12 “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 2020 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, 2020, included in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes in the first nine months of 2021 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. Based on the that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that there were no such changes during the quarter ended September 30, 2021, that has materially affected, or is 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 2021 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.

Some of the 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, 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, policy terms and conditions, 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 MCCA;

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•

an increase in mandatory assessments by state guaranty funds;

•

risks and uncertainties associated with the Michigan legislation that took effect on July 2, 2020 and reformed the prior 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 the 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;

•

continuing risks and uncertainties associated with the impact of the COVID-19 Pandemic and related general economic conditions; 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, 2020.

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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 2021 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, 2021		83,835	$	136.34		83,662	$	394
August 1 - 31, 2021		70,909		138.57		70,600		384
September 1 - 30, 2021		20,325		138.78		20,000		381
Total		175,069	$	137.53		174,262	$	381

(1)	Includes 173 shares, 309 shares and 325 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, 2021, respectively.

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ITEM 6 – EXHIBITS


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, 2021 formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (i) Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020; (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020; (iii) Consolidated Balance Sheets at September 30, 2021 and December 31, 2020; (iv) Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, 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, 2021, formatted in iXBRL (embedded within EX – 101).

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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, 2021		/s/ John C. Roche
Date		John C. Roche
		President, Chief Executive Officer and Director


October 28, 2021		/s/ Jeffrey M. Farber
Date		Jeffrey M. Farber
		Executive Vice President and Chief Financial Officer