What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-28 compared with 2020-07-29 · 246 added, 225 removed, 466 unchanged (50% of the section changed)

16 unchanged sentences

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, as well as our former Chaucer business.

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

Executive Overview

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Commercial Lines, Personal Lines and Other.

Our strategy, which focuses on the independent agency distribution channel, reinforces THG’s commitment to our agency partners.

Our strategy, which focuses on the independent agency distribution channel, supports THG’s commitment to our agency partners.

It is designed to generate profitable growth by leveraging the strengths of our distribution approach, including expansion of our agency footprint in underpenetrated geographies, as warranted.

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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.

and global financial markets and economies during the nine months ended September 30, 2020.

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

Our investment portfolio was affected by the deterioration in investment markets during March 2020, as well as volatility in the subsequent months.

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

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

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

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.

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

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

see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $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.

see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $334.4 million for the nine months ended September 30, 2020, compared to $343.1 million for the nine months ended September 30, 2019, a decrease of $8.7 million.

This decrease was primarily due to higher catastrophe losses and, to a lesser extent, lower net investment income.

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

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

Pre-tax catastrophe losses were $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.

Pre-tax catastrophe losses were $251.6 million for the nine months ended September 30, 2020, compared to $134.2 million during the same period of 2019.

The increase of $117.4 million was primarily due to $38.2 million in property damages related to riots and civil unrest in several major cities across the country, as well as wind and hail storms throughout the Midwest and Southeast, and Hurricane Isaias.

Net favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”) was $9.5 million for the nine months ended September 30, 2020, while development was insignificant overall for the nine months ended September 30, 2019.

Commercial Lines

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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 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 .

Net premiums written increased 0.7% in the first nine months of 2020, compared to the same period in 2019.

The modest premium growth during 2020 reflects a reduction in insured business activity as a result of the Pandemic.

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

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

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.

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

Personal Lines

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We continue to seek appropriate rate increases that meet or exceed underlying loss cost trends, subject to regulatory and competitive considerations.

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

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

Net premiums written decreased by 0.5% in the first nine months of 2020, compared to the same period in 2019.

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

Excluding the impact of the premium refund, net written premiums increased 1.6%.

Underwriting results improved in the first 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.

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

The lower personal automobile losses were due to fewer accidents and decreased claim activity resulting from fewer miles driven as a result of the Pandemic.

Description of Operating Segments

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Results of Operations – Consolidated

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.

Consolidated net income for both the three months ended September 30, 2020 and the three months ended September 30, 2019 was $118.9 million.

Net income remained flat year-over-year primarily due to consistent operating income combined with offsetting fluctuations in non-operating and discontinued items.

After-tax net realized and unrealized investment gains increased $17.2 million in the third quarter of 2020 as compared to the third quarter of 2019.

This was offset by the net loss from repayment of debt of $6.1 million in the third quarter of 2020, as well as the absence, in 2020, of Chaucer related earnings and tax benefits totaling $12.9 million.

Consolidated net income for the nine months ended September 30, 2020 was $194.1 million, compared to $315.3 million for the nine months ended September 30, 2019, a decrease of $121.2 million.

The year-over-year comparison of consolidated net income was primarily affected by an increase in after-tax net realized and unrealized investment losses of approximately $110.4 million, primarily related to the change in fair value of equity securities and, to a lesser extent, an increase in impairment losses on investments.

In addition, lower operating income in 2020 as compared to 2019 and the aforementioned loss on the repayment of debt contributed to the change.

Operating income decreased primarily as a result of higher catastrophe losses and, to a lesser extent, lower net investment income.

These decreases in operating income were partially offset by lower non-catastrophe current accident year losses, as well as a non-recurring premium tax benefit received in the second quarter of 2020.

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

Nine Months Ended

September 30,

(in millions)

Operating income (loss) before interest expense and income taxes:

Operating income before interest expense and income taxes:

Commercial Lines

7 unchanged sentences

Net realized and unrealized investment gains (losses)

Net loss from repayment of debt

Effect of new tax regulations on Chaucer gain on sale

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Sale of Chaucer business

Loss from Chaucer business

Income from Chaucer business

Loss from discontinued life businesses

4 unchanged sentences

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.

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

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

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

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Operating income before interest expense and income taxes

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.

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

Operating income before interest expense and income taxes was $128.4 million in the three months ended September 30, 2020, compared to $126.3 million in the three months ended September 30, 2019, an increase of $2.1 million.

This increase was primarily due to lower non-catastrophe current accident year losses in our personal automobile line, partially offset by higher catastrophe losses.

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

Production and Underwriting Results

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These items are not meaningful for our Other segment.

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

(dollars in millions)

1 unchanged sentence

Personal Lines

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

(dollars in millions)

3 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in millions)

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

Three Months Ended June 30,

Three Months Ended September 30,

(in millions)

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on non-catastrophe losses

Prior year favorable

Prior year favorable (unfavorable)

catastrophe development

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Commercial Lines

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.

Commercial Lines net premiums written were $760.5 million in the three months ended September 30, 2020, compared to $746.4 million in the three months ended September 30, 2019.

This $14.1 million increase was primarily driven by pricing increases and strong retention.

Commercial Lines underwriting profit for the three months ended September 30, 2020 was $18.7 million, compared to $30.4 million for the three months ended September 30, 2019, a decrease of $11.7 million.

Catastrophe losses for the three months ended September 30, 2020 were $33.6 million, compared to $22.0 million for the three months ended September 30, 2019.

The $11.6 million increase was primarily due to wildfires on the West Coast and Hurricane Isaias.

Favorable development on prior year’s loss reserves for the three months ended September 30, 2020 was $3.9 million, compared to $5.6 million for the three months ended September 30, 2019, an unfavorable change of $1.7 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $48.4 million for the three months ended September 30, 2020 , compared to $46.8 million for the three months ended September 30, 2019 .

This $1.6 million in crease was primarily d riven by lower non-catastrophe current accident year losses.

The lower non-catastrophe current accident year losses were due to lower property loss activity in our other commercial and commercial automobile lines, partially offset by higher property losses in our commercial multiple peril line .

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

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

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

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.

The extent and duration of the Pandemic's future disruption to our businesses are unknown and may result in continued moderation in claims volumes due to a substantial reduction in business activity.

For example, less traffic and congestion on the roads may result in fewer accidents involving our insureds in our commercial automobile line.

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

Personal Lines

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

Net premiums written in the personal automobile line of business for the three months ended September 30, 2020 were $311.6 million, compared to $308.2 million for the three months ended September 30, 2019, an increase of $3.4 million.

Personal automobile policies in force decreased by 1.7%.

Net premiums written in the homeowners line of business for the three months ended 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.

Net premiums written in the homeowners line of business for the three months ended September 30, 2020 were $179.7 million, compared to $174.3 million for the three months ended September 30, 2019, an increase of $5.4 million.

Homeowners policies in force decreased by 0.2%.

Personal Lines underwriting profit for the three months ended September 30, 2020 was $43.0 million, compared to $28.8 million for the three months ended September 30, 2019, an increase of $14.2 million.

Catastrophe losses for the three months ended September 30, 2020 were $32.3 million, compared to $13.2 million for the three months ended September 30, 2019, an increase of $19.1 million, primarily due to Hurricane Isaias.

Unfavorable development on prior year’s loss reserves for the three months ended September 30, 2020 was $1.0 million, compared to $5.6 million for the three months ended September 30, 2019, a favorable change of $4.6 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $76.3 million for the three months ended September 30, 2020, compared to $47.6 million for the three months ended September 30, 2019.

This $28.7 million increase was primarily due to lower current accident year losses in our personal automobile line.

The lower personal automobile losses were due to fewer accidents and decreased claim activity resulting from fewer miles driven a result of the Pandemic.

We have been able to obtain rate increases in our Personal Lines markets and believe that our ability to obtain increases will continue over the long term.

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We monitor these trends and consider them in our rate actions.

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

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

In addition, in 2019, Michigan enacted major reforms of its current system governing personal and commercial automobile insurance, especially related to automobile Personal Injury Protection (“PIP”) coverage.

We believe that we are effectively executing the transition and will be able to navigate this market successfully.

As of September 30, 2020, the net impact of these reforms was not significant to our total net premiums written and underwriting profit.

For the full year 2019, net premiums written that were attributable to PIP coverage in Michigan were $159.7 million, or 3.5% of our total full year 2019 net premiums written, while Michigan personal automobile net premiums written represented 12% of THG’s total full year 2019 net premiums written.

For more information, please refer to “Risk Factors – Michigan PIP Reform” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.

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

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

Operating income before interest expense and income taxes was $334.4 million in the nine months ended September 30, 2020, compared to $343.1 million in the nine months ended September 30, 2019, a decrease of $8.7 million.

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

These items were partially offset by lower non-catastrophe current accident year losses primarily in our personal and commercial automobile lines and a non-recurring premium tax benefit.

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

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.

The increase in catastrophe losses was primarily due to property damages related to riots and civil unrest in several major cities across the country, wind and hailstorms throughout the Midwest and Southeast, and Hurricane Isaias.

Net premiums written increased by $7.7 million in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

Premiums grew during the period in both our Commercial and Personal Line segments, partially offset by the personal automobile premium refund of approximately $30 million in the second quarter.

Production and Underwriting Results

2 unchanged sentences

These items are not meaningful for our Other segment.

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

(dollars in millions)

1 unchanged sentence

Personal Lines

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

(dollars in millions)

6 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 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.

Six Months Ended June 30,

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

Nine Months Ended September 30,

(in millions)

13 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 $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.

Commercial Lines net premiums written were $2,083.0 million in the nine months ended September 30, 2020, compared to $2,068.5 million in the nine months ended September 30, 2019.

The modest premium growth during 2020 reflects a reduction in insured business activity as a result of the Pandemic.

Commercial Lines underwriting profit for the nine months ended September 30, 2020 was $50.4 million, compared to $96.2 million for the nine months ended September 30, 2019, a decrease of $45.8 million.

Catastrophe losses for the nine months ended September 30, 2020 were $122.2 million, compared to $55.4 million for the nine months ended September 30, 2019.

The $66.8 million increase was due to property damages related to the riots and civil unrest in several major cities across the country, wildfires on the West Coast, and Hurricane Isaias.

Favorable development on prior years’ loss reserves for the nine months ended September 30, 2020 was $12.7 million, compared to $17.1 million for the nine months ended September 30, 2019, an unfavorable change of $4.4 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $159.9 million for the nine months ended September 30, 2020, compared to $134.5 million for the nine months ended September 30, 2019, an increase of $25.4 million, primarily due to lower non-catastrophe current accident year losses.

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

The reserve provisions for exposures due to the Pandemic of approximately $19 million were primarily reflected in our workers’ compensation, healthcare, commercial multiple peril, management and professional liability, and surety lines.

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

Personal Lines

Personal Lines net premiums written were $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.

Personal Lines net premiums written were $1,403.4 million in the nine months ended September 30, 2020, compared to $1,410.2 million in the nine months ended September 30, 2019, a decrease of $6.8 million.

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

Excluding the impact of the premium refund, net written premiums would have increased 1.6%.

Personal Lines underwriting profit for the 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.

Personal Lines underwriting profit for the nine months ended September 30, 2020 was $104.5 million, compared to $45.4 million for the nine months ended September 30, 2019, an increase of $59.1 million.

Catastrophe losses for the nine months ended September 30, 2020 were $129.4 million, compared to $78.8 million for the nine months ended September 30, 2019.

The increase of $50.6 million was primarily due to several wind and hailstorms throughout the Midwest and Southeast and Hurricane Isaias.

Favorable development on prior years’ loss reserves for the nine months ended September 30, 2020 was $0.7 million, compared to unfavorable development of $16.4 million for the nine months ended September 30, 2019, a favorable change of $17.1 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $ 233.2 million in the nine months ended September 30, 2020, compared to $ 140 .

6 million in the nine months ended September 30, 201 9 .

This $9 2.6 million increase was primarily due to lower current accident year losses in our personal automobile line and , to a lesser extent, a non - recurring premium tax benefit.

Personal automobile losses were lower due to fewer accidents and decreased claim activity resulting from fewer miles driven as a result of the Pandemi c.

Our Other segment had operating income of $0.5 million for the nine months ended September 30, 2020, compared to $7.3 million for the nine months ended September 30, 2019.

The decline of $6.8 million was primarily due to lower net investment income as a result of the deployment of cash in the prior year.

Reserve for Losses and Loss Adjustment Expenses

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

Six Months Ended

Nine Months Ended

September 30,

(in millions)

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Net incurred losses and LAE in respect of losses occurring in:

Current year (1)

Prior year non-catastrophe loss development

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Gross reserve for losses and LAE, end of period

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

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

September 30,

(in millions)

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions)

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Other Segment

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.

Total prior year (favorable) unfavorable development

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

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

Catastrophe Loss Development

In the 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.

In the nine months ended September 30, 2020 and 2019, favorable catastrophe development was $16.6 million and $20.5 million, respectively.

The favorable catastrophe development during the nine months ended September 30, 2020 was primarily due to lower than expected losses related to certain 2017, 2018, and 2019 windstorms, winter storms and hurricanes and the 2017 and 2018 California wildfires.

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

2020 Loss and LAE Development, excluding catastrophes

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.

For the nine months ended September 30, 2020, net favorable loss and LAE development, excluding catastrophes, was $9.5 million.

Lower than expected losses in the workers’ compensation line of $25.6 million in accident years 2016 through 2019 and other commercial lines of $11.1 million were partially offset by higher than expected losses in the commercial multiple peril line of $13.3 million, in accident years 2016, 2017 and 2019, and the commercial automobile line of $10.7 million, driven by higher bodily injury and personal injury protection losses, primarily in accident years 2017 through 2019.

Within other commercial lines, lower than expected losses in our marine line of $13.1 million, in accident years 2017 through 2019, and specialty industrial property and commercial miscellaneous property lines were partially offset by higher than expected losses in the general liability lines.

The adverse prior year development for our Other Segment was due to our run-off voluntary assumed property and casualty reinsurance pools business primarily based on an updated third-party actuarial study received in the first quarter of 2020 for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool that consists of asbestos and environmental exposures.

2019 Loss and LAE Development, excluding catastrophes

For the 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.

For the nine months ended September 30, 2019, net unfavorable loss and LAE development, excluding catastrophes, was $0.2 million.

Higher than expected losses in the personal automobile line of $13.9 million, primarily in accident years 2016 and 2017, and the commercial automobile line were substantially offset by lower than expected losses in the workers’ compensation line of $15.7 million, primarily in accident years 2016 through 2018.

Within other commercial lines, lower than expected losses in the marine and commercial miscellaneous property lines were partially offset by higher than expected losses in the general liability lines.

In addition, Other Segment unfavorable development of $0.9 million was due to adverse loss trends in our run-off voluntary assumed property and casualty reinsurance pools business which includes asbestos and environmental reserves.

Reinsurance Recoverables

Reinsurance recoverables were $1,813.7 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.

Reinsurance recoverables were $1,841.1 million and $1,814.0 million at September 30, 2020 and December 31, 2019, respectively, of which $76.0 million and $89.8 million represent billed recoverables.

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

Billed reinsurance recoverables related to the 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.

Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $33.7 million and $29.2 million at September 30, 2020 and December 31, 2019, respectively, and billed non-MCCA reinsurance recoverables totaled $42.3 million and $60.6 million at September 30, 2020 and December 31, 2019, respectively.

At September 30, 2020, $2.2 million of the billed non-MCCA recoverables were outstanding greater than 90 days, whereas at December 31, 2019, there were no balances outstanding greater than 90 days.

Investment Results

Net investment income before income taxes was as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in millions)

8 unchanged sentences

Earned yield, total portfolio

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.

The decrease in net investment income for the three months ended September 30, 2020 was primarily due to the impact of lower new money yields and the deployment of cash during 2019 for accelerated share repurchases and special dividends.

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

The decrease in net investment income for the nine months ended September 30, 2020 was primarily due to the deployment of cash during 2019 for accelerated share repurchases and special dividends, the impact of lower new money yields and lower partnership income.

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

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.

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

Investment Portfolio

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

June 30, 2020

September 30, 2020

December 31, 2019

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Cash and Investments

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

Total cash and investments increased $747.2 million, or 9.1%, for the nine months ended September 30, 2020, as compared to December 31, 2019, primarily due to operational cashflows, market value appreciation and the net proceeds from our senior debt issuance in August 2020.

These increases were partially offset by the funding of financing activities, including our debt retirement, stock repurchases and dividend payments.

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

September 30, 2020

(in millions)

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

June 30, 2020

September 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 June 30, 2020 and December 31, 2019, respectively.

Based on ratings by the National Association of Insurance Commissi oners (“NAIC”), approximately 96 % and 95% of the fixed maturity portfolio consisted of investment grade securities at September 30, 2020 and December 31, 201 9 , 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.

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The duration of our fixed maturity portfolio was as follows:

June 30, 2020

September 30, 2020

December 31, 2019

15 unchanged sentences

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 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.

For the three months ended September 30, 2020, we recognized $0.8 million of impairments, consisting primarily of additional credit losses on mortgage loans partially offset by recoveries of credit losses on fixed maturities, primarily resulting from increased market values during the quarter.

For the nine months ended September 30, 2020, we recognized $27.9 million of impairments, consisting primarily of $19.1 million on fixed maturities and $6.6 million on mortgage loans.

Impairments on fixed maturities included $16.5 million categorized as intend-to-sell and $2.6 million of credit-related losses, primarily in the energy sector, and to a lesser degree, consumer non-cyclical and consumer cyclical sectors.

For the three and 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.

For the three and nine months ended September 30, 2019, we recognized $0.8 million and $1.2 million, respectively, of other-than-temporary impairments on corporate fixed maturity securities.

At September 30, 2020 and December 31, 2019, the allowance for credit losses on mortgage loans was $7.8 million and $1.3 million, respectively.

The allowance for credit losses on available-for-sale securities was $1.6 million at September 30, 2020.

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

The carrying values of fixed maturity securities on non-accrual status at 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.

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

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

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

Unrealized Losses

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.

Gross unrealized losses on fixed maturities at September 30, 2020 were $2.5 million, a decrease of $5.1 million compared to December 31, 2019, primarily attributable to lower interest rates, partially offset by wider credit spreads.

At September 30, 2020, gross unrealized losses consisted primarily of $1.7 million on corporate fixed maturities, $0.3 million on U.

government securities and $0.3 million on residential mortgage-backed securities.

See Note 3 – “Investments” in the Notes to Interim Consolidated Financial Statements.

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Inherent in our assessment are the risks that market factors may differ from our expectations;

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

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

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

2 unchanged sentences

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 June 30, 2020 and December 31, 2019.

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

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

September 30,

(in millions)

7 unchanged sentences

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 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.

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

Financial markets have substantially recovered from the significant declines experienced earlier in the year;

however, the economic outlook remains uncertain as a resurgence of the infection rate is being experienced in many U.S.

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 minimize the 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 through fiscal policy actions, such as passage of the CARES Act and other bills that will provide roughly $3 trillion in economic support.

These actions have muted the recessionary dynamics that occur in a downturn and have supported a strong but incomplete recovery of the labor markets.

It is unclear whether such actions will be sufficient to minimize the economic recession in the near and intermediate term, and what effect such unprecedented events will ultimately have on our investment portfolio.

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

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

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

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 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.

In the U.S., for example, the Federal Reserve (the “Fed”) is maintaining its federal funds target range at 0% to 0.25% and is conducting unprecedented quantities of asset purchases.

Additionally, lending facilities have been established to support the flow of credit to households, businesses and state and local governments.

However, because the Pandemic still poses considerable downside risks to economic activity and labor markets over the medium term, U.S.

government officials are working toward another round of fiscal policy actions to support the economy and the flow of credit to households and businesses experiencing the greatest financial impact from the Pandemic.

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

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

While we may experience defaults on fixed income securities, particularly with respect to non-investment grade debt securities, it is difficult to foresee which issuers, industries or markets will be most affected.

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.

Net income also included the following items:

Three Months Ended June 30,

Three Months Ended September 30,

(in millions)

Net realized and unrealized investment gains (losses)

Net realized and unrealized investment gains

Loss from repayment of debt

Discontinued life businesses

3 unchanged sentences

Discontinued life businesses

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions)

Net realized and unrealized investment losses

Loss from repayment of debt

Discontinued life businesses

6 unchanged sentences

We managed investment assets separately for our former Chaucer business.

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 on investment were $37.7 million for the three months ended September 30, 2020, compared to $14.8 million for the three months ended September 30, 2019.

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

Net realized and unrealized losses on investment were $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.

Net realized and unrealized losses on investment were $60.2 million for the nine months ended September 30, 2020, compared to net realized and unrealized gains of $75.1 million for the nine months ended September 30, 2019.

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

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

On September 19, 2020, we redeemed our outstanding $175.0 million principal amount of 6.35% subordinated debentures due 2053.

We recognized the remaining $6.1 million of unamortized debt issuance costs associated with this debt.

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

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

For the three months and 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.

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

This was partially offset by gains from the sale of the Chaucer-related Australian and Irish entities for the nine month period.

Losses of $2.0 million and $2.5 million in the discontinued life businesses for the nine months ended September 30 , 2020 and 2019, respectively, primarily reflect adverse loss trends related to the long-term care pool.

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

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tax as permitted.

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.

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

The provision for income taxes from continuing operations was an expense of $29.1 million and $19.1 million for the three months ended September 30, 2020 and 2019, respectively.

These provisions resulted in consolidated effective federal tax rates of 19.6% and 14.7% for the three months ended September 30, 2020 and 2019, respectively.

These provisions reflect benefits related to tax planning strategies implemented in prior years of $2.5 million and $3.2 million for the three months ended September 30, 2020 and 2019, respectively.

In addition, these provisions also included excess tax benefits related to stock-based compensation of $0.1 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively.

Lastly, the provision for 2019 includes a benefit of $4.4 million, which reflects the effect of changes in the tax law related to the 2018 sale of Chaucer.

Absent these items, the provision for income taxes would have been an expense of $31.7 million, or 21.3%, and $27.2 million, or 20.9%, for the three months ended September 30, 2020 and 2019, respectively.

The income tax provision on operating income was an expense of $25.1 million and $23.9 million for the three months ended September 30, 2020 and 2019, respectively.

These provisions resulted in effective tax rates for operating income of 21.2% and 20.4% for the three months ended September 30, 2020 and 2019, respectively.

These provisions include excess tax benefits related to stock-based compensation of $0.1 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively.

Absent this item, the provision for income taxes would have been an expense of $25.2 million, or 21.2%, and $24.4 million, or 20.9%, for the three months ended September 30, 2020 and 2019, respectively.

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

The provision for income taxes from continuing operations was an expense of $41.7 million and $69.9 million for the nine months ended September 30, 2020 and 2019, respectively.

These provisions resulted in consolidated effective federal tax rates of 17.5% and 18.0% for the nine months ended September 30, 2020 and 2019, respectively.

These provisions reflect benefits related to tax planning strategies implemented in prior years of $6.9 million and $10.4 million for the nine months ended September 30, 2020 and 2019, respectively.

In addition, these provisions also included excess tax benefits related to stock-based compensation of $2.0 million and $2.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Finally, the provision for 2019 includes a charge of $1.2 million, which reflects the effect of changes in the tax law related to the 2018 sale of Chaucer.

Absent these items, the provision for income taxes would have been an expense of $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.

Absent these items, the provision for income taxes would have been an expense of $50.6 million, or 21.3%, and $81.7 million, or 21.0%, for the nine months ended September 30, 2020 and 2019, respectively.

The income tax provision on operating income was an expense of $62.8 million and $63.6 million for the nine months ended September 30, 2020 and 2019, respectively.

These provisions resulted in effective tax rates for operating income of 20.5% and 20.2% for the nine months ended September 30, 2020 and 2019, respectively.

These provisions include excess tax benefits related to stock-based compensation of $2.0 million and $2.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Absent this item, the provision for income taxes would have been an expense of $64.8 million, or 21.2%, and $66.2 million, or 21.0%, for the nine months ended September 30, 2020 and 2019, respectively.

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 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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The following table reflects statutory surplus for our insurance subsidiaries:

September 30,

(in millions)

Total Statutory Capital and Surplus

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

The statutory capital and surplus for our insurance subsidiaries decreased $47.9 million during the first nine months of 2020.

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

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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 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):

The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other insurance subsidiaries), as of September 30, 2020, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):

(dollars in millions)

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

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

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

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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 $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.

Net cash provided by operating activities was $546.6 million during the first nine months of 2020, as compared to $423.9 million during the first nine months of 2019.

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

Net cash used in investing activities was $480.3 million during the first nine months of 2020, as compared to $505.2 million during the first nine months of 2019.

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

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

Net cash used in financing activities was $50.5 million during the first nine months of 2020, as compared to $785.1 million during the first nine months of 2019.

During the first nine months of 2020, cash used in financing activities primarily resulted from the repayment of debt, the repurchase of common stock and three quarterly dividend payments to shareholders, offset by net proceeds received from debt borrowings.

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

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

During the first 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.

During the first nine months of 2020, as declared by the Board, we paid three quarterly dividends of $0.65 per share to our shareholders totaling approximately $74 million.

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

At June 30 , 2020 , THG, as a holding company, held approximately $ 481.5 million of fixed maturities and cash.

At September 30 , 2020 , THG, as a holding company, held approximately $ 528 .4 million of fixed maturities and cash.

We believe our holding company assets will be sufficient to meet our current year obligations, which we expect to consist primarily of quarterly dividends to our shareholders (as and to the extent declared), interest on our senior and subordinated debentures, certain costs associated with benefits due to our former life employees and agents, and, to the extent required, payments related to indemnification of liabilities associated with the sale of various subsidiaries.

As discussed below, we have, and opportunistically may continue to, repurchase our common stock.

Additionally, from time to time, we may also repurchase our debt on an opportunistic basis .

As discussed below, we have, and opportunistically may continue to, repurchase our common stock and our deb t .

We do not expect that it will be necessary to dividend additional funds from our insurance subsidiaries in order to fund 20 20 holding company obligations;

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However, there can be no assurance that unforeseen business needs or other items, including any effects of the Pandemic or associated legislative, judicial or regulatory actions on our liquidity and investment portfolio, will not occur causing us to have to sell those securities in a loss position before their values fully recover, thereby causing us to recognize impairment charges in that time period.

The Board of Directors authorized a stock repurchase program which provides for aggregate repurchases of our common stock of up to $900 million, including a $300 million increase to the program that was authorized on December 5, 2019.

The Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of our common stock of up to $900 million.

Under the repurchase authorization, we may repurchase, from time to time, common stock in amounts, at prices and at such times as we deem appropriate, subject to market conditions and other considerations.

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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 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.

In addition to the shares repurchased under the December 2019 ASR, during the first nine months of 2020 we repurchased approximately 1.0 million shares at an aggregate cost of $94.3 million.

As of September 30 , 2020, we have repurchased 5.4 million shares under this $900 million program and have approximately $242 million available for additional repurchases.

On October 27, 2020, we entered into a new ASR agreement (the “October 2020 ASR”), pursuant to which we will pay $100.0 million in exchange for shares of our common stock.

Initial share delivery, of approximately 80% of the total number of shares expected to be received under this agreement, is scheduled for October 29, 2020.

Final settlement of the October 2020 ASR is expected to occur not later than February 3, 2021.

On August 24, 2020, we issued $300.0 million aggregate principal amount of 2.50% senior unsecured debentures due September 1, 2030.

Net proceeds of the debt issuance were $297.7 million.

A portion of the net proceeds was used to redeem $175.0 million outstanding 6.35% subordinated notes due 2053, resulting in a pre-tax loss of $6.1 million, related primarily to the accelerated amortization of debt issuance costs.

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

At 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;

At September 30 , 2020, we had borrowing capacity of $108.0 million.

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

however, we have and may continue to borrow, from time to time, through this facility to provide short-term liquidity.

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).

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 facili ty up to $300.0 million (assuming no default and satisfaction of other specified conditions, including the receipt o f additional lender commitments ) .

The agreement also includes an uncommitted subfacility of $50.0 million for standby letters of credit.

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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.

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 six months of 2020.

We currently have no borrowings under this agreement and h ad no borrowings under this agreement during the first nine months of 20 20 .

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

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

Off-Balance Sheet Arrangements

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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 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.

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

Draft legislation has been proposed in several state legislatures and/or in the United States Congress that seeks to require insurers to retroactively pay unfunded Pandemic business interruption claims that insurance policies do not currently cover, to impose presumptions on insurance policy interpretation, and/or to mandate prospective pandemic coverage.

The impact of such legislation, were it to be adopted, would, according to a statement of the NAIC on March 25, 2020, “create substantial solvency risks” for the property and casualty insurance sector, “significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.” Industry trade groups further assert that any such legislation would be violative of basic contract law and well-founded principles of constitutional law.

Federal stimulus plans such as the CARES Act providing financial support 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 flood program.

Details on such proposals are too preliminary to estimate their potential impact on our business.

Federal stimulus plans such as the CARES Act providing financial support to individuals and businesses during the Pandemic may mitigate the political pressure to continue advancing such proposed legislation.

Proposals are also being considered at the federal level to establish government-funded pandemic insurance programs, possibly similar to the federal terrorism risk insurance program.

Discussion on such competing proposals is ongoing and at a preliminary stage such that it is too early to estimate their potential impact, if any, on our business.

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

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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