What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-29 compared with 2020-04-29 · 297 added, 174 removed, 394 unchanged (54% of the section changed)

24 unchanged sentences

Our goal is to grow responsibly in all of our businesses, while managing volatility.

The outbreak of the novel coronavirus, also known as COVID-19, and subsequent global pandemic (“Pandemic”) began significantly impacting the U.S.

and global financial markets and economies during the quarter ended March 31, 2020.

Circumstances relating to the Pandemic are unprecedented in scope, are changing rapidly, and are complex and uncertain.

Our investment portfolio was adversely affected by the deterioration in investment markets during the quarter.

We experienced minimal adverse effects from the Pandemic on our underwriting results and operations, as well as our financial condition, through March 31, 2020, and we believe that the Pandemic’s economic impacts on our 2020 results should be manageable.

However the severity, duration and long-term impacts of the Pandemic, including continued declines in general economic conditions, adverse impacts to our investment portfolio and uncertainty around possible and actual governmental responses to the crisis, may significantly affect the property and casualty insurance industry, our business, and our financial results over the intermediate and long-term.

The outbreak of the novel coronavirus, also known as COVID-19, and subsequent global pandemic (“Pandemic”) significantly impacted the U.S.

and global financial markets and economies during the six months ended June 30, 2020.

Circumstances relating to the Pandemic are unprecedented in scope, continue to evolve, and are complex and uncertain.

Our investment portfolio was affected by the deterioration in investment markets during March 2020, as well as the partial recovery in the subsquent months.

In addition, we experienced both favorable and adverse effects from the Pandemic on our underwriting results and operations, as well as our financial condition, during March through June of 2020.

However, we continue to believe that the Pandemic’s economic impacts on our 2020 results should be manageable.

The severity, duration and long-term impacts of the Pandemic, including continued declines in general economic conditions, adverse impacts to our investment portfolio and uncertainty around possible and actual governmental responses to the crisis, may significantly affect the property and casualty insurance industry, our business, and our financial results over the intermediate and long-term.

(See “Contingencies and Regulatory Matters” and “Item 1A – Risk Factors” for further discussion).

During the three months ended March 31, 2020, our results reflected a net loss of $40.0 million, compared to net income of $122.4 million for the three months ended March 31, 2019, a decrease of $162.4 million, primarily due to a decrease in fair value of equity securities, as well as impairment losses on fixed income securities.

During the six months ended June 30, 2020, our net income was $75.2 million, compared to $196.4 million for the six months ended June 30, 2019, a decrease of $121.2 million, primarily due to a decrease in fair value of equity securities and, to a lesser extent, impairment losses on fixed income securities.

Operating income before interest expense and income taxes (a non-GAAP financial measure;

see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $117.1 million for the three months ended March 31, 2020, compared to $109.8 million for the three months ended March 31, 2019, an increase of $7.3 million.

This increase was primarily due to lower expenses and earned premium growth, partially offset by higher non-catastrophe current accident year losses, primarily within our commercial multiple peril line.

Pre-tax catastrophe losses were $37.9 million for the three months ended March 31, 2020, compared to $39.4 million during the same period of 2019.

Net favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”) was $2.0 million for the three months ended March 31, 2020, compared to net unfavorable development of $0.3 million in 2019.

see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $206.0 million for the six months ended June 30, 2020, compared to $216.8 million for the six months ended June 30, 2019, a decrease of $10.8 million.

This decrease was primarily due to higher catastrophe losses and lower net investment income.

These items were partially offset by lower non-catastrophe current accident year losses, primarily in our personal and commercial automobile lines, and a non-recurring premium tax benefit of $13.8 million due to a Michigan refund related to tax years 2014 through 2016.

The lower current accident year losses were primarily due to a reduced level of economic activity as a result of the Pandemic.

Pre-tax catastrophe losses were $185.7 million for the six months ended June 30, 2020, compared to $99.0 million during the same period of 2019.

The increase of $86.7 million was due to several wind and hail storms throughout the Midwest and Southeast, as well as from property damages related to riots and civil unrest in several major cities across the country.

Net favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”) was $6.9 million for the six months ended June 30, 2020, while development was insignificant overall for the six months ended June 30, 2019.

Commercial Lines

1 unchanged sentence

We continue to pursue our core strategy of developing strong partnerships with agents, enhanced franchise value through selective distribution, distinctive products and coverages, and continued investment in industry segmentation.

Commercial Lines net premiums written grew by 4.5% in the first three months of 2020, compared to the same period in 2019, primarily due to growth in our commercial multiple peril, commercial automobile, professional liability and marine lines.

Underwriting results declined in the first three months of 2020 , primarily due to higher non-catastrophe current accident year large loss activity and catastrophe losses , partially offset by lower expenses .

Additionally, the Commercial Lines current accident year losses and LAE also reflected a n initial reserve provision for COVID-19 related exposures.

Commercial Lines net premiums written in the first six months of 2020, were consistent with the same period in 2019.

The premium growth in the first quarter of 2020 was offset by a reduction in insured business activity as a result of the Pandemic during the second quarter.

Underwriting results declined in the first six months of 2020 , primarily due to higher catastrophe losses , partially offset by lower non- catastrophe current accident year losses.

The lower non-catastrophe current accident year losses in our commercial automobile, specialty industrial property and marine lines were partially offset by reserve provision s for exposure s related to the Pandemic .

The lower current accident year losses were primarily due to a reduced level of economic activity as a result of the Pandemic.

The competitive nature of the Commercial Lines market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins, and we continue to seek rate increases across our lines of business.

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Due to the Pandemic, and the resulting economic downturn affecting our Personal Lines businesses, there is an increased level of uncertainty in our ability to grow our business and maintain or improve our underwriting profitability.

Net premiums written grew by 2.1% in the first three months of 2020, compared to the same period in 2019, primarily due to higher renewal premium driven by rate increases.

Underwriting results improved in the first three months of 2020, primarily due to lower catastrophe losses, lower non-catastrophe current accident year losses and net favorable change in prior year reserve development.

On April 10, 2020, we announced that THG will return 15% of April and May personal automobile premiums to our eligible Personal Lines customers in all our markets, providing financial relief during the Pandemic.

Our decision to return a portion of premium payments to our customers is a recognition of the impact of government-mandated stay-at-home measures, which are reducing the number of vehicles on the roads and miles driven, and consequently, the number of claims filed.

We estimate that this premium refund will be approximately $30 million, which will be recognized in the second quarter of 2020.

Pending regulatory approvals, we will credit April in-force policies in May, and May in-force policies in June.

Net premiums written decreased by 2.0% in the first six months of 2020, compared to the same period in 2019.

During the second quarter of 2020, we returned approximately $30 million of premiums to our eligible personal automobile customers in all of our markets, providing financial relief during the Pandemic.

Excluding the impact of the premium refund, net written premiums increased 1.3%.

Underwriting results improved in the first six months of 2020, primarily due to lower non-catastrophe current accident year losses in our personal automobile line, a favorable change in development of prior years’ loss reserves and a non-recurring premium tax benefit, partially offset by higher catastrophe losses.

The lower personal automobile losses were due to fewer vehicles on the road as a result of the Pandemic.

Description of Operating Segments

11 unchanged sentences

Results of Operations – Consolidated

Consolidated net loss for the three months ended March 31, 2020 was $40.0 million, compared to consolidated net income of $122.4 million for the three months ended March 31, 2019, a decrease of $162.4 million.

This decrease is primarily a result of after-tax net realized and unrealized investment losses of $125.5 million in the first quarter of 2020, as compared to after-tax net realized and unrealized investment gains of $41.9 million in the first quarter of 2019.

Partially offsetting this decrease was higher operating income before interest expense and income taxes for the three months ended March 31, 2020.

Operating income before interest expense and income taxes increased $7.3 million primarily due to lower expenses and earned premium growth, partially offset by higher non-catastrophe current accident year losses.

Consolidated net income for the three months ended June 30, 2020 was $115.2 million, compared to consolidated net income of $74.0 million for the three months ended June 30, 2019, an increase of $41.2 million.

This increase was primarily due to an increase in after-tax net realized and unrealized investment gains of $39.8 million, as compared to the second quarter of 2019, principally related to changes in fair value of equity securities.

This increase was partially offset by operating income before interest expense and income taxes which decreased $18.1 million for the three months ended June 30, 2020.

This decrease was primarily due to higher catastrophe losses and lower net investment income, partially offset by lower non-catastrophe current accident year losses, as well as a non-recurring premium tax benefit.

Consolidated net income for the six months ended June 30, 2020 was $75.2 million, compared to $196.4 million for the six months ended June 30, 2019, a decrease of $121.2 million.

The year-over-year comparison of consolidated net income was primarily affected by an increase in after-tax net realized and unrealized investment losses of approximately $128 million, primarily related to the change in fair value of equity securities and, to a lesser extent, the increase in impairment losses on investments.

These losses were primarily offset by operating income before interest expense and income taxes for the six months ended June 30, 2020, which decreased by $10.8 million.

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

Six Months Ended

(in millions)

9 unchanged sentences

Net realized and unrealized investment gains (losses)

Effect of new tax regulations on Chaucer gain on sale

Other non-operating

Income tax benefit (expense) on non-operating items

Income (loss) from continuing operations, net of taxes

Income from continuing operations, net of taxes

Discontinued operations (net of taxes):

2 unchanged sentences

Loss from discontinued life businesses

Net income (loss)

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 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.

As reflected in the table above, operating income before interest and taxes excludes interest expense on debt and certain other items which we believe are not indicative of our core operations, such as net realized and unrealized investment gains and losses.

Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales.

Also, operating income before taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items.

Although the items excluded from operating income before taxes are important components in understanding and assessing our overall financial performance, we believe a discussion of operating income before 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 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.

Also, operating income before interest and taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items.

Although the items excluded from operating income before interest and taxes are important components in understanding and assessing our overall financial performance, we believe a discussion of operating income before taxes enhances an investor’s understanding of our results of operations by highlighting net income attributable to the core operations of the business.

However, operating income before interest and taxes, which is a non-GAAP measure, should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.

Catastrophe losses and prior years’ reserve development are significant components in understanding and assessing the financial performance of our business.

8 unchanged sentences

Three Months Ended

Six Months Ended

(in millions)

10 unchanged sentences

Operating income before interest expense and income taxes

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Operating income before interest expense and income taxes was $117.1 million in the three months ended March 31, 2020, compared to $109.8 million for the three months ended March 31, 2019, an increase of $7.3 million.

Net premiums written increased by $38.9 million in the three months ended March 31, 2020, compared to the three months ended March 31, 2019, due to growth in both our Commercial and Personal Lines segments.

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

Operating income before interest expense and income taxes was $88.9 million in the three months ended June 30, 2020, compared to $107.0 million in the three months ended June 30, 2019, a decrease of $18.1 million.

This decrease was primarily due to higher catastrophe losses and lower net investment income, partially offset by lower non-catastrophe current accident year losses and a non-recurring premium tax benefit.

The lower non-catastrophe current accident year losses are primarily due to lower personal and commercial automobile losses and lower large property loss activity in our commercial multiple peril and marine lines, partially offset by additional reserve provisions for exposures related to the Pandemic.

The lower current accident year losses were primarily due to a reduced level of economic activity as a result of the Pandemic.

Net premiums written decreased $56.8 million in the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to the aforementioned premium refund and economic impacts of the Pandemic in both our Commercial and Personal Lines segments.

Production and Underwriting Results

2 unchanged sentences

These items are not meaningful for our Other segment.

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

(dollars in millions)

1 unchanged sentence

Personal Lines

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

(dollars in millions)

3 unchanged sentences

Loss and LAE and catastrophe loss ratios include prior year reserve development.

Three Months Ended March 31,

Three Months Ended June 30,

(dollars in millions)

9 unchanged sentences

Total Personal Lines

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.

Three Months Ended March 31,

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

Three Months Ended June 30,

(in millions)

Underwriting profit, excluding

prior year reserve development

and catastrophes

Underwriting profit (loss),

excluding prior year reserve

development and catastrophes

Prior year favorable (unfavorable)

1 unchanged sentence

on non-catastrophe losses

Prior year favorable (unfavorable)

Prior year favorable

catastrophe development

4 unchanged sentences

Other operating expenses

Operating income (loss) before

Operating income before

interest expense and income taxes

Commercial Lines

Commercial Lines net premiums written were $707.6 million in the three months ended March 31, 2020, compared to $677.4 million in the three months ended March 31, 2019.

This $30.2 million increase was primarily driven by pricing increases and strong retention.

Commercial Lines underwriting profit for the three months ended March 31, 2020 was $10.4 million, compared to $36.7 million for the three months ended March 31, 2019, a decrease of $26.3 million.

Catastrophe-related losses for the three months ended March 31, 2020 were $23.8 million, compared to $10.4 million for the three months ended March 31, 2019, an increase of $13.4 million.

Prior year favorable catastrophe development for the three months ended March 31, 2019 included $13.3 million for the sale of subrogation rights on certain California wildfire losses.

Favorable development on prior years’ loss reserves for the three months ended March 31, 2020 was $3.7 million, compared to $7.5 million for the three months ended March 31, 2019, a decrease of $3.8 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $30.5 million for the three months ended March 31, 2020 , compared to $39.6 million for the three months ended March 31, 2019 .

This $9.1 million de crease was primarily d riven by a $12.6 million large property loss in our commercial multiple peril line, partially offset by lower expenses.

Our property per risk excess of loss reinsurance treaty includes a $10 million annual aggregate deductible for the $10 million excess of $10 million layer.

As this loss was the first to impact this layer of coverage in the treaty year, we retained $10 million of this large commercial multiple peril property loss to satisfy this deductible for the layer .

Additionally, the Commercial Lines current accident year losses and LAE also reflected a n initial reserve provision for COVID-19 related exposures.

We are continuing to manage underwriting performance through increased rates, pricing segmentation, specific underwriting actions and targeted new business growth.

Commercial Lines net premiums written were $614.9 million in the three months ended June 30, 2020, compared to $644.7 million in the three months ended June 30, 2019.

This $29.8 million decrease was primarily driven by the reduction in insured business activity during the period as a result of the Pandemic.

Commercial Lines underwriting profit for the three months ended June 30, 2020 was $21.3 million, compared to $29.1 million for the three months ended June 30, 2019, a decrease of $7.8 million.

Catastrophe losses for the three months ended June 30, 2020 were $64.8 million, compared to $23.0 million for the three months ended June 30, 2019.

The $41.8 million increase was primarily driven by property damages related to riots and civil unrest in several major cities across the country.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $81.0 million for the three months ended June 30, 2020, compared to $48.1 million for the three months ended June 30, 2019.

This $32.9 million increase was primarily driven by lower non-catastrophe current accident year losses.

The lower non-catastrophe current accident year losses were due to lower loss activity in our commercial multiple peril, workers’ compensation, marine and commercial automobile lines, primarily due to a reduced level of economic activity as a result of the Pandemic.

This lower loss activity was partially offset by approximately $6 million of additional reserve provisions for exposures related to the Pandemic, reflected in our workers’ compensation line.

We continu e to manage underwriting performance through increased rates, pricing segmentation, specific underwriting actions and targeted new business growth.

Our ability to achieve overall rate increases is affected by many factors, including regulatory activity and the current competitive pricing environment, particularly within the workers’ compensation line.

Due to the Pandemic and the resulting economic downturn affecting our Commercial Lines segment, there is an increased level of uncertainty in our ability to grow our business and maintain or improve our underwriting profitability.

The extent and duration of the Pandemic's future disruption to our businesses are unknown and may result in a moderation in claims volumes due to a substantial reduction in business activity, for example, less traffic and congestion on the roads may result in fewer accidents involving our insureds in our commercial automobile line.

In addition, a sharp reduction in our insured's underlying business activity, as well as the inability of certain businesses to restart operations and recover from the economic impacts of the prolonged stay-at-home orders, may result in a significant reduction in our future commercial multiple peril, workers' compensation and general liability premium levels.

The extent and duration of the Pandemic's future disruption to our businesses are unknown and may result in continued moderation in claims volumes due to a substantial reduction in business activity, for example, less traffic and congestion on the roads may result in fewer accidents involving our insureds in our commercial automobile line.

In addition, a reduction in our insured's underlying business activity, as well as the inability of certain businesses to restart operations and recover from the economic impacts of the prolonged stay-at-home orders, may result in a significant reduction in our future commercial multiple peril, workers' compensation and general liability premium levels.

Personal Lines

Personal Lines net premiums written were $429.3 million in the three months ended March 31, 2020, compared to $420.6 million in the three months ended March 31, 2019, an increase of $8.7 million.

This was primarily due to higher renewal premium driven by rate increases.

Net premiums written in the personal automobile line of business for the three months ended March 31, 2020 were $279.4 million, compared to $276.7 million for the three months ended March 31, 2019, an increase of $2.7 million.

This was primarily due to an increase in policies in force of 0.7%.

Net premiums written in the homeowners line of business for the three months ended March 31, 2020 were $137.6 million, compared to $133.6 million for the three months ended March 31, 2019, an increase of $4.0 million.

This is attributable to rate increases and an increase in policies in force of 1.6%.

Personal Lines underwriting profit for the three months ended March 31, 2020 was $44.1 million, compared to $5.7 million for the three months ended March 31, 2019, an increase of $38.4 million.

Catastrophe losses for the three months ended March 31, 2020 were $14.1 million, compared to $29.0 million for the three months ended March 31, 2019, a decrease of $14.9 million.

Favorable development on prior years’ loss reserves for the three months ended March 31, 2020 was $1.6 million, compared to unfavorable development of $7.5 million for the three months ended March 31, 2019, a favorable change of $9.1 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $56.6 million for the three months ended March 31, 2020, compared to $42.2 million for the three months ended March 31, 2019.

This $14.4 million increase was primarily due to lower current accident year property losses in our personal automobile line, partially due to a decrease in estimated miles driven in the month of March due to the Pandemic, and earned premium growth.

Personal Lines net premiums written were $466.1 million in the three months ended June 30, 2020, compared to $493.1 million in the three months ended June 30, 2019, a decrease of $27.0 million.

This was due to the premium refund on personal automobile policies.

Net premiums written in the personal automobile line of business for the three months ended June 30, 2020 were $276.8 million, compared to $310.4 million for the three months ended June 30, 2019, a decrease of $33.6 million.

This was primarily due to the personal automobile policy premium refund of $29.4 million.

Personal automobile policies in force decreased by 0.1%.

Net premiums written in the homeowners line of business for the three months ended June 30, 2020 were $173.7 million, compared to $169.1 million for the three months ended June 30, 2019, an increase of $4.6 million.

This was attributable to rate increases and an increase in policies in force of 0.8%.

Personal Lines underwriting profit for the three months ended June 30, 2020 was $17.4 million, compared to $10.9 million for the three months ended June 30, 2019, an increase of $6.5 million.

Catastrophe losses for the three months ended June 30, 2020 were $83.0 million, compared to $36.6 million for the three months ended June 30, 2019, an increase of $46.4 million primarily due to several wind and hail storms throughout the Midwest and Southeast.

Favorable development on prior year’s loss reserves for the three months ended June 30, 2020 was $0.1 million, compared to unfavorable development of $3.3 million for the three months ended June 30, 2019, a favorable change of $3.4 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $100.3 million for the three months ended June 30, 2020, compared to $50.8 million for the three months ended June 30, 2019.

This $49.5 million increase was primarily due to lower current accident year losses in our personal automobile line and a non-recurring premium tax benefit.

The lower personal automobile losses were due to fewer vehicles on the road as a result of the Pandemic.

The non-recurring premium tax benefit of $13.8 million was due to a Michigan refund related to tax years 2014 through 2016.

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.

3 unchanged sentences

Due to the Pandemic and the resulting economic downturn affecting our Personal Lines segment, there is an increased level of uncertainty in our ability to retain or grow our business and maintain or improve our underwriting profitability.

The extent and duration of the Pandemic's future disruption to our businesses are unknown and may result in a moderation in claims volumes due to a substantial reduction in customer activity, for example, lower miles driven by the insureds in our personal automobile line.

We estimate that this premium refund will be approximately $30 million, which will be recognized in the second quarter of 2020.

Pending regulatory approvals, we will credit April in-force policies in May, and May in-force policies in June.

The extent and duration of the Pandemic's future disruption to our businesses are unknown and may result in a continued moderation in claims volumes due to a substantial reduction in customer activity, for example, lower miles driven by the insureds in our personal automobile line.

In addition, and as discussed under “Risk Factors – Michigan PIP Reform” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, Michigan enacted major reforms of its current system governing personal and commercial automobile insurance in 2019.

Michigan business represents 46% of our total personal automobile net premiums written.

As of March 31, 2020, the net impact of these reforms is not significant to our total net premiums written and underwriting income.

Our Other Segment had an operating loss of $2.4 million for the three months ended March 31, 2020, compared to operating income of $2.8 million for the three months ended March 31, 2019, a decline of $5.2 million.

The decline was primarily due to lower net investment income as a result of the deployment of proceeds from the sale of our former Chaucer business.

In addition, we recorded adverse prior year reserve development in our run-off voluntary assumed property and casualty reinsurance pools business.

This $3.3 million reserve increase was 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.

As of June 30, 2020, the net impact of these reforms is not significant to our total net premiums written and underwriting income.

Our Other segment had operating income of $1.0 million for the three months ended June 30, 2020, compared to $2.5 million for the three months ended June 30, 2019, a decline of $1.5 million.

The decline was primarily due to lower net investment income as a result of the deployment of proceeds from the sale of our former Chaucer business in the prior year.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Operating income before interest expense and income taxes was $206.0 million in the six months ended June 30, 2020, compared to $216.8 million in the six months ended June 30, 2019, a decrease of $10.8 million.

This decrease was primarily due to higher catastrophe losses and lower net investment income, partially offset by lower non-catastrophe current accident year losses, primarily in our personal and commercial automobile lines, and a non-recurring premium tax benefit.

The increase in catastrophe losses is due to several wind and hail storms throughout the Midwest and Southeast and property damages related to riots and civil unrest in several major cities across the country.

The lower current accident year losses were primarily due to a reduced level of economic activity as a result of the Pandemic.

Net premiums written decreased by $17.9 million in the six months ended June 30, 2020, compared to the six months ended June 30, 2019.

The personal automobile premium refund and reduction in commercial insured business activity during the second quarter as a result of the Pandemic more than offset the premium growth in the first quarter in both our Commercial and Personal Lines segments.

Production and Underwriting Results

The following tables summarize premiums written on a gross and net basis, net premiums earned and loss (including catastrophe losses), LAE, expense and combined ratios for the Commercial Lines and Personal Lines segments.

Loss, LAE, catastrophe loss and combined ratios shown below include prior year reserve development.

These items are not meaningful for our Other segment.

Six Months Ended June 30, 2020

(dollars in millions)

Commercial Lines

Personal Lines

Six Months Ended June 30, 2019

(dollars in millions)

Premiums Written

Premiums Earned

Commercial Lines

Personal Lines

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.

Six Months Ended June 30,

(dollars in millions)

Commercial Lines:

Commercial multiple peril

Commercial automobile

Workers’ compensation

Other commercial

Total Commercial Lines

Personal Lines:

Personal automobile

Other personal

Total Personal Lines

Six Months Ended June 30,

(in millions)

Underwriting profit (loss),

excluding prior year reserve

development and catastrophes

Prior year favorable (unfavorable)

loss and LAE reserve

development on

non-catastrophe losses

Prior year favorable (unfavorable)

catastrophe development

Current year catastrophe losses

Underwriting profit (loss)

Net investment income

Fees and other income

Other operating expenses

Operating income (loss) before

interest expense and income taxes

Commercial Lines

Commercial Lines net premiums written were $1,322.5 million in the six months ended June 30, 2020, compared to $1,322.1 million in the six months ended June 30, 2019.

The premium growth in the first quarter of 2020 was offset by a reduction in insured business activity as a result of the Pandemic during the second quarter.

Commercial Lines underwriting income for the six months ended June 30, 2020 was $31.7 million, compared to $65.8 million for the six months ended June 30, 2019, a decrease of $34.1 million.

Catastrophe losses for the six months ended June 30, 2020 were $88.6 million, compared to $33.4 million for the six months ended June 30, 2019.

The $55.2 million increase was primarily due to property damages related to the riots and civil unrest in several major cities across the country.

Favorable development on prior years’ loss reserves for the six months ended June 30, 2020 was $8.8 million, compared to $11.5 million for the six months ended June 30, 2019, a change of $2.7 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $111.5 million for the six months ended June 30, 2020, compared to $87.7 million for the six months ended June 30, 2019, an increase of $23.8 million primarily due to lower current accident year losses.

The lower current year non-catastrophe losses were primarily due to lower commercial automobile losses and lower large property loss activity in our specialty industrial property and marine lines, partially offset by reserve provisions for exposures due to the Pandemic.

These reserve provisions of approximately $19 million were primarily reflected in our workers’ compensation, healthcare, commercial multiple peril, management and professional liability and surety lines.

The lower current accident year losses were primarily due to a reduced level of economic activity as a result of the Pandemic.

Personal Lines

Personal Lines net premiums written were $895.4 million in the six months ended June 30, 2020, compared to $913.7 million in the six months ended June 30, 2019, a decrease of $18.3 million.

During the second quarter of 2020, we returned approximately $30 million of premiums to our eligible Personal Lines customers in all our markets, providing financial relief during the Pandemic.

Excluding the impact of the premium refund, net written premiums would have increased 1.2%.

Personal Lines underwriting profit for the six months ended June 30, 2020 was $61.5 million, compared to $16.6 million for the six months ended June 30, 2019, an increase of $44.9 million.

Catastrophe losses for the six months ended June 30, 2020 were $97.1 million, compared to $65.6 million for the six months ended June 30, 2019.

The increase of $31.5 million was primarily due to several wind and hail storms throughout the Midwest and Southeast.

Favorable development on prior years’ loss reserves for the six months ended June 30, 2020 was $1.7 million, compared to unfavorable development of $10.8 million for the six months ended June 30, 2019, a favorable change of $12.5 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $156.9 million in the six months ended June 30, 2020, compared to $93.0 million in the six months ended June 30, 201 9 .

This $63.9 million increase was primarily due to lower current accident year losses in our personal automobile line and a non - recurring premium tax benefit.

Personal automobile losses were lower due to fewer vehicles on the road as a result of the Pandemi c.

Our Other segment had an operating loss of $1.4 million for the six months ended June 30, 2020, compared to operating income of $5.3 million for the six months ended June 30, 2019.

The decline of $6.7 million was primarily due to lower net investment income as a result of the deployment of proceeds from the sale of our former Chaucer business in the prior year.

Reserve for Losses and Loss Adjustment Expenses

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

Three Months Ended

Six Months Ended

(in millions)

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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 unfavorable (favorable) development for the periods indicated:

Three Months Ended March 31,

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

Six Months Ended June 30,

(in millions)

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Other Segment

Total prior year unfavorable (favorable) development

It is not possible to know whether the factors that affected loss reserves in the first three months of 2020 will also occur in future periods.

Total prior year favorable development

It is not possible to know whether the factors that affected loss reserves in the first six months of 2020 will also occur in future periods.

We encourage you to read our 2019 Annual Report on Form 10-K for more information about our reserving process and the judgments, uncertainties and risks associated therewith.

Catastrophe Loss Development

In the three months ended March 31, 2020 and 2019, favorable catastrophe development was zero and $13.5 million, respectively.

The favorable catastrophe development during the three months ended March 31, 2019 was primarily due to lower than expected losses related to the 2017 and 2018 California wildfires, including the sale of subrogation rights on certain California wildfire losses.

In the six months ended June 30, 2020 and 2019, favorable catastrophe development was $7.0 and $20.5 million, respectively.

The favorable catastrophe development during the six months ended June 30, 2020 was primarily due to lower than expected losses related to certain 2017 and 2019 wind storms, winter storms and hurricanes.

The favorable catastrophe development during the six months ended June 30, 2019 was primarily due to lower than expected losses related to the 2017 and 2018 California wildfires, including the sale of subrogation rights on certain California wildfire losses.

2020 Loss and LAE Development, excluding catastrophes

For the three months ended March 31, 2020, net favorable loss and LAE development, excluding catastrophes, was $2.0 million.

Lower than expected losses in the workers’ compensation line, primarily in accident years 2016, 2018 and 2019, and other commercial and homeowners lines were partially offset by higher than expected losses in the commercial and personal automobile and commercial multiple peril lines.

Within other commercial lines, lower than expected losses in our marine line, primarily in accident years 2018 and 2019, and specialty industrial and commercial 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.

This $3.3 million reserve increase was based on an updated third-party actuarial study received in the first quarter of 2020 for the legacy ECRA pool that primarily consists of asbestos and environmental exposures.

For the six months ended June 30, 2020, net favorable loss and LAE development, excluding catastrophes, was $6.9 million.

Lower than expected losses in the workers’ compensation line of $15.8 million in accident years 2016 through 2019 and other commercial lines were partially offset by higher than expected losses in the commercial and personal automobile lines and the commercial multiple peril line.

Within other commercial lines, lower than expected losses in our marine line of $11.5 million, in accident years 2017 through 2019, and commercial miscellaneous property line 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 ECRA pool that primarily consists of asbestos and environmental exposures.

2019 Loss and LAE Development, excluding catastrophes

For the three months ended March 31, 2019, net unfavorable loss and LAE development, excluding catastrophes, was $0.3 million.

Higher than expected losses in the personal and commercial automobile lines were substantially offset by lower than expected losses in the workers’ compensation and commercial multiple peril lines.

For the six months ended June 30, 2019, net favorable loss and LAE development, excluding catastrophes, was $0.1 million.

Lower than expected losses in the workers’ compensation line of $10.7 million in accident years 2017 and 2018 and the commercial multiple peril line were substantially offset by higher than expected losses in the personal and commercial automobile lines.

In addition, Other Segment unfavorable development of $0.6 million was due to adverse loss trends in our run-off voluntary assumed property and casualty reinsurance pools business which includes asbestos and environmental reserves.

Reinsurance Recoverables

Reinsurance recoverables were $1,813.7 million and $1,814.0 million at June 30, 2020 and December 31, 2019, respectively, of which $78.2 million and $89.8 million represent billed recoverables.

A reinsurance recoverable is billed after an eligible reinsured claim is paid by an insurer.

Billed reinsurance recoverables related to the MCCA were $38.9 million and $29.2 million at June 30, 2020 and December 31, 2019, respectively, and billed non-MCCA reinsurance recoverables totaled $39.3 million and $60.6 million at June 30, 2020 and December 31, 2019, respectively.

At June 30, 2020, $0.8 million of the billed non-MCCA recoverables were outstanding greater than 90 days, whereas at December 31, 2019, there were no balances outstanding greater than 90 days.

Investment Results

Net investment income before income taxes was as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in millions)

Fixed maturities

Limited partnerships

Mortgage loans

Equity securities

Limited partnerships

Other investments

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Earned yield, total portfolio

The decrease in net investment income for the three months ended March 31, 2020 was primarily due to the deployment of Chaucer proceeds during 2019 for accelerated share repurchases and special dividends, as well as the impact of lower new money yields.

These decreases were partially offset by the continued investment of operational cash flows and higher limited partnership income.

The decrease in net investment income for the three and six months ended June 30, 2020 was primarily due to lower partnership income and the deployment of Chaucer proceeds during 2019 for accelerated share repurchases and special dividends, as well as the impact of lower new money yields.

These decreases were partially offset by the continued investment of operational cash flows.

Income from limited partnerships is recorded one quarter in arrears as financial information is provided by the partnership on a two or three month lag.

Therefore, limited partnership results in the second quarter of 2020 reflect lower valuations due to Pandemic-related business and financial market disruptions experienced during the first quarter of 2020.

We expect average fixed income yields to continue to decline as new money rates remain lower than embedded book yield.

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

March 31, 2020

June 30, 2020

December 31, 2019

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Cash and Investments

Total cash and investments decreased $240.3 million, or 2.9%, for the three months ended March 31, 2020, as compared to December 31, 2019, primarily due to market value depreciation.

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

March 31, 2020

Total cash and investments increased $272.4 million, or 3.3%, for the six months ended June 30, 2020, as compared to December 31, 2019, primarily due to operational cashflows and market value appreciation, partially offset by the funding of financing activities, including dividend payments and stock repurchases.

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

June 30, 2020

(in millions)

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Net Unrealized

Gains (Losses)

Change in Net

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Total fixed maturities

The decrease in net unrealized gains on fixed maturities was primarily due to wider credit spreads.

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

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

March 31, 2020

June 30, 2020

December 31, 2019

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Total fixed maturities

Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 96% and 95% of the fixed maturity portfolio consisted of investment grade securities at March 31, 2020 and December 31, 2019, respectively.

The quality of our fixed maturity portfolio remains strong based on ratings, capital structure position, support through guarantees, underlying security, issuer diversification and yield curve position.

Our investment portfolio primarily consists of fixed maturity securities whose fair value is susceptible to market risk, including interest rate changes.

See also “Quantitative and Qualitative Disclosures about Market Risk” included in Management’s Discussion and Analysis contained in our 201 9 Annual Report on Form 10-K.

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 201 9 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:

March 31, 2020

June 30, 2020

December 31, 2019

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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, with financial information provided by the investee on a two or three month lag.

Accordingly, the adverse impact of the recent disruption in global financial markets associated with the Pandemic on our net investment income from these investments was not reflected in our results for the first quarter of 2020.

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.

For the three months ended March 31, 2020, we recognized $28.5 million of impairments, consisting primarily of $22.2 million on fixed maturities and $4.8 million on mortgage loans.

Impairments on fixed maturities included $16.0 million categorized as intend-to-sell and $6.2 million of credit-related losses, primarily in the energy sector, and to a lesser degree, consumer cyclical and transportation sectors.

For the three months ended March 31, 2019, we did not recognize any other-than-temporary impairments on our investment portfolio.

The carrying values of fixed maturity securities on non-accrual status at March 31, 2020 and December 31, 2019 were not material.

The effects of non-accruals for the three months ended March 31, 2020 and 2019, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were also not material.

For the three months ended June 30, 2020, we recognized a $1.4 million net decrease in credit losses on fixed maturities, primarily resulting from increased market values during the quarter.

For the six months ended June 30, 2020, we recognized $27.1 million of impairments, consisting primarily of $20.8 million on fixed maturities and $4.8 million on mortgage loans.

Impairments on fixed maturities included $16.2 million categorized as intend-to-sell and $4.6 million of credit-related losses, primarily in the energy sector, and to a lesser degree, consumer non-cyclical and consumer cyclical sectors.

For the three and six months ended June 30, 2019, we recognized $0.4 million of other-than-temporary impairments on corporate fixed maturity securities.

At June 30, 2020 and December 31, 2019, the allowance for credit losses on mortgage loans was $6.1 million and $1.3 million, respectively.

The allowance for credit losses on available-for-sale securities was $3.8 million at June 30, 2020.

There was no allowance for credit losses on available-for-sale securities at December 31, 2019.

The carrying values of fixed maturity securities on non-accrual status at June 30, 2020 and December 31, 2019 were not material.

The effects of non-accruals for the six months ended June 30, 2020 and 2019, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were also not material.

Any defaults in the fixed maturities portfolio in future periods may negatively affect investment income.

Unrealized Losses

Gross unrealized losses on fixed maturities at March 31, 2020 were $64.1 million, an increase of $56.5 million compared to December 31, 2019, primarily attributable to wider credit spreads.

At March 31, 2020, gross unrealized losses consisted primarily of $60.0 million on corporate fixed maturities.

Gross unrealized losses on fixed maturities at June 30, 2020 were $4.3 million, a decrease of $3.3 million compared to December 31, 2019, primarily attributable to lower interest rates, partially offset by wider credit spreads.

At June 30, 2020, gross unrealized losses consisted primarily of $3.7 million on corporate fixed maturities.

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” ).

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 forecasted econom ic downturn resulting from the Pandemic is longer and more severe than current expectations ;

the global econom ic downturn resulting from the Pandemic is longer and more severe than current expectations ;

we may decide to subsequently sell a security for unforeseen business needs;

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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 March 31, 2020 and December 31, 2019.

The following table sets forth gross unrealized losses for fixed maturities by maturity period at June 30, 2020 and December 31, 2019.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers.

(in millions)

Due in one year or less

Due after one year through five years

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As a result, we could incur additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations and/or financial position.

In the first quarter of 2020, the Pandemic resulted in significant economic disruption due to various government-mandated emergency orders, consumer and business uncertainty, and forced business closures.

Stock and bond markets plunged, unemployment rolls expanded significantly, and many non-essential businesses were required to close in the U.S.

and around the globe for an uncertain amount of time.

In the first six months of 2020, the Pandemic resulted in significant economic disruption due to various government-mandated emergency orders, consumer and business uncertainty, and forced business closures.

Financial markets have substantially recovered from the significant declines experienced earlier in the year, however the economic outlook remains uncertain.

Unemployment rates remain elevated, many corporations have eliminated forward revenue and earnings guidance, several foreign countries have placed restrictions on travel by U.S.

citizens and many small businesses remain closed.

A resurgence of the infection rate in many southern and western U.S.

states has added to the uncertainty of timing of re-opening of businesses and schools.

While the U.S.

government and its agencies have taken extraordinary measures to stabilize the economy, it is unclear whether such actions will be sufficient to avoid economic recession in the near and intermediate term, and what effect such unprecedented events will ultimately have on our investment portfolio.

government and its agencies have taken extraordinary measures to stabilize the economy, it is unclear whether such actions will be sufficient to minimize the economic recession in the near and intermediate term, and what effect such unprecedented events will ultimately have on our investment portfolio.

Due to the Pandemic, global monetary policies have become extremely accommodative in support of financial market stability.

Major central banks have lowered interest rates, relaxed collateral requirements and instituted various asset purchase programs to stabilize financial markets and support economic growth.

In the U.S., for example, the Federal Reserve (the “Fed”) reduced its federal funds target range to 0% to 0.25% in March.

The Fed has also offered support for the flow of credit to households and businesses.

In April, the Fed announced it will provide up to $2.3 trillion in loans to support the economy and assist households and employers, and bolster state and local governments to deliver critical services during the Pandemic.

In the U.S., for example, the Federal Reserve (the “Fed”) is maintaining its federal funds target range at 0% to 0.25%.

The Fed has also offered support for the flow of credit to households and businesses by providing up to $2.3 trillion in loans to support the economy and assist households and employers, and bolster state and local governments to deliver critical services during the Pandemic.

Fiscal stimulus by major market economies has also been enacted.

has declared a national emergency and earmarked approximately $50 billion in emergency funding, Congress has passed the $2.2 trillion stimulus package to support households and businesses and the U.S.

will give individuals and small businesses a three-month tax deferral, among other measures.

Fundamental conditions in certain corporate sectors are particularly tenuous, however, especially in the energy sector where the Russia/Saudi Arabia oil dispute and the decline in global demand have driven meaningful declines in our holdings of related fixed maturities.

has declared a national emergency and earmarked approximately $50 billion in emergency funding, Congress provided a $2.2 trillion stimulus package to support households and businesses and the U.S.

gave individuals and small businesses a three-month tax deferral, among other measures.

In May, the House of Representatives passed an additional stimulus relief package that includes $3.0 trillion of support for essential workers in the form of hazard pay, funding for state and local governments and continued small business and household assistance.

Fundamental conditions in certain corporate sectors are particularly tenuous, especially in the energy sector where the decline in global demand has driven meaningful declines in the value of our holdings of related fixed maturities.

Further, the lodging, restaurant and transportation services subsectors are severely impacted by the Pandemic.

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Net income also included the following items:

Three Months Ended March 31,

Three Months Ended June 30,

(in millions)

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Discontinued life businesses

Net realized and unrealized investment gains

Discontinued operations - Chaucer business, including

sale, net of taxes

Discontinued life businesses

Six Months Ended June 30,

(in millions)

Net realized and unrealized investment losses

Discontinued life businesses

Net realized and unrealized investment gains (losses)

Discontinued operations - Chaucer business, including

gain on sale, net of taxes

sale, net of taxes

Discontinued life businesses

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We managed investment assets separately for our former Chaucer business.

Net realized and unrealized losses on investment were $161.6 million for the three months ended March 31, 2020, compared to net realized and unrealized gains of $48.2 million for the three months ended March 31, 2019.

For the three months ended March 31, 2020, net realized and unrealized gains (losses) were primarily due to changes in the fair value of equity securities, and to a lesser extent, from impairment losses on investments.

For the three months ended March 31, 2019, net realized and unrealized gains (losses) were primarily due to changes in the fair value of equity securities.

Discontinued operations include our discontinued accident and health and life businesses.

Losses of $1.3 million and $0.8 million for the three months ended March 31, 2020 and 2019, respectively, primarily reflect adverse loss trends related to the long-term care pool.

Net realized and unrealized gains on investment were $63.7 million for the three months ended June 30, 2020, compared to $12.1 million for the three months ended June 30, 2019.

Net realized and unrealized gains in both 2020 and 2019 were primarily due to changes in the fair value of equity securities.

Net realized and unrealized losses on investment were $97.9 million for the six months ended June 30, 2020, compared to net realized and unrealized gains of $60.3 million for the six months ended June 30, 2019.

For the six months ended June 30, 2020, net realized and unrealized losses were primarily due to changes in the fair value of equity securities and, to a lesser extent, from impairment losses on investments.

For the six months ended June 30, 2019, net realized and unrealized gains were primarily due to changes in the fair value of equity securities.

Discontinued operations in 2020 include our discontinued accident and health and life businesses.

In 2019, our discontinued operations primarily included our former Chaucer business and, to a lesser extent, our discontinued life business.

For the three months and six months ended June 30, 2019, results related to our discontinued Chaucer business, including the sale, net of taxes, primarily reflects a revision to our best estimate of Chaucer’s 2018 catastrophe losses, which reduced our estimate of pre-tax contingent proceeds by $13.5 million.

This was partially offset by gains from the sale of the Chaucer-related Australian entity in both the three and six month periods, and by the gain from the sale of the Chuacer-related Irish entity for the six month period.

Losses of $1.4 million and $1.7 million in the discontinued life businesses for the six months ended June 30 , 2020 and 2019, respectively, primarily reflect adverse loss trends related to the long-term care pool.

We are subject to the tax laws and regulations of the U.S.

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tax as permitted.

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

The provision for income taxes from continuing operations was a benefit of $15.2 million and an expense of $26.0 million for the three months ended March 31, 2020 and 2019, respectively.

These provisions resulted in consolidated effective federal tax rates of 28.2% and 17.5% for the three months ended March 31, 2020 and 2019, respectively.

These provisions reflect benefits related to tax planning strategies implemented in prior years of $1.9 million and $3.8 million for the three months ended March 31, 2020 and 2019, respectively.

In addition, these provisions also included excess tax benefits related to stock-based compensation of $1.9 million and $1.5 million for the three months ended March 31, 2020 and 2019, respectively.

Absent these items, the provision for income taxes would have been a benefit of $11.4 million, or 21.2%, and an expense of $31.3 million, or 21.1%, for the three months ended March 31, 2020 and 2019, respectively.

The income tax provision on operating income was an expense of $20.9 million and $19.7 million for the three months ended March 31, 2020 and 2019, respectively.

These provisions resulted in effective tax rates for operating income of 19.4% and 19.6% for the three months ended March 31, 2020 and 2019, respectively.

These provisions included excess tax benefits related to stock-based compensation of $1.9 million and $1.5 million for the three months ended March 31, 2020 and 2019, respectively.

Absent this item, the provision for income taxes would have been an expense of $22.8 million, or 21.2%, and $21.2 million, or 21.1%, for the three months ended March 31, 2020 and 2019, respectively.

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

The provision for income taxes from continuing operations was an expense of $27.8 million and $24.8 million for the three months ended June 30, 2020 and 2019, respectively.

These provisions resulted in consolidated effective federal tax rates of 19.4% and 22.6% for the three months ended June 30, 2020 and 2019, respectively.

These provisions reflect benefits related to tax planning strategies implemented in prior years of $2.5 million and $3.4 million for the three months ended June 30, 2020 and 2019, respectively.

In addition, the provision for 2019 includes a charge of $5.6 million, which reflects the effect of changes in the tax law related to the 2018 sale of Chaucer.

Lastly, the provision for 2019 also includes excess tax benefits related to stock-based compensation of $0.6 million for the three months ended June 30, 2019.

Absent these items, the provision for income taxes would have been an expense of $30.3 million, or 21.2%, and $23.2 million, or 21.1%, for the three months ended June 30, 2020 and 2019, respectively.

The income tax provision on operating income was an expense of $16.8 million and $20.0 million for the three months ended June 30, 2020 and 2019, respectively.

These provisions resulted in effective tax rates for operating income of 21.1% and 20.5% for the three months ended June 30, 2020 and 2019, respectively.

The provision for 2019 includes excess tax benefits related to stock-based compensation of $0.6 million for the three months ended June 30, 2019.

Absent this item, the provision for income taxes for 2019 would have been an expense of $20.6 million, or 21.1%, for the three months ended June 30, 2019.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

The provision for income taxes from continuing operations was an expense of $12.6 million and $50.8 million for the six months ended June 30, 2020 and 2019, respectively.

These provisions resulted in consolidated effective federal tax rates of 14.1% and 19.7% for the six months ended June 30, 2020 and 2019, respectively.

These provisions reflect benefits related to tax planning strategies implemented in prior years of $4.4 million and $7.2 million for the six months ended June 30, 2020 and 2019, respectively.

In addition, these provisions also included excess tax benefits related to stock-based compensation of $1.9 million and $2.1 million for the six months ended June 30, 2020 and 2019, respectively.

Finally, the provision for 2019 includes a charge of $5.6 million, which reflects the effect of changes in the tax law related to the 2018 sale of Chaucer.

Absent these items, the provision for income taxes would have been an expense of $18.9 million, or 21.2%, and $54.5 million, or 21.1%, for the six months ended June 30, 2020 and 2019, respectively.

The income tax provision on operating income was an expense of $37.7 million and $39.7 million for the six months ended June 30, 2020 and 2019, respectively.

These provisions resulted in effective tax rates for operating income of 20.1% and 20.0% for the six months ended June 30, 2020 and 2019, respectively.

These provisions include excess tax benefits related to stock-based compensation of $1.9 million and $2.1 million for the six months ended June 30, 2020 and 2019, respectively.

Absent this item, the provision for income taxes would have been an expense of $39.6 million, or 21.2%, and $41.8 million, or 21.1%, for the six months ended June 30, 2020 and 2019, respectively.

Critical Accounting Estimates

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

Additionally, as a result of the recent economic disruption to the financial markets and overall challenges to economic conditions worldwide as a result of the Pandemic, we are experiencing a higher level of impairments in the first quarter of 2020 than in recent years.

Additionally, as a result of the recent economic disruption to the financial markets and overall challenges to economic conditions worldwide as a result of the Pandemic, we experienced a higher level of impairments in the first six months of 2020 than in recent years.

Accordingly, the following critical accounting estimate has been added.

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Total Statutory Capital and Surplus

The statutory capital and surplus for our insurance subsidiaries decreased by $50.0 million during the first three months of 2020.

This decrease was primarily due to net realized and unrealized investment losses, primarily due to changes in the fair value of equity securities, and to a lesser extent, from impairment losses on investments.

This decrease was partially offset by underwriting profits and changes in deferred taxes.

The statutory capital and surplus for our insurance subsidiaries decreased $156.8 million during the first six months of 2020.

This decrease was primarily due to the payment of a $245 million dividend and from unrealized and realized net investment losses, primarily due to changes in the fair value of equity securities.

These decreases were partially offset by underwriting profits.

The NAIC prescribes an annual calculation regarding risk based capital (“RBC”).

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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 March 31, 2020, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):

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 June 30, 2020, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):

(dollars in millions)

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However, dividend payments to us by our insurance subsidiaries are subject to limitations imposed by regulators, such as prior notice periods and the requirement that dividends in excess of a specified percentage of statutory surplus or prior year’s statutory earnings receive prior approval (so called “extraordinary dividends”).

During the first quarter of 2020, Hanover Insurance did not pay dividends to the holding company.

During the second quarter of 2020, Hanover Insurance paid $245.0 million in dividends to the holding company.

Sources of cash for our insurance subsidiaries primarily consist of premiums collected, investment income and maturing investments.

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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 $36.6 million during the first three months of 2020, as compared to $37.2 million during the first three months of 2019.

During 2020, the $0.6 million decrease in cash provided was primarily the result of higher loss payments, partially offset by an increase in premiums collected.

Net cash used in investing activities was $99.9 million during the first three months of 2020, as compared to $279.3 million during the first three months of 2019.

During 2020 and 2019, cash used in investing activities primarily related to net purchases of fixed maturities, and to a lesser extent, equity securities and other investments.

In 2019, these decreases in cash were partially offset by net proceeds received from the sale of the Chaucer-related Irish entity.

Net cash used in financing activities was $8.5 million during the first three months of 2020, as compared to $610.6 million during the first three months of 2019.

During 2020, cash was used in financing activities for the repurchase of common stock and for the quarterly dividend payment to our shareholders.

These payments were partially offset by short-term borrowings.

During 2019, cash used in financing activities primarily resulted from repurchases of common stock through an accelerated share repurchase (“ASR”) agreement, the payments of a special dividend and a quarterly dividend to shareholders, and the repayment of the FHLB advances.

Net cash provided by operating activities was $225.8 million during the first six months of 2020, as compared to $150.6 million during the first six months of 2019.

The $75.2 million increase in cash provided was primarily the result of lower federal income tax payments in the first six months of 2020, compared to the first six months of 2019 and, to a lesser extent, a reduction in operating expense payments, partially offset by slightly higher net loss and LAE payments.

Net cash used in investing activities was $156.7 million during the first six months of 2020, as compared to $215.4 million during the first six months of 2019.

During the first six months of 2020, cash used in investing activities primarily related to net purchases of fixed maturities.

During the first six months of 2019, cash used in investing activities primarily related to net purchases of fixed maturities and, to a lesser extent, equity securities and other investments, partially offset by net proceeds received from the sale of the Chaucer-related Irish and Australian entities.

Net cash used in financing activities was $102.2 million during the first six months of 2020, as compared to $779.4 million during the first six months of 2019.

During the first six months of 2020, cash used in financing activities primarily resulted from two quarterly dividend payments to shareholders and from the repurchase of common stock.

During the first six months of 2019, cash used in financing activities primarily resulted from repurchases of common stock through two accelerated share repurchase (“ASR”) agreements, the payments of a special dividend and two quarterly dividends to shareholders, and the repayment of the Federal Home Loan Bank (“FHLB”) advances.

Dividends to common shareholders are subject to quarterly board approval and declaration.

During the first three months of 2020, as declared by the Board, we paid a quarterly dividend of $0.65 per share to our shareholders totaling approximately $25 million.

During the first six months of 2020, as declared by the Board, we paid two quarterly dividends of $0.65 per share to our shareholders totaling approximately $50 million.

We believe that our holding company assets are sufficient to provide for future shareholder dividends should the Board of Directors declare them.

At March 31, 2020 , THG, as a holding company, held approximately $ 309.2 million of fixed maturities and cash.

At June 30 , 2020 , THG, as a holding company, held approximately $ 481.5 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.

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On February 26, 2020, we received approximately 0.2 million shares of our common stock as final settlement of shares repurchased under the December 2019 ASR.

In addition to the shares repurchased under the December 2019 ASR, during the first three months of 2020 we repurchased approximately 0.3 million shares at an aggregate cost of $34.9 million.

As of March 31, 2020, we have repurchased 4.8 million shares under this $900 million program and have approximately $300 million available for additional repurchases.

In addition to the shares repurchased under the December 2019 ASR, during the first six months of 2020 we repurchased approximately 0.5 million shares at an aggregate cost of $49.3 million.

As of June 30 , 2020, we have repurchased 4.9 million shares under this $900 million program and have approximately $287 million available for additional repurchases.

We maintain our membership in FHLB which provides us with access to additional liquidity based on our stock holdings and pledged collateral.

At March 31, 2020, we had borrowing capacity of $96.5 million.

There were $54.0 million of outstanding borrowings under this short-term facility at March 31, 2020, which is included in debt on our Consolidated Balance Sheet.

We may continue to borrow, from time to time, through this facility to provide short-term liquidity.

At June 30 , 2020, we had borrowing capacity of $116.3 million.

There were no outstanding borrowings under this short-term facility at June 30 , 2020;

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 new credit agreement that provides for a five-year unsecured revolving credit facility not to exceed $200.0 million at any one time outstanding, with the option to increase the facility up to $300.0 million (assuming no default and satisfaction of other specified conditions, including the receipt of additional lender commitments).

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Concurrent with our entry into this agreement, we voluntarily terminated our then existing $200.0 million credit agreement, dated November 12, 2013.

We currently have no borrowings under this agreement and had no borrowings under this agreement during the first three months of 2020.

We currently have no borrowings under this agreement and had no borrowings under this agreement during the first six months of 2020.

The LIBOR rate, upon which Adjusted LIBOR is based, is expected to be discontinued by the end of 2021.

Our credit agreement permits us to agree with the Administrative Agent for the credit facility on a replacement to Adjusted LIBOR subject to the satisfaction of certain conditions.

At March 31, 2020, we were in compliance with the covenants of our debt and credit agreements.

At June 30, 2020, we were in compliance with the covenants of our debt and credit agreements.

Off-Balance Sheet Arrangements

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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 are expected to be impacted by the Pandemic, including certain commercial lines, for the periods currently impacted by stay-at-home orders and other governmental restrictions, with premium adjustments based on factors such as the ongoing frequency and severity of claims, inflation, repair costs and reinsurance pricing, among others;

In response to the Pandemic, regulators in many of the states in which we operate have issued orders or guidance pertaining to, among other things, (a) premium refunds, credits or reductions for personal automobile insurance premiums and premiums for other insurance lines that regulators have determined are disproportionately impacted by the Pandemic, including certain commercial lines, for the periods during which stay-at-home orders and other governmental restrictions were or remain in effect, with premium adjustments based on factors such as the ongoing frequency and severity of claims, inflation, repair costs and reinsurance pricing, among others;

(b) premium payment grace periods, moratoriums on policy non-renewals and cancellations, and other measures that are similar to actions historically implemented in regions heavily impacted by catastrophes, which we anticipate to be manageable, depending on the duration of the regulatory orders and the degree to which policyholder payment patterns vary as a result;

and (c) a reassessment of rates in light of current exposures, loss experience and economic conditions.

Regulatory restrictions on rate increases, underwriting and the ability to non-renew business may, depending on their duration, limit the Company’s ability to manage our mix of business and any potential exposures that emerge in our lines of business in the near term.

Regulatory restrictions on rate increases, underwriting 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 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, and/or to mandate prospective pandemic coverage.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis