What changed in this filing

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Item 1. Financial Statements

2021-04-30 compared with 2020-10-28 · 131 added, 329 removed, 592 unchanged (44% of the section changed)

4 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(In millions, except per share data)

1 unchanged sentence

Net realized and unrealized investment gains (losses):

Net realized gains from sales and other

Net realized gains (losses) from sales and other

Net change in fair value of equity securities

7 unchanged sentences

Interest expense

Loss from repayment of debt

Other operating expenses

Total losses and expenses

Income from continuing operations before income taxes

Income (loss) from continuing operations before income taxes

Income tax expense (benefit):

Effect of new tax regulations on Chaucer gain on sale

Total income tax expense

Income from continuing operations

Total income tax expense (benefit)

Income (loss) from continuing operations

Discontinued operations (net of taxes):

Sale of Chaucer business

Income from Chaucer business

Loss from discontinued life businesses

Net income (loss)

Earnings per common share:

Income from continuing operations

Income (loss) from continuing operations

Discontinued operations (net of taxes):

Sale of Chaucer business

Income from Chaucer business

Loss from discontinued life businesses

Net income per share

Net income (loss) per share

Weighted average shares outstanding

Income from continuing operations

Income (loss) from continuing operations

Discontinued operations (net of taxes):

Sale of Chaucer business

Income from Chaucer business

Loss from discontinued life businesses

Net income per share

Net income (loss) per share

Weighted average shares outstanding

4 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(In millions)

Other comprehensive income, net of tax:

Net income (loss)

Other comprehensive income (loss), net of tax:

Available-for-sale securities:

Changes in net unrealized gains on investment

Changes in net unrealized losses on investment securities:

Having no credit losses recognized in the

5 unchanged sentences

Net change in net actuarial loss

Cumulative foreign currency translation adjustment:

Amount recognized as cumulative foreign currency

translation during the period

Total other comprehensive income, net of tax

Comprehensive income

Total other comprehensive loss, net of tax

Comprehensive loss

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

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,

(In millions, except share data)

34 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(In millions)

10 unchanged sentences

Balance at beginning of period

Net appreciation on available-for-sale securities

Adoption of Accounting Standards Updates (No.

Net depreciation on available-for-sale securities

Balance at end of period

3 unchanged sentences

Balance at end of period

Cumulative Foreign Currency Translation Adjustment:

Balance at beginning of period

Amount recognized as cumulative foreign currency

translation during the period

Balance at end of period

Total accumulated other comprehensive income

3 unchanged sentences

Balance at beginning of period, as adjusted

Net income (loss)

Dividends to shareholders

11 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended

September 30,

Three Months Ended

(In millions)

Cash Flows From Operating Activities

Net income (loss)

Adjustments to reconcile net income to net cash provided by operating activities:

Net realized and unrealized investment losses (gains)

Loss from repayment of debt

Sale of Chaucer business

Net realized and unrealized investment (gains) losses

Net amortization and depreciation

14 unchanged sentences

Capital expenditures

Net cash proceeds from sale of Chaucer-related Irish and Australian entities,

partially offset by cash transferred

Net cash used in investing activities

1 unchanged sentence

Proceeds from exercise of employee stock options

Proceeds from debt borrowings, net

Change in cash collateral related to securities lending program

Proceeds from short-term borrowings

Dividends paid to shareholders

Repurchases of common stock

Repayment of debt

Other financing activities

1 unchanged sentence

Net change in cash and cash equivalents

Net change in cash related to discontinued operations

Cash and cash equivalents, beginning of period

9 unchanged sentences

Certain financial information that is provided in annual financial statements, but is not required in interim reports, has been omitted.

The interim consolidated financial statements of THG include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America, THG’s principal property and casualty companies;

and other insurance and non-insurance subsidiaries.

These legal entities conduct their operations through several business segments discussed in Note 9 – “Segment Information.” The interim consolidated financial statements also include the Company’s discontinued operations, consisting of the Company’s former accident and health and life insurance businesses, as well as the Company’s former Chaucer business.

These legal entities conduct their operations through several business segments discussed in Note 8 – “Segment Information.” The interim consolidated financial statements also include the Company’s discontinued operations, consisting of the Company’s former accident and health and life insurance businesses.

All intercompany accounts and transactions have been eliminated.

3 unchanged sentences

In the opinion of the Company’s management, the accompanying interim consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair presentation of the financial position and results of operations.

The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year.

These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2020.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.

These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2021.

New Accounting Pronouncements

Recently Implemented Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASC Update No.

2016-13, (Topic 326) Financial Instruments – Credit Losses:

Measurement of Credit Losses on Financial Instruments (“ASC Update No.

This ASC update introduces new guidance for the accounting for credit losses on financial instruments within its scope.

A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures).

The estimate of expected credit losses should consider both historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments.

The estimated credit losses and subsequent adjustment to such loss estimates are recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings.

ASC Update No.

2016-13 also modifies the impairment model for available-for-sale debt securities.

The new model requires an estimate of expected credit losses only when the fair value is below the amortized cost of the asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost no longer affects the determination of whether a credit loss exists.

In addition, credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value.

In November 2018, the FASB issued ASC Update No.

2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses , which explicitly states that receivables arising from operating leases are not within the scope of Subtopic 326-20.

In 2019 and 2020, the FASB issued several updates to ASC Update No.

2016-13, including the issuance in April 2019 of ASC Update 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments , the issuance in May 2019 of ASC Update 2019-05, Financial Instruments – Credit Losses (Topic 326):

Targeted Transition Relief, the issuance in November 2019 of ASC Update No.

2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses and the issuance in February 2020 of ASC Update 2020-02, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.

2016-02, Leases (Topic 842) .

The Company implemented this guidance effective January 1, 2020 and it did not have a material impact on its financial position or results of operations.

In August 2018, the FASB issued ASC Update No.

2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract .

This ASC update requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract consistent with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting agreement, and apply impairment guidance consistent with long-lived assets.

ASC Update No.

2018-15 also provides specific guidelines related to the presentation of these capitalized implementation costs and related expenses in the financial statements.

The Company implemented this guidance prospectively, effective January 1, 2020 , and it did not have a material impact on its financial position or results of operations.

In August 2018, the FASB issued ASC Update No.

2018-13, (Topic 820) Fair Value Measurement, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement .

The update removes the requirement for disclosure of the following:

1) the amount and reasons for transfers between level 1 and level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for level 3 fair value measurements.

This update also added a requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements, in addition to other fair value disclosure modifications.

This update required both prospective and retrospective application to certain disclosures upon implementation.

The Company implemented this guidance effective January 1, 2020 and it did not have an impact on the Company’s financial position or results of operations as the update is disclosure related.

In January 2017, the FASB issued ASC Update No.

2017-04, (Topic 350) Intangibles – Goodwill and Other:

Simplifying the Test for Goodwill Impairment .

This guidance eliminates step 2 from the goodwill impairment test.

Instead, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, including any applicable income tax effects, and recognize an impairment for the amount by which the carrying amount exceeds the reporting unit’s fair value.

However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Update No.

2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs .

This guidance clarifies, for each reporting period, that an entity should reevaluate whether a callable debt security with multiple call dates is required to amortize any premium to the next call date.

The updated guidance is effective for annual and interim periods beginning after December 15, 2020 and should be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities.

The Company implemented this guidance effective January 1, 2021 , and it did not have a material impact on its financial position or results of operations.

Recently Issued Standards

In August 2020, the FASB issued ASC Update No.

2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) .

This ASC update aims to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt – Debt with Conversion and Other Options, for convertible instruments.

The update also simplifies the settlement conditions required to be met to qualify for equity classification for contracts that are settled in an entity’s own equity.

ASC Update No.

2020-06 also requires that an entity use the if-converted method for convertible instruments in its earnings per share (“EPS”) calculations, requires the effect of potential share settlement to be included in the diluted EPS calculation when an instrument may be settled in cash or shares, eliminates the beneficial conversion features model, and clarifies the use of an average market price for calculating the diluted EPS denominator.

The updated guidance is effective for annual and interim periods beginning after December 15, 2021.

Early adoption is permitted no earlier than for annual and interim periods beginning after December 15, 2020.

This ASC allows for either a modified retrospective method of transition or a fully retrospective method of transition.

The Company does not expect the adoption of ASC Update No.

2020-06 to have a material impact on its financial position or results of operations.

In January 2020, the FASB issued ASC Update No.

3 unchanged sentences

The updated guidance is effective for annual and interim periods beginning after December 15, 2020.

The Company does not expect the adoption of ASC Update No.

2020-01 to have a material impact on its financial position or results of operations.

The Company implemented this guidance effective January 1, 2021 , and it did not have a material impact on its financial position or results of operations.

In December 2019, the FASB issued ASC Update No.

3 unchanged sentences

The updated guidance is effective for interim and annual periods beginning after December 15, 2020.

Early adoption is permitted, including interim periods.

The Company does not expect the adoption of ASC Update No.

2019-12 to have a material effect on its financial position or results of operations.

In August 2018, the FASB issued ASC Update No.

2018-14 , (Topic 715-20) Compensation – Retirement Benefits – Defined Benefit Plans – General – Disclosure Framework – Changes to the Disclosure Requirements for the Defined Benefit Plans.

This ASC update modifies disclosures related to defined benefit pension or other postretirement plans.

This ASC update removes the disclosure of amounts in accumulated other comprehensive income expected to be recognized over the next fiscal year and the effects of a one percentage point change of health care cost trends on net periodic benefit costs and postretirement benefit obligations and clarifies the specific requirements of disclosures related to the project ed benefit obligation and accumulated benefit obligation.

This ASC u pdate also adds disclosures related to weighted average crediting rates for cash balance plans and requires disclosure of an explanation of any significant gains and losses related to changes in benefit obligations for the period.

The amendments in this ASC update are effective for fiscal years ending after December 15, 2020, and should be applied on a retrospective basis to all periods presented.

Early adoption is permitted.

The Company does not expect the adoption of ASC Update No.

2018-14 to have a material effect on its financial position or results of operations as the update is disclosure related .

The Company implemented this guidance effective January 1, 2021 , and it did not have a material impact on its financial position or results of operations.

Fixed maturities

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

September 30, 2020

March 31, 2021

Amortized Cost,

7 unchanged sentences

December 31, 2020

Amortized Cost,

Net of Allowance

(in millions)

4 unchanged sentences

Total fixed maturities

As of December 31, 2019, other-than-temporary impairments (“OTTI”) unrealized losses in the table above represents OTTI recognized in accumulated other comprehensive income (“AOCI”).

This amount excludes net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date of $ 4.2 million.

The Company deposits funds with various state and governmental authorities.

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

For a discussion of the Company’s deposits with state and governmental authorities, see also Note 3 – “Investments” in the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report on Form 10-K.

The amortized cost and fair value by maturity periods for fixed maturities are shown in the following table.

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

September 30, 2020

March 31, 2021

Amortized Cost, Net

9 unchanged sentences

Fixed maturity securities in an unrealized loss position

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

September 30, 2020

The following tables provide information about the Company’s available-for-sale fixed maturity securities that were in an unrealized loss position at March 31, 2021 and December 31, 2020, including the length of time the securities have been in an unrealized loss position:

March 31, 2021

12 months or less

27 unchanged sentences

the general outlook for market conditions in the industry or geographic region in which the issuer operates;

and the degree to which the fair value of an issuer’s securities i s below the Company’s amortized cost.

and the degree to which the fair value of an issuer’s securities is below the Company’s amortized cost.

The Company also considers any factors that might raise doubt about the issuer’s ability to make contractual payments as they come due and whether the Company expects to recover the entire amortized cost basis of the security.

1 unchanged sentence

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

Three Months Ended September 30,

Proceeds from

(in millions)

Fixed maturities

Nine Months Ended September 30,

Proceeds from

Three Months Ended March 31,

(in millions)

Fixed maturities, excluding held-for-sale (Chaucer)

Fixed maturities, held-for-sale

Total fixed maturities

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

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

Proceeds from sales

For the three months ended March 31, 2021, the Company did no t recognize any impairments.

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

Impairments on fixed maturities included $ 16.0 million categorized as intend-to-sell and $ 6.2 million of credit-related losses.

For the three and nine months ended September 30, 2019, total impairments on fixed maturities recognized in earnings were $ 0.8 million and $ 1.2 million, respectively.

See Note 2, “New Accounting Pronouncements — Recently Implemented Standards ”, for a discussion of new guidance effective January 1, 2020, which impacts the accounting for expected credit losses on fixed maturity securities and mortgage loans.

Under the new guidance, credit losses on fixed maturities continue to be measured based on the present value of expected future cash flows compared to amortized cost;

however, credit losses on available-for-sale fixed maturities are now recognized through an allowance instead of a direct write down of amortized cost.

The new guidance stipulates that recoveries of previously recorded credit losses are recorded immediately as a reversal of the allowance.

In addition, the allowance is limited to the amount that fair value is less than amortized cost and therefore, increases in the fair value of investments due to reasons other than credit could result in decreases in the allowance.

Changes in the allowance for credit losses are recorded in net realized and unrealized investment gains (losses).

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

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

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

At March 31, 2021 and December 31, 2020, the allowance for credit losses on mortgage loans was $ 7.9 million.

At March 31, 2021, there was no allowance for credit losses on available-for-sale securities and at December 31, 2020, the allowance for credit losses on available-for-sale securities was $ 0.1 million.

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

Fixed maturities, Corporate bonds – the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating, asset duration and loss-given-default factors based on security type.

Fixed maturities, Corporate bonds – the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating and asset duration, and loss-given-default factors based on security type.

These factors are based on historical data provided by an independent third-party rating agency.

In addition, other market data relevant to the realizability of contractual cash flows may be considered, including current conditions and reasonable and supportable forecasts.

Mortgage loans – the Company utilized a model that estimates expected losses based on mortgage risk rating and risk factors based on property type, such as office, retail, lodging, multi-family and industrial.

Expected loss ratios are based on historical data provided by an independent third-party rating agency.

The risk factors, based on property characteristics and metrics including the geographic market, are predominantly driven by loan-to-value and debt service coverage ratios.

An adjustment to ratings may be made to reflect current conditions and to incorporate reasonable and supportable forecasts, such as volatility of cash flows and valuation.

In addition, other qualitative market data relevant to the realizability of contractual cash flows may be considered, including current conditions and reasonable and supportable forecasts.

Mortgage loans – the Company estimated losses by applying expected loss rates, which are based on historical data.

Embedded in expected loss rates are mortgage risk ratings and risk factors associated with property type such as office, retail, lodging, multi-family and industrial.

Risk ratings, based on property characteristics and metrics including the geographic market, are predominantly driven by estimates of loan-to-value and debt service coverage ratios.

Ratings may be adjusted to reflect current conditions and to incorporate reasonable and supportable forecasts, such as volatility of cash flows and valuation.

Equity securities

1 unchanged sentence

The following table provides pre-tax net realized and unrealized gains (losses) on equity securities:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in millions)

86 unchanged sentences

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

September 30, 2020

March 31, 2021

December 31, 2020

18 unchanged sentences

The Company does not adjust quotes or prices obtained from the pricing service unless the pricing service agrees with the Company’s challenge.

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

During the first three months of 2021 and 2020, the Company did not adjust any prices received from its pricing service.

Changes in the observability of valuation inputs may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy.

3 unchanged sentences

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

September 30, 2020

March 31, 2021

(in millions)

20 unchanged sentences

Limited partnerships measured at fair value using NAV based on an ownership interest in partners’ capital have not been included in the hierarchy tables.

At September 30, 2020 and December 31, 2019, the fair values of these investments were $ 174.3 million and $ 183.6 million, respectively, approximately 2 % of total investment assets.

At March 31, 2021 and December 31, 2020, the fair values of these investments were $ 172.9 million and $ 172.8 million, respectively, approximately 2 % of total investment assets.

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

September 30, 2020

March 31, 2021

(in millions)

10 unchanged sentences

(in millions)

Three Months Ended

September 30, 2020

Balance July 1, 2020

Three Months Ended March 31, 2021

Balance January 1, 2021

Total gains (losses):

Included in total net realized and

unrealized investment gains

Included in other comprehensive income-net appreciation on available-for-sale securities

Balance September 30, 2020

Change in unrealized gains for the period

included in other comprehensive income for

Included in other comprehensive loss-net depreciation on available-for-sale securities

Balance March 31, 2021

Change in unrealized losses for the period

included in other comprehensive loss for

assets held at the end of the period

Three Months Ended

September 30, 2019

Balance July 1, 2019

Included in other comprehensive income-net appreciation on available-for-sale securities

Balance September 30, 2019

Fixed Maturities

(in millions)

Nine Months Ended

September 30, 2020

Three Months Ended March 31, 2020

Balance January 1, 2020

Transfers out of Level 3

Included in total net realized and unrealized

investment gains

Included in other comprehensive income-net

appreciation on available-for-sale securities

Balance September 30, 2020

Change in unrealized gains for the period

included in other comprehensive income for

Total gains (losses):

Included in other comprehensive loss-net appreciation (depreciation) on available-for-sale securities

Balance March 31, 2020

Change in unrealized gains (losses) for the period

included in other comprehensive loss for

assets held at the end of the period

Nine Months Ended

September 30, 2019

Balance January 1, 2019

Included in other comprehensive income-net

appreciation on available-for-sale securities

Purchases and sales:

Balance September 30, 2019

There were no transfers between Level 2 and Level 3 during the three months ended September 30, 2020 and 2019.

During the nine months ended September 30, 2020, a fixed maturity security was transferred from Level 3 to Level 2, primarily as a result of assessing the significance of unobservable inputs on the fair value measurement.

There were no transfers between Level 2 and Level 3 for the nine months ended September 30, 2019.

There were no Level 3 liabilities held by the Company for the three and nine months ended September 30, 2020 and 2019.

There were no transfers between Level 2 and Level 3, and there were no Level 3 liabilities held by the Company for the three months ended March 31, 2021 and 2020.

The following table provides quantitative information about the significant unobservable inputs used by the Company in the fair value measurements of Level 3 assets.

Where discounted cash flows were used in the valuation of fixed maturities, the internally-developed discount rate was adjusted by the significant unobservable inputs shown in the table.

September 30, 2020

March 31, 2021

December 31, 2020

7 unchanged sentences

Credit stress

Above-market coupon

0.7 - 6.8% (5.0%)

2 unchanged sentences

Small issue size

Credit stress

Above-market coupon

2 unchanged sentences

Small issue size

Credit stress

Above-market coupon

Lease structure

1.9 - 3.1% (2.7%)

Credit stress

1.9 - 3.1% (2.7%)

3 unchanged sentences

market multiples

Internal price

Unadjusted price from

financing round

Discount rate

5 unchanged sentences

There were no interrelationships between these inputs which might magnify or mitigate the effect of changes in unobservable inputs on the fair value measurement.

Debt and Credit Arrangements

Debt consists of the following:

(in millions)

September 30, 2020

December 31, 2019

Senior debentures maturing April 15, 2026

Senior debentures maturing September 1, 2030

Senior debentures maturing October 15, 2025

Subordinated debentures maturing March 30, 2053

Subordinated debentures maturing February 3, 2027

Total principal debt

Unamortized debt issuance costs

On August 24, 2020, the Company issued $ 300.0 million aggregate principal amount of 2.50 % unsecured senior debentures maturing in 2030 .

This debt is subject to certain restrictive covenants, including limitations on the issuance or disposition of stock of restricted subsidiaries and limitations on liens, and pays interest semi-annually.

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

The Company recognized $ 6.1 million of unamortized debt issuance costs associated with this debt.

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

Income tax expense for the nine months ended September 30, 2020 and 2019 has been computed using estimated annual effective tax rates.

Income tax expense for the three months ended March 31, 2021 and 2020 has been computed using estimated annual effective tax rates.

These rates are revised, if necessary, at the end of each successive interim period to reflect current estimates of the annual effective tax rates.

The tax provision was comprised of a U.S.

federal income tax expense of $ 41.7 million and $ 69.9 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company and its subsidiaries files income tax returns in the U.S.

federal income tax expense of $ 21.3 million and a benefit of $ 15.2 million for the three months ended March 31, 2021 and 2020, respectively.

The Company and its subsidiaries file income tax returns in the U.S.

federal jurisdiction and various state jurisdictions, and have previously filed in foreign jurisdictions.

2 unchanged sentences

Pension Plans

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

Three Months Ended September 30,

(in millions)

Pension Plans

Interest cost

Expected return on plan assets

Recognized net actuarial loss

Net periodic pension cost

Nine Months Ended September 30,

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

Three Months Ended March 31,

(in millions)

3 unchanged sentences

Recognized net actuarial loss

Net periodic pension cost

Other Comprehensive Income

The following tables provide changes in other comprehensive income.

Three Months Ended September 30,

Net periodic pension (benefit) cost

Other Comprehensive Income (Loss)

The following tables provide changes in other comprehensive loss.

Three Months Ended March 31,

(in millions)

Changes in net unrealized gains (losses) on investment

Net unrealized gains arising during period for

those having no credit losses in Consolidated

Statement of Income

Net unrealized gains arising during period for

those having credit losses in Consolidated

Statement of Income

Amount of gains realized from sales and other

recognized in Consolidated Statement of

Amount of credit losses (recoveries)

recognized in the Consolidated

Statement of Income

Amount of additional impairment losses

recognized in the Consolidated Statement

Net unrealized gains

Pension and postretirement benefits:

Amortization of net actuarial losses

recognized as net periodic benefit cost

Other comprehensive income

Nine Months Ended September 30,

(in millions)

Changes in net unrealized gains (losses) on

investment securities:

Net unrealized gains arising during period for

Net unrealized losses arising during period for

those having no credit losses in Consolidated

Statement of Income

Net unrealized gains (losses) arising during period for

Net unrealized losses arising during period for

those having credit losses in Consolidated

Statement of Income

Amount of gains realized from sales and other

recognized in Consolidated Statement of

Amount of (gains) losses realized from sales and

other recognized in Consolidated Statement

Amount of credit losses recognized in the

2 unchanged sentences

recognized in the Consolidated Statement

Net unrealized gains

Net unrealized losses

Pension and postretirement benefits:

1 unchanged sentence

recognized as net periodic benefit cost

Cumulative foreign currency translation adjustment:

Foreign currency translation recognized

during the period

Other comprehensive income

Other comprehensive loss

Reclassifications out of accumulated other comprehensive income were as follows:

Three Months Ended

Nine Months Ended

September 30,

(in millions)

6 unchanged sentences

Where Net Income (Loss) is Presented

Net unrealized gains on investment

Net realized gains from sales and

Impairment (losses) recoveries on

Net unrealized gains (losses) on investment

Net realized gains (losses) from sales and

Impairment losses on investments

Total before tax

Continuing operations;

Discontinued operations - life

Discontinued operations - life businesses

Amortization of defined benefit pension

4 unchanged sentences

Total reclassifications for the period

Benefit (expense) reflected in

income, net of tax

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

Expense reflected in income (loss),

Segment Information

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This consists primarily of interest on the Company’s senior and subordinated debentures.

Management evaluates the results of the aforementioned segments based on operating income before taxes, excluding interest expense on debt.

Operating income before taxes excludes certain items which are included in net income, such as net realized and unrealized investment gains and losses.

Management evaluates the results of the aforementioned segments based on operating income before income taxes, excluding interest expense on debt.

Operating income before income taxes excludes certain items which are included in net income, such as net realized and unrealized investment gains and losses.

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

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

Although the items excluded from operating income before taxes may be important components in understanding and assessing the Company’s overall financial performance, management believes that the presentation of operating income before taxes enhances an investor’s understanding of the Company’s results of operations by highlighting net income attributable to the core operations of the business.

However, operating income before taxes should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.

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

Although the items excluded from operating income before income taxes may be important components in understanding and assessing the Company’s overall financial performance, management believes that the presentation of operating income before income taxes enhances an investor’s understanding of the Company’s results of operations by highlighting net income attributable to the core operations of the business.

However, operating income before income taxes should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.

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

Three Months Ended

Nine Months Ended

September 30,

(in millions)

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Commercial Lines:

Underwriting income

Underwriting income (loss)

Net investment income

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Other expense

Other operating income

Other operating income (loss)

Operating income before interest expense and income taxes

3 unchanged sentences

Net realized and unrealized investment gains (losses)

Loss from repayment of debt

Other non-operating

Income from continuing operations before income taxes

Income (loss) from continuing operations before income taxes

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

(in millions)

September 30, 2020

March 31, 2021

December 31, 2020

Property and Casualty Companies

Property and Casualty Insurance Companies

Assets of discontinued businesses

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

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

Stock-based Compensation

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

As of March 31, 2021, there were 1,980,405 shares and 2,329,534 shares available for grant under The Hanover Insurance Group 2014 Long-Term Incentive Plan and The Hanover Insurance Group 2014 Employee Stock Purchase Plan, respectively.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in millions)

2 unchanged sentences

Stock Options

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

Nine Months Ended September 30,

Information on the Company’s stock option activity for the three months ended March 31, 2021 and 2020 is summarized below.

Three Months Ended March 31,

(in whole shares and dollars)

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in whole shares and dollars)

7 unchanged sentences

Outstanding, end of period

In the first nine months of 2020 and 2019, the Company granted market-based awards totaling 34,911 and 23,924 , respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity.

In the first three months of 2021 and 2020, the Company granted market-based awards totaling 37,348 and 34,911 , respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity.

The vesting of these stock units is based on the relative total shareholder return (“TSR”) of the Company.

12 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(in millions, except per share data)

4 unchanged sentences

Diluted shares used in the calculation of earnings per share

Per share effect of dilutive securities on income from

Per share effect of dilutive securities on income (loss) from

continuing operations

Per share effect of dilutive securities on net income

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

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

T he Board of Directors authorized a stock repurchase program which provides for aggregate repurchases of up to $ 900 million.

Excludes 0.6 million shares due to antidilution that resulted from the Company having losses from continuing operations and net losses for the quarter ended March 31, 2020.

Diluted earnings per share for the three months ended March 31, 2021 and 2020 excludes 0.2 million and 0.4 million shares, respectively, issuable under the Company’s stock compensation plans because their effect would be antidilutive.

T he Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of the Company’s common stock of up to $ 900 million, and under which the Company had approximately $ 78 million available at March 31, 2021.

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

1 unchanged sentence

The Company is not required to purchase any specific number of shares or to make purchases by any certain date under this program.

On December 9, 2019, pursuant to the terms of an accelerated share repurchase (“ASR”) agreement (the “December 2019 ASR”) the Company paid $ 150.0 million in exchange for an initial delivery of approximately 0.9 million shares of common stock.

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

As discussed further in Note 14 - "Subsequent Events", the Company entered into a new ASR agreement on October 27, 2020.

On October 29, 2020, pursuant to the terms of an accelerated share repurchase agreement (the “October 2020 ASR”) the Company paid $ 100.0 million and received an initial delivery of approximately 0.8 million shares of its common stock, which was approximately 80 % of the total number of shares expected to be repurchased under the October 2020 ASR.

On January 29, 2021, the Company received approximately 45,000 shares of its common stock shares as final settlement of shares repurchased under the October 2020 ASR.

Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses

3 unchanged sentences

Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and loss event occurred.

These types of subsequent adjustments are described as “prior years’ loss reserves”.

Such development can be either favorable or unfavorable to the Company’s financial results and may vary by line of business.

These types of subsequent adjustments are described as “prior years’ loss reserves.” Such development can be either favorable or unfavorable to the Company’s financial results and may vary by line of business.

In this section, all amounts presented include catastrophe losses and LAE, unless otherwise indicated.

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

Nine Months Ended

September 30,

Three Months Ended

(in millions)

Gross loss and LAE reserves, beginning of period

Gross reserve for losses and LAE, beginning of period

Reinsurance recoverable on unpaid losses

Net loss and LAE reserves, beginning of period

Net reserve for losses and LAE, beginning of period

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

6 unchanged sentences

As a result of continuing trends in the Company’s business, reserves, including catastrophes, have been re-estimated for all prior accident years and were decreased by $ 8.2 million and $ 2.0 million in 2021 and 2020, respectively.

For the nine months ended September 30, 2020, net favorable loss and LAE development was $ 26.1 million primarily as a result of net favorable Commercial Lines development of $ 30.9 million, partially offset by unfavorable development in the Other Segment.

Commercial Lines favorable development was primarily due to lower than expected losses of $ 25.6 million within the workers’ compensation line in accident years 2016 through 2019 and, within other commercial lines, $ 15.3 million within the marine line primarily in accident years 2017 through 2019, partially offset by higher than expected losses of $ 10.6 million in the commercial automobile line driven by higher bodily injury and personal injury protection losses, primarily in accident years 2017 through 2019.

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

For the nine months ended September 30, 2019, net favorable loss and LAE development was $ 20.3 million, primarily as a result of favorable catastrophe development due to lower than expected losses related to the 2017 and 2018 California wildfires, including the sale of subrogation rights on certain California wildfire losses, and lower than expected losses related to the 2018 hurricanes.

For non-catastrophe loss and LAE development, lower than expected losses of $ 15.7 million in the workers’ compensation line were substantially offset by higher than expected losses of $ 13.7 million in the personal automobile line.

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

For the three months ended March 31, 2021, net favorable loss and LAE development was $ 8.2 million.

This was primarily due to lower than expected losses in the personal automobile line, driven by lower bodily injury and personal injury protection losses primarily in accident year 2020, and in the workers’ compensation line, primarily in accident years 2015 through 2017 and 2019.

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

Lower than expected losses in the workers’ compensation line, other commercial lines and homeowners line were partially offset by higher than expected losses in the commercial and personal automobile lines, commercial multiple peril line, and in the Company’s run-off voluntary assumed property and casualty reinsurance pools business.

Within other commercial lines, lower than expected losses in the Company’s marine line and specialty industrial and commercial property lines were partially offset by higher than expected losses in the general liability lines.

The higher than expected losses in the Company’s run-off voluntary assumed property and casualty reinsurance pools business was based on an updated third-party actuarial study received in the first quarter of 2020 for the Excess and Casualty Reinsurance Association (“ECRA”) pool that primarily consists of asbestos and environmental exposures.

Commitments and Contingencies

2 unchanged sentences

In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies.

The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry, examination or investigation, and its ultimate liability, if any, from such actions or regulatory proceedings, is difficult to predict at this time.

The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry or investigation, and its ultimate liability, if any, from such actions or regulatory proceedings, is difficult to predict at this time.

The ultimate resolutions of such proceedings are not expected to have a material effect on its financial position, although they could have a material effect on the results of operations for a particular quarterly or annual period.

3 unchanged sentences

Subsequent Events

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

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

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

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

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 1. Financial Statements