HANOVER INSURANCE GROUP, INC. 10-Q

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE OF CONTENTS Introduction 24 Executive Overview 24 Description of Operating Segments 25 Results of Operations - Consolidated 25 Results of Operations - Segments 27 Investments 32 Other Items 35 Income Taxes 36 Critical Accounting Estimates 36 Statutory Surplus of Insurance Subsidiaries 36 Liquidity and Capital Resources 37 Off - Balance Sheet Arrangements 38 Contingencies and Regulatory Matters 38 Risks and Forward - Looking Statements 39 23 Table of Contents Introduction The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist readers in understanding the interim consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and its subsidiaries (“THG”). Consolidated results of operations and financial condition are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2021. Results of operations include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), our principal property and casualty insurance companies, and other insurance and non-insurance subsidiaries. Our results of operations also include the results of our discontinued operations, consisting of our accident and health and former life insurance businesses. Executive Overview Business operations consist of three operating segments: Commercial Lines, Personal Lines and Other. Our strategy, which focuses on the independent agency distribution channel, supports THG’s commitment to our customers and to our agency partners. It is designed to generate profitable growth by leveraging the strengths of our distribution approach, including expansion of our agency footprint in underpenetrated geographies, as warranted. As part of that strategy, we have increased our capabilities in specialty markets and made investments designed to develop growth solutions for our agency distribution channel and meet the needs of our customers. Our goal is to grow responsibly in all of our businesses, while managing volatility. The outbreak of the novel coronavirus, also known as COVID-19, and subsequent global pandemic (“Pandemic”) has significantly impacted the U.S. and global financial markets and economies since March 2020. Circumstances relating to the Pandemic are unprecedented in scope and impact, continue to evolve, and are complex and uncertain. Our investment portfolio was affected by the deterioration in investment markets during March 2020, as well as the volatility in the subsequent months. In addition, we experienced both favorable and adverse effects from the Pandemic on our underwriting results and operations, as well as our financial condition, during the period from March 2020 through March 2021. We continue to believe that the Pandemic’s impacts on our near-term results should be manageable. However, the severity, duration and long-term impacts of the Pandemic may affect the property and casualty insurance industry, our business, and our financial results over the intermediate and long-term. (See “Contingencies and Regulatory Matters” and “Item 1A – Risk Factors” for further discussion). During the three months ended March 31, 2021, our net income was $92.7 million, compared to a net loss of $40.0 million for the three months ended March 31, 2020, an increase of $132.7 million, primarily due to changes in the fair value of equity securities and, to a lesser extent, prior year impairments on fixed income securities, partially offset by a decrease in operating income. Operating income before interest expense and income taxes (a non-GAAP financial measure; see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $85.1 million for the three months ended March 31, 2021, compared to $117.1 million for the three months ended March 30, 2020, a decrease of $32.0 million. This decrease was primarily due to higher catastrophe losses, partially offset by lower non-catastrophe current accident year losses, primarily in our personal automobile and commercial multiple peril lines and, to a lesser extent, higher net investment income. Pre-tax catastrophe losses were $133.3 million for the three months ended March 31, 2021, compared to $37.9 million during the same period of 2020. The increase of $95.4 million was primarily due to freeze events in Texas and surrounding states impacting our commercial property lines. Net favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”) was $8.2 million for the three months ended March 31, 2021, compared to $2.0 million for the three months ended March 31, 2020. Commercial Lines Our account-focused approach to the small commercial market, distinctiveness in the middle market, and continued development of specialty lines provides us with a diversified portfolio of products and delivers significant value to agents and policyholders. We continue to pursue our core strategy of developing strong partnerships with agents, enhanced franchise value through selective distribution, distinctive products and coverages, and through continued investment in industry segmentation. Net premiums written increased 7.0% in the first three months of 2021, compared to the same period in 2020, primarily due to pricing increases. Underwriting results declined in the first three months of 2021, primarily due to higher catastrophe losses, partially offset by lower non-catastrophe current accident year losses in our commercial multiple peril and commercial automobile lines. The competitive nature of the Commercial Lines market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins, and we continue to seek rate increases across many lines of business. Due to uncertainty caused by the Pandemic, there is a level of uncertainty in our ability to grow our business and maintain or improve our underwriting profitability in this environment. 24 Table of Contents Personal Lines Personal Lines focuses on partnering with high quality, value-oriented agencies that deliver consultative selling to customers and stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and/or additional coverages, to address customers’ broader objectives). Approximately 86% of our policies in force have been issued to customers with multiple policies and/or coverages with us. We are focused on seeking profitable growth opportunities, building a distinctive position in the market in order to meet our customers’ needs and diversifying geographically. We continue to seek appropriate rate increases that meet or exceed underlying loss cost trends, subject to regulatory and competitive considerations. Due to uncertainty caused by the Pandemic, there is a level of uncertainty in our ability to grow our business and maintain or improve our underwriting profitability in this environment. Net premiums written increased by 2.2% in the first three months of 2021, compared to the same period in 2020. The modest premium growth reflects rate increases, partially offset by lower policies in force. Underwriting results improved in the first three months of 2021, primarily due to lower non-catastrophe current accident year losses in our personal automobile line, partially offset by higher large losses in our homeowners line. The lower personal automobile losses were due to fewer accidents and decreased claim activity resulting from changes in driving patterns as a result of the Pandemic. Description of Operating Segments Primary business operations include insurance products and services currently provided through three operating segments: Commercial Lines, Personal Lines and Other. Commercial Lines includes commercial multiple peril, commercial automobile, workers’ compensation and other commercial coverages, such as management and professional liability, marine, Hanover Programs, specialty industrial and commercial property, monoline general liability and surety. Personal Lines includes personal automobile, homeowners and other personal coverages, such as umbrella. Included in the “Other” segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds, and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to our former life insurance employees and agents; and a run-off voluntary property and casualty pools business. We present the separate financial information of each segment consistent with the manner in which our chief operating decision maker evaluates results in deciding how to allocate resources and in assessing performance. We report interest expense on debt separately from the earnings of our operating segments. This consists primarily of interest on our senior and subordinated debentures. Results of Operations – Consolidated Consolidated net income for the three months ended March 31, 2021 was $92.7 million, compared to a net loss of $40.0 million for the three months ended March 31, 2020, an increase of $132.7 million. The increase in consolidated net income (loss) was primarily a result of $31.4 million of after-tax net realized and unrealized investment gains in 2021 as compared to $125.5 million of after-tax net realized and unrealized investment losses in 2020, a change of $156.9 million. This change was primarily related to the change in fair value of equity securities and, to a lesser extent, a decrease in impairment losses on investments. Partially offsetting this increase was lower operating income before interest expense and income taxes for the three months ended March 31, 2021. Operating income before interest expense and income taxes decreased $32.0 million primarily due to higher catastrophe losses, partially offset by lower non-catastrophe current accident year losses, and, to a lesser extent, higher net investment income. 25 Table of Contents The following table reflects operating income (loss) before interest expense and income taxes for each operating segment and a reconciliation to consolidated net income (loss) from operating income before interest expense and income taxes (a non-GAAP measure). Three Months Ended March 31, (in millions) 2021 2020 Operating income (loss) before interest expense and income taxes: Commercial Lines $ 2.2 $ 54.6 Personal Lines 81.8 64.9 Other 1.1 (2.4 ) Operating income before interest expense and income taxes 85.1 117.1 Interest expense on debt (8.5 ) (9.4 ) Operating income before income taxes 76.6 107.7 Income tax expense on operating income (15.2 ) (20.9 ) Operating income 61.4 86.8 Non-operating items: Net realized and unrealized investment gains (losses) 37.5 (161.6 ) Income tax benefit (expense) on non-operating items (6.1 ) 36.1 Income (loss) from continuing operations, net of taxes 92.8 (38.7 ) Discontinued operations (net of taxes): Loss from discontinued life businesses (0.1 ) (1.3 ) Net income (loss) $ 92.7 $ (40.0 ) Non-GAAP Financial Measures In addition to consolidated net income, discussed above, we assess our financial performance based upon pre-tax “operating income,” and we assess the operating performance of each of our three operating segments based upon the pre-tax operating income (loss) generated by each segment. As reflected in the table above, operating income before interest expense and income taxes excludes interest expense on debt and certain other items which we believe are not indicative of our core operations, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before interest expense and income taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before interest expense and income taxes are important components in understanding and assessing our overall financial performance, we believe a discussion of operating income before interest expense and income taxes enhances an investor’s understanding of our results of operations by highlighting net income (loss) attributable to the core operations of the business. However, operating income before interest expense and income taxes, which is a non-GAAP measure, should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income (loss). Catastrophe losses and prior years’ reserve development are significant components in understanding and assessing the financial performance of our business. Management reviews and evaluates catastrophes and prior years’ reserve development separately from the other components of earnings. References to “current accident year underwriting results” exclude prior accident year reserve development and may also be presented “excluding catastrophes.” Prior years’ reserve development and catastrophes are not predictable as to timing or the amount that will affect the results of our operations and have an effect on each year’s operating and net income. Management believes that providing certain financial metrics and trends excluding the effects of catastrophes and prior years’ reserve development helps investors to understand the variability in periodic earnings and to evaluate the underlying performance of our operations. Discussion of catastrophe losses in this Management’s Discussion and Analysis includes development on prior years’ catastrophe reserves and, unless otherwise indicated, such development is excluded from discussions of prior year loss and LAE reserve development. 26 Table of Contents Results of Operations – Segments The following is our discussion and analysis of the results of operations by business segment. The operating results are presented before interest expense, income taxes and other items which management believes are not indicative of our core operations, including realized gains and losses, as well as unrealized gains and losses on equity securities, and the results of discontinued operations. The following table summarizes the results of operations for the periods indicated: Three Months Ended March 31, (in millions) 2021 2020 Operating revenues Net premiums written $ 1,196.1 $ 1,136.9 Net premiums earned 1,161.8 $ 1,141.4 Net investment income 76.8 69.6 Other income 7.2 6.8 Total operating revenues 1,245.8 1,217.8 Losses and operating expenses Losses and LAE 781.3 728.2 Amortization of deferred acquisition costs 240.3 236.9 Other operating expenses 139.1 135.6 Total losses and operating expenses 1,160.7 1,100.7 Operating income before interest expense and income taxes $ 85.1 $ 117.1 Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Operating income before interest expense and income taxes was $85.1 million for the three months ended March 31, 2021, compared to $117.1 million for the three months ended March 31, 2020, a decrease of $32.0 million. This decrease was primarily due to higher catastrophe losses in our commercial property lines, partially offset by lower non-catastrophe current accident year losses, primarily in our personal automobile and commercial multiple peril lines and, to a lesser extent, higher net investment income. Net premiums written increased $59.2 million in the three months ended March 31, 2021, compared to the three months ended March 31, 2020, due to growth in both our Commercial and Personal Lines segments. Production and Underwriting Results The following tables summarize premiums written on a gross and net basis, net premiums earned and loss (including catastrophe losses), LAE, expense and combined ratios for the Commercial Lines and Personal Lines segments. Loss, LAE, catastrophe loss and combined ratios shown below include prior year reserve development. These items are not meaningful for our Other segment. Three Months Ended March 31, 2021 (dollars in millions) Gross Premiums Written Net Premiums Written Net Premiums Earned Catastrophe Loss Ratios Loss & LAE Ratios Expense Ratios Combined Ratios Commercial Lines $ 884.0 $ 757.4 $ 692.9 17.1 72.8 34.1 106.9 Personal Lines 453.6 438.7 468.9 3.1 59.0 28.0 87.0 Total $ 1,337.6 $ 1,196.1 $ 1,161.8 11.5 67.2 31.6 98.8 Three Months Ended March 31, 2020 (dollars in millions) Gross Premiums Written Net Premiums Written Net Premiums Earned Catastrophe Loss Ratios Loss & LAE Ratios Expense Ratios Combined Ratios Commercial Lines $ 830.5 $ 707.6 $ 675.9 3.5 64.2 34.0 98.2 Personal Lines 458.4 429.3 465.5 3.0 62.5 27.5 90.0 Total $ 1,288.9 $ 1,136.9 $ 1,141.4 3.3 63.8 31.4 95.2 27 Table of Contents The following table summarizes net premiums written, and loss and LAE and catastrophe loss ratios by line of business for the Commercial Lines and Personal Lines segments. Loss and LAE and catastrophe loss ratios include prior year reserve development. Three Months Ended March 31, 2021 2020 (dollars in millions) Net Premiums Written Loss & LAE Ratios Catastrophe Loss Ratios Net Premiums Written Loss & LAE Ratios Catastrophe Loss Ratios Commercial Lines: Commercial multiple peril $ 242.5 96.8 39.6 $ 234.9 74.0 6.4 Commercial automobile 92.2 59.3 (0.1 ) 89.9 72.0 0.2 Workers’ compensation 97.2 56.5 — 96.9 54.7 — Other commercial 325.5 62.3 9.2 285.9 56.6 3.2 Total Commercial Lines $ 757.4 72.8 17.1 $ 707.6 64.2 3.5 Personal Lines: Personal automobile $ 280.7 58.4 0.2 $ 279.4 68.6 0.6 Homeowners 143.1 62.0 8.6 137.6 54.2 7.7 Other personal 14.9 38.6 — 12.3 27.7 1.5 Total Personal Lines $ 438.7 59.0 3.1 $ 429.3 62.5 3.0 The following table summarizes U.S. GAAP underwriting results for the Commercial Lines, Personal Lines and Other segments and reconciles them to operating income (loss) before interest expense and income taxes. Three Months Ended March 31, 2021 2020 (in millions) Commercial Lines Personal Lines Other Total Commercial Lines Personal Lines Other Total Underwriting profit, excluding prior year reserve development and catastrophes $ 66.2 $ 68.2 $ — $ 134.4 $ 30.5 $ 56.6 $ — $ 87.1 Prior year favorable (unfavorable) loss and LAE reserve development on non-catastrophe losses 3.3 5.2 (0.3 ) 8.2 3.7 1.6 (3.3 ) 2.0 Prior year favorable (unfavorable) catastrophe development — — — — 3.3 (3.3 ) — — Current year catastrophe losses (118.8 ) (14.5 ) — (133.3 ) (27.1 ) (10.8 ) — (37.9 ) Underwriting profit (loss) (49.3 ) 58.9 (0.3 ) 9.3 10.4 44.1 (3.3 ) 51.2 Net investment income 51.8 22.1 2.9 76.8 46.4 20.3 2.9 69.6 Fees and other income 3.6 2.3 1.3 7.2 2.4 2.7 1.7 6.8 Other operating expenses (3.9 ) (1.5 ) (2.8 ) (8.2 ) (4.6 ) (2.2 ) (3.7 ) (10.5 ) Operating income (loss) before interest expense and income taxes $ 2.2 $ 81.8 $ 1.1 $ 85.1 $ 54.6 $ 64.9 $ (2.4 ) $ 117.1 Commercial Lines Commercial Lines net premiums written were $757.4 million for the three months ended March 31, 2021, compared to $707.6 million for the three months ended March 31, 2020. This $49.8 million increase was primarily driven by pricing increases and strong retention. Commercial Lines underwriting loss for the three months ended March 31, 2021 was $49.3 million, compared to underwriting profit of $10.4 million for the three months ended March 31, 2020, a decrease of $59.7 million. Catastrophe losses for the three months ended March 31, 2021 were $118.8 million, compared to $23.8 million for the three months ended March 31, 2020. The $95.0 million increase was primarily due to freeze events in Texas and surrounding states associated with record low temperatures. Net favorable development on prior year’s loss reserves for the three months ended March 31, 2021 was $3.3 million, compared to $3.7 million for the three months ended March 31, 2020, a decrease of $0.4 million. Commercial Lines current accident year underwriting profit, excluding catastrophes, was $66.2 million for the three months ended March 31, 2021, compared to $30.5 million for the three months ended March 31, 2020. This $35.7 million increase was primarily driven by lower non-catastrophe current accident year losses, primarily in our commercial multiple peril and commercial automobile lines. The lower current accident year losses in commercial multiple peril reflect a single $12.6 million large property loss in 2020. 28 Table of Contents Our property per risk excess of loss reinsurance treaty incepts annually on July 1 st and includes a $10 million annual aggregate deductible for the $10 million excess of $10 million layer. As the 2020 large loss was the first to impact this layer of coverage in the treaty year, we retained $10 million of this large commercial multiple peril property loss to satisfy this deductible for the layer. The lower commercial automobile losses were due to fewer accidents and decreased claim activity resulting from changes in driving patterns as a result of the Pandemic. Additionally, the Commercial Lines current accident year losses and LAE also reflected a reserve provision for COVID-19 related exposures in 2020. 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 uncertainty caused by the Pandemic, there is a level of uncertainty in our ability to grow our business and maintain or improve our underwriting profitability in this environment. The extent and duration of the Pandemic's future disruption to our businesses are unknown and may result in continued moderation in claims volumes due to a reduction in business activity and reduced premium levels. Personal Lines Personal Lines net premiums written were $438.7 million for the three months ended March 31, 2021, compared to $429.3 million for the three months ended March 31, 2020. The premium growth of $9.4 million was primarily driven by rate increases, partially offset by lower policies in force. Net premiums written in the personal automobile line of business for the three months ended March 31, 2021 were $280.7 million, compared to $279.4 million for the three months ended March 31, 2020, an increase of $1.3 million. Personal automobile policies in force decreased by 2.7%. Net premiums written in the homeowners line of business for the three months ended March 31, 2021 were $143.1 million, compared to $137.6 million for the three months ended March 31, 2020, an increase of $5.5 million. Homeowners policies in force decreased by 0.9%. Personal Lines underwriting profit for the three months ended March 31, 2021 was $58.9 million, compared to $44.1 million for the three months ended March 31, 2020, an increase of $14.8 million. Catastrophe losses for the three months ended March 31, 2021 were $14.5 million, compared to $14.1 million for the three months ended March 31, 2020, an increase of $0.4 million. Net favorable development on prior year’s loss reserves for the three months ended March 31, 2021 was $5.2 million, compared to $1.6 million for the three months ended March 31, 2020, an increase of $3.6 million. Personal Lines current accident year underwriting profit, excluding catastrophes, was $68.2 million for the three months ended March 31, 2021, compared to $56.6 million for the three months ended March 31, 2020. This $11.6 million increase was primarily due to lower current accident year losses in our personal automobile line, partially offset by higher large losses in our homeowners line. The lower personal automobile losses were due to fewer accidents and decreased claim activity resulting from changes in driving patterns as a result of the Pandemic. We have been able to obtain rate increases in our Personal Lines markets and believe that our ability to obtain increases will continue over the long term. Our ability to maintain Personal Lines net premiums written may be affected, however, by price competition, and regulatory and legal activity and developments. See “Contingencies and Regulatory Matters.” Additionally, these factors along with weather-related loss volatility may also affect our ability to maintain and improve underwriting results. We monitor these trends and consider them in our rate actions. Due to uncertainty caused by the Pandemic, there is a level of uncertainty in our ability to retain or grow our business, and maintain or improve our underwriting profitability in this environment. Other Our Other segment had operating income of $1.1 million for the three months ended March 31, 2021, compared to an operating loss of $2.4 million for the three months ended March 31, 2020, a favorable change of $3.5 million. This change is primarily due to prior year’s results including a $3.3 million reserve increase, based on the receipt of an updated third-party actuarial study for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool. 29 Table of Contents Reserve for Losses and Loss Adjustment Expenses The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses. Three Months Ended March 31, (in millions) 2021 2020 Gross reserve for losses and LAE, beginning of period $ 6,024.0 $ 5,654.4 Reinsurance recoverable on unpaid losses 1,641.6 1,574.8 Net reserve for losses and LAE, beginning of period 4,382.4 4,079.6 Net incurred losses and LAE in respect of losses occurring in: Current year 789.5 730.2 Prior year non-catastrophe loss development (8.2 ) (2.0 ) Total incurred losses and LAE 781.3 728.2 Net payments of losses and LAE in respect of losses occurring in: Current year 178.5 174.6 Prior years 435.0 484.4 Total payments 613.5 659.0 Net reserve for losses and LAE, end of period 4,550.2 4,148.8 Reinsurance recoverable on unpaid losses 1,673.5 1,576.1 Gross reserve for losses and LAE, end of period $ 6,223.7 $ 5,724.9 The table below summarizes the gross reserve for losses and LAE by line of business. March 31, December 31, (in millions) 2021 2020 Commercial multiple peril $ 1,288.5 $ 1,211.0 Workers’ compensation 710.0 699.4 Commercial automobile 459.4 454.8 Other commercial lines: Hanover Programs 565.7 565.3 Management and professional liability 356.9 340.8 Monoline general liability 287.1 280.3 Umbrella 246.2 230.2 Specialty industrial and commercial property 111.7 76.9 Surety 103.3 93.6 Marine 99.9 94.0 Other lines 27.2 29.5 Total other commercial lines 1,798.0 1,710.6 Total Commercial Lines 4,255.9 4,075.8 Personal automobile 1,669.5 1,670.3 Homeowners and other personal 257.9 237.5 Total Personal Lines 1,927.4 1,907.8 Total Other Segment 40.4 40.4 Total loss and LAE reserves $ 6,223.7 $ 6,024.0 “Other commercial lines – Other lines” in the table above is primarily comprised of fidelity and crime lines of business. Loss and LAE reserves in our “Total Other Segment” relate to our run-off voluntary assumed property and casualty reinsurance pools business. 30 Table of Contents The following table summarizes prior year (favorable) unfavorable development for the periods indicated: Three Months Ended March 31, 2021 2020 (in millions) Loss & LAE Catastrophe Total Loss & LAE Catastrophe Total Commercial Lines $ (3.3 ) $ — $ (3.3 ) $ (3.7 ) $ (3.3 ) $ (7.0 ) Personal Lines (5.2 ) — (5.2 ) (1.6 ) 3.3 1.7 Other Segment 0.3 — 0.3 3.3 — 3.3 Total prior year favorable development $ (8.2 ) $ — $ (8.2 ) $ (2.0 ) $ — $ (2.0 ) It is not possible to know whether the factors that affected loss reserves in the first three months of 2021 will also occur in future periods. We encourage you to read our 2020 Annual Report on Form 10-K for more information about our reserving process and the judgments, uncertainties and risks associated therewith. Catastrophe Loss Development For the three months ended March 31, 2021 and 2020, catastrophe loss development was zero in both periods. 2021 Loss and LAE Development, excluding catastrophes For the three months ended March 31, 2021, net favorable loss and LAE development, excluding catastrophes, was $8.2 million 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. 2020 Loss and LAE Development, excluding catastrophes For the three months ended March 31, 2020, net favorable loss and LAE development, excluding catastrophes, was $2.0 million. Lower than expected losses in the workers’ compensation line, primarily in accident years 2016, 2018 and 2019, and other commercial and homeowners lines were partially offset by higher than expected losses in the commercial and personal automobile and commercial multiple peril lines. Within other commercial lines, lower than expected losses in our marine line, primarily in accident years 2018 and 2019, and specialty industrial and commercial property lines were partially offset by higher than expected losses in the general liability lines. The adverse prior year development for our Other Segment was due to our run-off voluntary assumed property and casualty reinsurance pools business. This $3.3 million reserve increase was based on an updated third-party actuarial study received in the first quarter of 2020 for the legacy ECRA pool that primarily consists of asbestos and environmental exposures. Reinsurance Recoverables Reinsurance recoverables were $1,882.9 million and $1,874.3 million at March 31, 2021 and December 31, 2020, respectively, of which $60.5 million and $88.4 million, respectively, represent billed recoverables. A reinsurance recoverable is billed after an eligible reinsured claim is paid by an insurer. Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $36.1 million and $35.5 million at March 31, 2021 and December 31, 2020, respectively, and billed non-MCCA reinsurance recoverables totaled $24.4 million and $52.9 million at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, $0.2 million of the billed non-MCCA recoverables were outstanding greater than 90 days, whereas at December 31, 2020, there were no balances outstanding greater than 90 days. 31 Table of Contents Investments Investment Results Net investment income before income taxes was as follows: Three Months Ended March 31, (dollars in millions) 2021 2020 Fixed maturities $ 54.5 $ 56.2 Limited partnerships 15.1 6.6 Mortgage loans 5.4 4.3 Equity securities 3.8 3.8 Other investments 0.7 0.9 Investment expenses (2.7 ) (2.2 ) Net investment income $ 76.8 $ 69.6 Earned yield, fixed maturities 3.11 % 3.45 % Earned yield, total portfolio 3.74 % 3.60 % The increase in net investment income for the three months ended March 31, 2021 was primarily due to higher limited partnership income, the continued investment of operational cash flows and higher mortgage loan income, partially offset by the impact of lower new money yields. Higher income from our limited partnerships primarily reflects increased market valuation due to positive valuation changes in the funds’ equity holdings and certain successful fund investments. 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: March 31, 2021 December 31, 2020 (dollars in millions) Carrying Value % of Total Carrying Value Carrying Value % of Total Carrying Value Fixed maturities, at fair value $ 7,370.3 82.7 % $ 7,454.4 83.2 % Equity securities, at fair value 641.0 7.2 598.5 6.7 Mortgage and other loans 442.1 4.9 467.6 5.2 Other investments 351.1 3.9 325.6 3.6 Cash and cash equivalents 112.1 1.3 120.6 1.3 Total cash and investments $ 8,916.6 100.0 % $ 8,966.7 100.0 % Cash and Investments Total cash and investments decreased $50.1 million, or less than 1%, for the three months ended March 31, 2021 as compared to December 31, 2020. This decrease was primarily due to market value depreciation and the funding of financing activities, including our stock repurchases and dividend payments, partially offset by the continued investment of operational cash flows. 32 Table of Contents Th e following table provides information about the investment types of our fixed maturities portfolio: March 31, 2021 (in millions) Investment Type Amortized Cost, Net of Allowance for Credit Losses Fair Value Net Unrealized Gains (Losses) Change in Net Unrealized For the Year U.S. Treasury and government agencies $ 360.7 $ 359.7 $ (1.0 ) $ (16.6 ) Foreign government 2.2 2.6 0.4 (0.1 ) Municipals: Taxable 1,015.0 1,040.9 25.9 (34.0 ) Tax-exempt 31.3 32.2 0.9 (0.8 ) Corporate 3,908.6 4,115.2 206.6 (134.8 ) Asset-backed: Residential mortgage-backed 981.5 994.2 12.7 (19.8 ) Commercial mortgage-backed 722.8 756.5 33.7 (20.9 ) Asset-backed 67.0 69.0 2.0 (0.6 ) Total fixed maturities $ 7,089.1 $ 7,370.3 $ 281.2 $ (227.6 ) The decrease in net unrealized gains on fixed maturities was primarily due to higher prevailing interest rates. Amortized cost and fair value by rating category were as follows: March 31, 2021 December 31, 2020 (dollars in millions) NAIC Designation Rating Agency Equivalent Designation Amortized Cost, Net of Allowance for Credit Losses Fair Value % of Total Fair Value Amortized Cost, Net of Allowance for Credit Losses Fair Value % of Total Fair Value 1 Aaa/Aa/A $ 4,549.7 $ 4,709.3 63.9 % $ 4,590.6 $ 4,894.2 65.7 % 2 Baa 2,244.1 2,351.6 31.9 2,075.6 2,258.9 30.3 3 Ba 177.4 185.1 2.5 162.3 173.6 2.3 4 B 111.5 117.1 1.6 109.3 118.3 1.6 5 Caa and lower 6.4 7.1 0.1 7.3 7.7 0.1 6 In or near default — 0.1 — 0.5 1.7 — Total fixed maturities $ 7,089.1 $ 7,370.3 100.0 % $ 6,945.6 $ 7,454.4 100.0 % Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 96% of the fixed maturity portfolio consisted of investment grade securities at March 31, 2021 and December 31, 2020. The quality of our fixed maturity portfolio remains strong based on ratings, capital structure position, support through guarantees, underlying security, issuer diversification and yield curve position. Our investment portfolio primarily consists of fixed maturity securities whose fair value is susceptible to market risk, including interest rate changes. See also “Quantitative and Qualitative Disclosures about Market Risk” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2020 Annual Report on Form 10-K. Duration is a measurement used to quantify our inherent interest rate risk and analyze invested assets relative to our reserve liabilities. The duration of our fixed maturity portfolio was as follows: March 31, 2021 December 31, 2020 (dollars in millions) Duration Amortized Cost, Net of Allowance for Credit Losses Fair Value % of Total Fair Value Amortized Cost, Net of Allowance for Credit Losses Fair Value % of Total Fair Value 0-2 years $ 1,167.0 $ 1,202.8 16.3 % $ 1,460.6 $ 1,510.5 20.3 % 2-4 years 1,650.7 1,766.9 24.0 1,738.4 1,872.5 25.1 4-6 years 1,742.6 1,859.0 25.2 1,570.0 1,734.0 23.3 6-8 years 1,200.8 1,249.9 17.0 1,016.6 1,134.0 15.2 8-10 years 1,024.6 991.2 13.4 812.2 837.8 11.2 10+ years 303.4 300.5 4.1 347.8 365.6 4.9 Total fixed maturities $ 7,089.1 $ 7,370.3 100.0 % $ 6,945.6 $ 7,454.4 100.0 % Weighted average duration 5.0 4.8 33 Table of Contents Our fixed maturity and equity securities are carried at fair value. Financial instruments whose value was determined using significant management judgment or estimation constituted less than 1% of the total assets we measured at fair value. See also Note 4 – “Fair Value” in the Notes to Interim Consolidated Financial Statements. Equity securities primarily consist of U.S. income-oriented large capitalization common stocks and developed market equity index and corporate bond exchange-traded funds. Mortgage and other loans consist primarily of commercial mortgage loan participations which represent our interest in commercial mortgage loans originated by a third party. We share, on a pro-rata basis, in all related cash flows of the underlying mortgage loans, which are primarily investment-grade quality and diversified by geographic area and property type. Other investments consist primarily of our interest in corporate middle market and real estate limited partnerships. Corporate middle market limited partnerships may invest in senior or subordinated debt, preferred or common equity or a combination thereof, of privately-held middle market businesses. Real estate limited partnerships hold equity ownership positions in real properties and invest in debt secured by real properties. Our limited partnerships are generally accounted for under the equity method, or as a practical expedient using the fund’s net asset value, with financial information provided by the partnership on a two or three month lag. Although we expect to invest new funds primarily in investment grade fixed maturities, we have invested, and expect to continue to invest, a portion of funds in limited partnerships, common equity securities, below investment grade fixed maturities and other investment assets. Impairments For the three months ended March 31, 2021, we did not recognize any impairments. For the three months ended March 31, 2020, we recognized $28.5 million of impairments, consisting primarily of $22.2 million on fixed maturities and $4.8 million on mortgage loans. Impairments on fixed maturities included $16.0 million categorized as intend-to-sell and $6.2 million of credit-related losses. At March 31, 2021 and December 31, 2020, the allowance for credit loses on mortgage loans was $7.9 million. There was no allowance for credit losses on available-for-sale securities as of March 31, 2021, compared to an allowance of $0.1 million at December 31, 2020. The carrying values of fixed maturity securities on non-accrual status at March 31, 2021 and December 31, 2020 were not material. The effects of non-accruals for the three months ended March 31, 2021 and 2020, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were also not material. Any defaults in the fixed maturities portfolio in future periods may negatively affect investment income. Unrealized Losses Gross unrealized losses on fixed maturities at March 31, 2021 were $58.1 million, an increase of $54.8 million compared to December 31, 2020, primarily attributable to higher interest rates. At March 31, 2021, gross unrealized losses consisted primarily of $20.9 million on corporate fixed maturities, $12.1 million on U. S. government securities, $11.7 million on municipals and $10.4 million on residential mortgage-backed securities. See Note 3 – “Investments” in the Notes to Interim Consolidated Financial Statements. We view gross unrealized losses on fixed maturities as non-credit related since it is our assessment that these securities will recover, allowing us to realize their anticipated long-term economic value. Further, we do not intend to sell, nor is it more likely than not we will be required to sell, such debt securities before this expected recovery of amortized cost (See also “Liquidity and Capital Resources” ). Inherent in our assessment are the risks that market factors may differ from our expectations; the global economic recovery following the Pandemic takes longer than current expectations; we may decide to subsequently sell a security for unforeseen business needs; or changes in the credit assessment from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, an impairment would be recognized as a realized loss. Although unrealized losses on fixed maturities are not reflected in the results of financial operations until they are realized, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets. The following table sets forth gross unrealized losses for fixed maturities by maturity period at March 31, 2021 and December 31, 2020. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers. March 31, December 31, (in millions) 2021 2020 Due after one year through five years $ 0.1 — Due after five years through ten years 21.0 0.5 Due after ten years 23.6 2.0 44.7 2.5 Mortgage-backed and asset-backed securities 13.4 0.8 Total fixed maturities $ 58.1 $ 3.3 34 Table of Contents Our investment portfolio and shareholders’ equity can be significantly impacted by changes in market values of our securities. Market volatility could increase and defaults on fixed income securities could occur. As a result, we could incur additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations and/or financial position. Signs of an economic recovery in the U.S. continue to build as COVID-19 vaccinations gain momentum, Federal Reserve monetary policy remains accommodative and approval of a third COVID-19 relief plan, the $1.9 trillion American Rescue Plan, begins to make an impact. Vaccination rates have recently exceeded 3 million doses per day in the U.S. and, while infection rates and virus mutations are still of concern, projected trends have allowed state and local governments to begin the process of gradual re-openings. Unemployment rates remain elevated and while the U.S. government and its agencies have taken extraordinary measures to stabilize the economy through fiscal and monetary policy actions which have muted typical recessionary dynamics, the recovery in the labor market has been uneven. It is unclear whether such actions will be sufficient to support continued economic recovery in the intermediate term, and what long-term effects such unprecedented events will ultimately have on our investment portfolio. Due to the Pandemic, global monetary policies remain extremely accommodative in support of financial market stability. Major central banks have lowered interest rates, relaxed collateral requirements and instituted various asset purchase programs to stabilize financial markets and support economic growth. In the U.S., for example, the Federal Reserve (the “Fed”) is maintaining its federal funds target range at 0% to 0.25% and is purchasing unprecedented quantities of assets. The Fed noted that continuation of these policies will need to balance the dual mandate of maximum employment and price stability should inflationary expectations increase, or should other economic conditions change, such as public health and the labor market. Fundamental conditions in certain corporate sectors remain challenging, such as the energy sector which faces a decline in global demand, and the lodging, restaurant and transportation services subsectors which have been directly impacted by the Pandemic. We may experience defaults on fixed income securities, particularly with respect to non-investment grade debt securities. Although we perform rigorous credit analysis of our fixed income investments, it is difficult to foresee which issuers, industries or markets will be most affected. As a result, the value of our fixed maturity portfolio could change rapidly in ways we cannot currently anticipate, and we could incur additional realized and unrealized losses in future periods. Other Items Net income also included the following items: Three Months Ended March 31, (in millions) Commercial Lines Personal Lines Other Discontinued Operations Total 2021 Net realized and unrealized investment gains $ 26.1 $ 11.2 $ 0.2 $ — $ 37.5 Discontinued life businesses — — — (0.1 ) (0.1 ) 2020 Net realized and unrealized investment gains (losses) $ (113.8 ) $ (47.9 ) $ 0.1 $ — $ (161.6 ) Discontinued life businesses — — — (1.3 ) (1.3 ) We manage investment assets for our Commercial Lines, Personal Lines and Other segments based on the requirements of our combined property and casualty insurance companies. We allocate the investment income, expenses and realized gains and losses to our Commercial Lines, Personal Lines and Other segments based on actuarial information related to the underlying businesses. Net realized and unrealized investment gains were $37.5 million for the three months ended March 31, 2021, compared to net realized and unrealized investment losses of $161.6 million for the three months ended March 31, 2020. For the three months ended March 31, 2021, net realized and unrealized investment gains were primarily due to changes in the fair value of equity securities. For the three months ended March 31, 2020, net realized and unrealized investment gains (losses) were primarily due to changes in the fair value of equity securities and, to a lesser extent, from impairment losses on investments. Discontinued operations include our discontinued accident and health and life businesses. Losses of $0.1 million and $1.3 million for the three months ended March 31, 2021 and 2020, respectively, primarily reflect adverse loss trends related to the long-term care pool. 35 Table of Contents Income Taxes We file a consolidated U.S. federal income tax return that includes our holding company and its domestic subsidiaries (including non-insurance operations). Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 The provision for income taxes from continuing operations was an expense of $21.3 million and a benefit of $15.2 million for the three months ended March 31, 2021 and 2020, respectively. These provisions resulted in consolidated effective federal tax rates of 18.7% and 28.2% for the three months ended March 31, 2021 and 2020, respectively. These provisions reflect benefits related to tax planning strategies implemented in prior years of $1.9 million in both of the three months ended March 31, 2021 and 2020. In addition, these provisions also included excess tax benefits related to stock-based compensation of $1.0 million and $1.9 million for the three months ended March 31, 2021 and 2020, respectively. Absent these items, the provision for income taxes would have been an expense of $24.2 million and a benefit of $11.4 million for the three months ended March 31, 2021 and 2020, respectively, or 21.2% for both periods. The income tax provision on operating income was an expense of $15.2 million and $20.9 million for the three months ended March 31, 2021 and 2020, respectively. These provisions resulted in effective tax rates for operating income of 19.8% and 19.4% for the three months ended March 31, 2021 and 2020, respectively. These provisions included excess tax benefits related to stock-based compensation of $1.0 million and $1.9 million for the three months ended March 31, 2021 and 2020, respectively. Absent this item, the provision for income taxes would have been an expense of $16.2 million, or 21.1%, and $22.8 million, or 21.2%, for the three months ended March 31, 2021 and 2020, respectively. Critical Accounting Estimates Interim consolidated financial statements have been prepared in conformity with U.S. GAAP and include certain accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of those policies. While we believe that the amounts included in our consolidated financial statements reflect our best judgment, the use of different assumptions could produce materially different accounting estimates. As disclosed in our 2020 Annual Report on Form 10-K, we believe the following accounting estimates are critical to our operations and require the most subjective and complex judgment: • Reserve for losses and loss expenses • Reinsurance recoverable balances • Pension benefit obligations • Investment credit losses • Deferred taxes For a more detailed discussion of these critical accounting estimates, see our 2020 Annual Report on Form 10-K. Statutory Surplus of Insurance Subsidiaries The following table reflects statutory surplus for our insurance subsidiaries: March 31, December 31, (in millions) 2021 2020 Total Statutory Capital and Surplus $ 2,667.7 $ 2,588.5 The statutory capital and surplus for our insurance subsidiaries increased $79.2 million during the first three months of 2021. This increase was primarily due to underwriting profits and from net realized and unrealized investment gains, primarily due to changes in the fair value of equity securities. The NAIC prescribes an annual calculation regarding risk-based capital (“RBC”). RBC ratios for regulatory purposes are expressed as a percentage of the capital required to be above the Authorized Control Level (the “Regulatory Scale”); however, in the insurance industry, RBC ratios are widely expressed as a percentage of the Company Action Level. The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other insurance subsidiaries), as of March 31, 2021, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level): (dollars in millions) Company Action Level Authorized Control Level RBC Ratio Industry Scale RBC Ratio Regulatory Scale The Hanover Insurance Company $ 1,107.6 $ 553.8 240 % 480 % 36 Table of Contents Liquidity and Capital Resources Liquidity is a measure of our ability to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, our primary ongoing source of cash is dividends from our insurance subsidiaries. However, dividend payments to us by our insurance subsidiaries are subject to limitations imposed by regulators, such as prior notice periods and the requirement that dividends in excess of a specified percentage of statutory surplus or prior year’s statutory earnings receive prior approval (so called “extraordinary dividends”). During the first quarter of 2021, Hanover Insurance did not pay dividends to the holding company. Sources of cash for our insurance subsidiaries primarily consist of premiums collected, investment income and maturing investments. Primary cash outflows are payments for losses and loss adjustment expenses, policy and contract acquisition expenses, other underwriting expenses and investment purchases. Cash outflows related to losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. We periodically adjust our investment policy to respond to changes in short-term and long-term cash requirements. Net cash provided by operating activities was $141.8 million during the first three months of 2021, as compared to $36.6 million during the first three months of 2020. The $105.2 million increase in cash provided was primarily due to an increase in premiums received and a decrease in loss payments in the first three months of 2021, compared to the first three months of 2020. Net cash used in investing activities was $78.6 million during the first three months of 2021, as compared to $99.9 million during the first three months of 2020. During the first three months of 2021, cash used in investing activities primarily related to net purchases of fixed maturities. During the first three months of 2020, cash used in investing activities primarily related to net purchases of fixed maturities and, to a lesser extent, equity securities and other investments. Net cash used in financing activities was $71.7 million during the first three months of 2021, as compared to $8.5 million during the first three months of 2020. During the first three months of 2021 and 2020, cash used in financing activities primarily resulted from the repurchase of common stock and for the quarterly dividend payment to our shareholders. The payments made in the first quarter of 2020 were partially offset by short-term borrowings. Dividends to common shareholders are subject to quarterly board approval and declaration. During the first three months of 2021, as declared by the Board, we paid a quarterly dividend of $0.70 per share to our shareholders totaling approximately $25.5 million. We believe that our holding company assets are sufficient to provide for future shareholder dividends should the Board of Directors declare them. At March 31, 2021, THG, as a holding company, held approximately $326.2 million of fixed maturities and cash. We believe our holding company assets will be sufficient to meet our current year obligations, which we expect to consist primarily of quarterly dividends to our shareholders (as and to the extent declared), interest on our senior and subordinated debentures, certain costs associated with benefits due to our former life employees and agents, and, to the extent required, payments related to indemnification of liabilities associated with the sale of various subsidiaries. As discussed below, we have, and opportunistically may continue to, repurchase our common stock and our debt. We do not expect that it will be necessary to dividend additional funds from our insurance subsidiaries in order to fund 2021 holding company obligations; however, we may decide to do so. We expect to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements relating to current operations, including the funding of our qualified defined benefit pension plan. The ultimate payment amounts for our benefit plan is based on several assumptions, including but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates, inflation and the ultimate valuation and determination of benefit obligations. Since differences between actual plan experience and our assumptions are almost certain, changes, both positive and negative, to our current funding status and ultimately our obligations in future periods are likely. Our insurance subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term investments. We believe that the quality of the assets we hold will allow us to realize the long-term economic value of our portfolio, including securities that are currently in an unrealized loss position. We do not anticipate the need to sell these securities to meet our insurance subsidiaries’ cash requirements since we expect our insurance subsidiaries to generate sufficient operating cash to meet all short-term and long-term cash requirements relating to current operations. However, there can be no assurance that unforeseen business needs or other items will not occur causing us to have to sell those securities in a loss position before their values fully recover, thereby causing us to recognize impairment charges in that time period. The Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of our common stock of up to $900 million. Under the repurchase authorization, we may repurchase, from time to time, common stock in amounts, at prices and at such times as we deem appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. On October 29, 2020, pursuant to the terms of an accelerated share repurchase (“ASR”) agreement (the “October 2020 ASR”), we paid $100.0 million in exchange for shares of our common stock. We received an initial share delivery, of approximately 0.8 million shares of common stock, which was approximately 80% of the total number of shares expected to be repurchased under the October 2020 ASR 37 Table of Contents agreement. On January 29, 2021, we received approximately 45,000 shares of our common stock as final settlement of shares repurchased under the October 2020 ASR. In addition to the shares repurchased under the October 2020 ASR, during the first three months of 2021 we repurchased approximately 0.4 million shares at an aggregate cost of $45.3 million. As of March 31 , 2021, we ha d repurchased 6.8 million shares under this $900 million program and ha d approximately $7 8 million available for additional repurchases. We maintain our membership in the Federal Home Loan Bank (“FHLB”) to provide access to additional liquidity based on our holdings of FHLB stock and pledged collateral. At March 31 , 2021, we had borrowing capacity of $130.1 million. There were no outstanding borrowings under this short-term facility at March 31 , 2021; however, we have and may continue to borrow, from time to time, through this facility to provide short-term liquidity. On April 30, 2019, we entered into a credit agreement that provides for a five-year unsecured revolving credit facility not to exceed $200.0 million at any one time outstanding, with the option to increase the facility up to $300.0 million (assuming no default and satisfaction of other specified conditions, including the receipt of additional lender commitments). The agreement also includes an uncommitted subfacility of $50.0 million for standby letters of credit. Borrowings, if any, under this agreement are unsecured and incur interest at a rate per annum equal to, at our election, either (i) the greater of, (a) the prime commercial lending rate of the administrative agent, (b) the NYFRB Rate plus half a percent, or (c) the one month Adjusted LIBOR plus one percent and a margin that ranges from 0.25% to 0.625% depending on our debt rating, or (ii) Adjusted LIBOR for the applicable interest period, plus a margin that ranges from 1.25% to 1.625% depending on our debt rating. The agreement also contains certain financial covenants such as maintenance of specified levels of consolidated equity and leverage ratios, and requires that certain of our subsidiaries maintain minimum RBC ratios. We currently have no borrowings under this agreement and had no borrowings under this agreement during the first three months of 2021. The LIBOR rate, upon which Adjusted LIBOR is based, is expected to be discontinued by the end of 2021. Our credit agreement permits us to agree with the Administrative Agent for the credit facility on a replacement to Adjusted LIBOR subject to the satisfaction of certain conditions. At March 31, 2021, we were in compliance with the covenants of our debt and credit agreements. Off-Balance Sheet Arrangements We currently do not have any material off-balance sheet arrangements that are reasonably likely to have an effect on our financial position, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources. Contingencies and Regulatory Matters REGULATORY AND INDUSTRY DEVELOPMENTS In response to the Pandemic, regulators in many of the states in which we operate have issued orders or guidance pertaining to, among other things, (a) premium refunds, credits or reductions for personal automobile insurance premiums and premiums for other insurance lines that regulators have determined are disproportionately impacted by the Pandemic, including certain commercial lines, for the periods during which governmental restrictions were or remain in effect, with premium adjustments based on factors such as the ongoing frequency and severity of claims, inflation, repair costs and reinsurance pricing, among others; (b) premium payment grace periods, moratoriums on policy non-renewals and cancellations, and other measures that are similar to actions historically implemented in regions heavily impacted by catastrophes, which we anticipate to be manageable, depending on the duration of the regulatory orders and the degree to which policyholder payment patterns vary as a result; and (c) a reassessment of rates in light of current exposures, loss experience and economic conditions. Regulatory restrictions on rate increases, underwriting, policy terms, and the ability to non-renew business may, depending on their duration, limit THG’s ability to manage our mix of business and any potential exposures that emerge in our lines of business in the near term. Draft legislation has been proposed in several state legislatures and/or in the United States Congress that seeks to require insurers to retroactively pay unfunded Pandemic business interruption claims that insurance policies do not currently cover, to impose presumptions on insurance policy interpretation, and/or to mandate prospective pandemic coverage. The impact of such legislation, were it to be adopted, would, according to a statement of the NAIC on March 25, 2020, “create substantial solvency risks” for the property and casualty insurance sector, “significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.” Industry trade groups further assert that any such legislation would be violative of basic contract law and well-founded principles of constitutional law. Federal stimulus plans such as the CARES Act and the American Rescue Plan Act of 2021 providing financial support to individuals and businesses during the Pandemic may mitigate the political pressure to continue advancing such proposed legislation. Proposals are also being considered at the federal level to establish government-funded pandemic insurance programs, possibly similar to the federal terrorism risk insurance program. Discussion on such competing proposals is ongoing and at a preliminary stage such that it is too early to estimate their potential impact, if any, on our business. Information regarding litigation, legal contingencies and regulatory matters appears in Part I – Note 12 “Commitments and Contingencies” in the Notes to Interim Consolidated Financial Statements. 38 Table of Contents Risks and Forward-Looking Statements Information regarding risk factors and forward-looking information appears in Part II – Item 1A of this Quarterly Report on Form 10-Q and in Part I – Item 1A of our 2020 Annual Report on Form 10-K. This Management’s Discussion and Analysis should be read and interpreted in light of such factors.