What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-07-28 · 196 added, 185 removed, 436 unchanged (47% of the section changed)

7 unchanged sentences

Liquidity and Capital Resources

Off - Balance Sheet Arrangements

Contingencies and Regulatory Matters

13 unchanged sentences

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

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

The global pandemic (“Pandemic”) has significantly impacted the U.S.

and global financial markets and economies since March 2020.

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

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

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

In addition, we experienced both favorable and adverse effects from the Pandemic on our underwriting results and operations, as well as our financial condition, during the period from March 2020 through June 2021.

Several uncertainties exist related to the Pandemic, including, among others, return to work initiatives, virus variants, vaccination rates, driving patterns, court caseload backlogs, and inflationary pressures.

Several uncertainties persist related to the Pandemic, including, among others, return to work initiatives, virus variants, vaccination rates, driving patterns, court caseload backlogs, and inflationary pressures.

We continue to believe that the Pandemic’s impacts on our near-term results should be manageable.

1 unchanged sentence

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

During the six months ended June 30, 2021, our net income was $221.2 million, compared to $75.2 million for the six months ended June 30, 2020, an increase of $146.0 million, primarily due to changes in the fair value of equity securities and, to a lesser extent, prior year impairments on fixed income securities and an increase in operating income.

During the nine months ended September 30, 2021, our net income was $255.2 million, compared to $194.1 million for the nine months ended September 30, 2020, an increase of $61.1 million, primarily due to changes in the fair value of equity securities and, to a lesser extent, $27.9 million of impairments on fixed income securities in the prior year that did not recur in 2021, partially offset by lower operating income.

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

see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $222.4 million for the six months ended June 30, 2021, compared to $206.0 million for the six months ended June 30, 2020, an increase of $16.4 million.

This increase was primarily due to higher net investment income, earned premium growth, and net favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves’), partially offset by higher catastrophe losses and expenses.

The higher expenses were primarily due to the absence in 2021 of a non-recurring premium tax benefit of $13.8 million from a Michigan refund related to tax years 2014 through 2016 that was received in 2020.

Pre-tax catastrophe losses were $210.1 million for the six months ended June 30, 2021, compared to $185.7 million during the same period of 2020.

The increase of $24.4 million was primarily due to freeze events in Texas and surrounding states impacting our commercial property lines in the first quarter of 2021.

Net favorable development on prior years’ loss reserves was $20.8 million for the six months ended June 30, 2021, compared to $6.9 million for the six months ended June 30, 2020.

see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $269.4 million for the nine months ended September 30, 2021, compared to $334.4 million for the nine months ended September 30, 2020, a decrease of $65.0 million.

This decrease was primarily due to higher catastrophe losses and higher Personal Lines non-catastrophe losses, partially offset by higher net investment income, earned premium growth, and net favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”).

The higher Personal Lines non-catastrophe losses were primarily due to higher personal automobile losses, compared to fewer accidents and decreased claim activity in 2020 that emerged from changes in driving patterns as a result of the Pandemic.

Pre-tax catastrophe losses were $363.6 million for the nine months ended September 30, 2021, compared to $251.6 million during the same period of 2020.

The increase of $112.0 million was primarily due to Hurricane Ida and several wind events and hailstorms in the Midwest during the third quarter and the freeze events in Texas and surrounding states during the first quarter.

Net favorable development on prior years’ loss reserves was $41.7 million for the nine months ended September 30, 2021, compared to $9.5 million for the nine months ended September 30, 2020, an increase of $32.2 million.

Commercial Lines

1 unchanged sentence

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

Net premiums written increased 9.2% in the first six months of 2021, compared to the same period in 2020, primarily due to pricing increases and a reduction in insured business activity in 2020 as a result of the Pandemic.

Underwriting results declined in the first six months of 2021 , primarily due to higher catastrophe losses , partially offset by earned premium growth and lower expenses .

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

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

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

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 .

Personal Lines

3 unchanged sentences

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 7.1% in the first six months of 2021, compared to the same period in 2020, primarily due to a return of approximately $30 million of premiums in 2020 to our eligible personal automobile customers in all our markets, providing financial relief during the Pandemic.

Excluding the impact of the premium refund, net premiums written grew by 3.6% primarily due to rate increases.

Underwriting results improved in the first six months of 2021, primarily due to lower catastrophe losses and favorable development of prior years’ loss reserves, partially offset by the aforementioned $13.8 million 2020 non-recurring premium tax refund and higher non-catastrophe current accident year large losses in our homeowners line.

Net premiums written increased by 7.4% in the first nine months of 2021, compared to the same period in 2020, which includes a return of approximately $30 million of premiums in 2020 to our eligible personal automobile customers in all our markets, providing financial relief during the Pandemic.

Excluding the impact of the premium refund, net premiums written grew by 5.2%, primarily due to increased new business, retention and, to a lesser extent, renewal rate increases.

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

Description of Operating Segments

11 unchanged sentences

Results of Operations – Consolidated

Consolidated net income for the three months ended June 30, 2021 was $128.5 million, compared to $115.2 million for the three months ended June 30, 2020, an increase of $13.3 million.

The increase in consolidated net income was primarily due to an increase in operating income before interest expense and income taxes for the three months ended June 30, 2021, partially offset by lower after-tax net realized and unrealized investment gains of approximately $27.1 million, primarily related to the change in the fair value of equity securities.

Operating income before interest expense and income taxes increased $48.4 million primarily due to lower catastrophe losses and, to a lesser extent, higher net investment income, partially offset by higher non-catastrophe current accident year losses and the absence in 2021 of a non-recurring premium tax benefit received in 2020.

Consolidated net income for the six months ended June 30, 2021 was $221.2 million, compared to $75.2 million for the six months ended June 30, 2020, an increase of $146.0 million.

Consolidated net income for the three months ended September 30, 2021 was $34.0 million, compared to $118.9 million for the three months ended September 30, 2020, a decrease of $84.9 million.

The decrease in consolidated net income was primarily due to a decrease in operating income before interest expense and income taxes for the three months ended September 30, 2021, as well as by lower after-tax net realized and unrealized investment gains of approximately $28.1 million, primarily related to the change in the fair value of equity securities.

Operating income before interest expense and income taxes decreased $81.4 million primarily due to higher catastrophe losses and increased Personal Lines non-catastrophe losses, partially offset by favorable development on prior years’ loss reserves, earned premium growth, and higher net investment income.

Consolidated net income for the nine months ended September 30, 2021 was $255.2 million, compared to $194.1 million for the nine months ended September 30, 2020, an increase of $61.1 million.

The increase in consolidated net income was primarily a result of $61.0 million of after-tax net realized and unrealized investment gains in 2021 as compared to $40.7 million of after-tax net realized and unrealized investment losses in 2020, a change of $101.7 million, primarily related to the change in the fair value of equity securities and, to a lesser extent, a decrease in impairment losses on investments.

Operating income before interest expense and income taxes increased $16.4 million primarily due to higher net investment income, earned premium growth, and net favorable development on prior years’ loss reserves, partially offset by higher catastrophe losses and the aforementioned absence of a non-recurring premium tax benefit received in 2020.

The following table reflects operating income (loss) before interest expense and income taxes for each operating segment and a reconciliation to consolidated net income from operating income before interest expense and income taxes (a non-GAAP measure).

Operating income before interest expense and income taxes decreased $65.0 million primarily due to higher catastrophe losses and higher Personal Lines non-catastrophe losses, partially offset by higher net investment income, earned premium growth, and net favorable development on prior years’ loss reserves.

The following table reflects operating income before interest expense and income taxes for each operating segment and a reconciliation to consolidated net income from operating income before interest expense and income taxes (a non-GAAP measure).

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

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

Operating income before interest expense and income taxes:

Commercial Lines

7 unchanged sentences

Net realized and unrealized investment gains (losses)

Net loss from repayment of debt

Other non-operating

Income tax benefit (expense) on non-operating items

Income tax (expense) benefit on non-operating items

Income from continuing operations, net of taxes

18 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

10 unchanged sentences

Operating income before interest expense and income taxes

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

Operating income before interest expense and income taxes was $137.3 million for the three months ended June 30, 2021, compared to $88.9 million for the three months ended June 30, 2020, an increase of $48.4 million.

This increase was primarily due to lower catastrophe losses, primarily in our commercial multiple peril and homeowners lines, and, to a lesser extent, higher net investment income, partially offset by higher non-catastrophe current accident year losses and a 2020 non-recurring premium tax benefit.

Net premiums written increased $126.2 million for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to rate increases and the aforementioned 2020 premium refund.

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

Operating income before interest expense and income taxes was $47.0 million for the three months ended September 30, 2021, compared to $128.4 million for the three months ended September 30, 2020, a decrease of $81.4 million.

This decrease was primarily due to higher catastrophe losses and increased Personal Lines non-catastrophe losses, partially offset by favorable development on prior years’ loss reserves, earned premium growth, and higher net investment income.

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

Production and Underwriting Results

2 unchanged sentences

These items are not meaningful for our Other segment.

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

(dollars in millions)

1 unchanged sentence

Personal Lines

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

(dollars in millions)

3 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in millions)

11 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30,

(in millions)

Underwriting profit (loss), excluding

Underwriting profit, excluding

prior year reserve development

13 unchanged sentences

Commercial Lines

Commercial Lines net premiums written were $686.8 million for the three months ended June 30, 2021, compared to $614.9 million for the three months ended June 30, 2020.

This $71.9 million increase was primarily driven by pricing increases and a reduction in insured business activity in 2020 as a result of the Pandemic.

Commercial Lines underwriting profit for the three months ended June 30, 2021 was $53.8 million, compared to $21.3 million for the three months ended June 30, 2020, an increase of $32.5 million.

Catastrophe losses for the three months ended June 30, 2021 were $18.2 million, compared to $64.8 million for the three months ended June 30, 2020, a decrease of $46.6 million.

The higher catastrophe losses in 2020 were primarily due to property damages related to riots and civil unrest in several major cities across the country.

Net favorable development on prior year’s loss reserves for the three months ended June 30, 2021 was $7.9 million, compared to $5.1 million for the three months ended June 30, 2020, an increase of $2.8 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $6 4 .

1 million for the three months ended June 30 , 2021 , compared to $ 81.0 million for the three months ended June 30 , 2020 .

This $16.9 million decrease was primarily driven by higher non-catastrophe current accident year losses, primarily due to lower frequency of claims in the second quarter of 2020 as a result of the economic slowdown due to the Pandemic and, to a lesser extent, property large loss activity in the second quarter of 2021 in our commercial multi ple peril and specialty industrial property lines, partially offset by earned premium growth and lower expenses.

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

Commercial Lines net premiums written were $826.8 million for the three months ended September 30, 2021, compared to $760.5 million for the three months ended September 30, 2020.

This $66.3 million increase was primarily driven by pricing increases and a more robust business environment in 2021.

Commercial Lines underwriting loss for the three months ended September 30, 2021 was $10.2 million, compared to an $18.7 million profit for the three months ended September 30, 2020, a decrease of $28.9 million.

Catastrophe losses for the three months ended September 30, 2021 were $74.8 million, compared to $33.6 million for the three months ended September 30, 2020, an increase of $41.2 million.

The higher catastrophe losses in 2021 were primarily due to Hurricane Ida and wind and hailstorms in the Midwest.

Net favorable development on prior year’s loss reserves for the three months ended September 30, 2021 was $11.4 million, compared to $3.9 million for the three months ended September 30, 2020, an increase of $7.5 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $53.2 million for the three months ended September 30, 2021, compared to $48.4 million for the three months ended September 30, 2020.

This $4.8 million increase was primarily driven by earned premium growth.

Within non-catastrophe current accident year losses, higher large property loss activity in our commercial multiple peril line was partially offset by lower loss activity in our inland marine and surety lines.

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

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

2 unchanged sentences

Personal Lines

Personal Lines net premiums written were $520.4 million for the three months ended June 30, 2021, compared to $466.1 million for the three months ended June 30, 2020.

The premium growth of $54.3 million was primarily driven by the return of approximately $30 million of automobile premiums, during the second quarter of 2020, to our eligible Personal Lines customers in all our markets, providing financial relief during the Pandemic, and by rate increases experienced during the second quarter of 2021.

Net premiums written in the personal automobile line of business for the three months ended June 30, 2021 were $318.6 million, compared to $276.8 million for the three months ended June 30, 2020, an increase of $41.8 million.

Personal automobile policies in force decreased by 0.9%.

Net premiums written in the homeowners line of business for the three months ended June 30, 2021 were $182.4 million, compared to $173.7 million for the three months ended June 30, 2020, an increase of $8.7 million.

Personal Lines net premiums written were $548.4 million for the three months ended September 30, 2021, compared to $508.0 million for the three months ended September 30, 2020.

The premium growth of $40.4 million was primarily driven by increased new business, retention and, to a lesser extent, renewal rate increases.

Net premiums written in the personal automobile line of business for the three months ended September 30, 2021 were $330.8 million, compared to $311.6 million for the three months ended September 30, 2020, an increase of $19.2 million.

Personal automobile policies in force increased by 2.8%.

Net premiums written in the homeowners line of business for the three months ended September 30, 2021 were $196.7 million, compared to $179.7 million for the three months ended September 30, 2020, an increase of $17.0 million.

Homeowners policies in force increased by 3.4%.

Personal Lines underwriting profit for the three months ended June 30, 2021 was $9.5 million, compared to $17.4 million for the three months ended June 30, 2020, an decrease of $7.9 million.

Catastrophe losses for the three months ended June 30, 2021 were $58.6 million, compared to $83.0 million for the three months ended June 30, 2020, a decrease of $24.4 million.

The higher catastrophe losses in 2020 were primarily due to several wind and hail storms throughout the Midwest and Southeast.

Net favorable development on prior year’s loss reserves for the three months ended June 30, 2021 was $5.0 million, compared to $0.1 million for the three months ended June 30, 2020, an increase of $4.9 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $63.1 million for the three months ended June 30, 2021, compared to $100.3 million for the three months ended June 30, 2020.

This $37.2 million decrease was primarily due to higher current accident year losses in our personal automobile line and a 2020 non-recurring premium tax benefit of $13.8 million.

The higher personal automobile losses were primarily due to fewer accidents and decreased claim activity in 2020 resulting from changes in driving patterns as a result of the Pandemic.

Personal Lines underwriting loss for the three months ended September 30, 2021 was $20.3 million, compared to $43.0 million profit for the three months ended September 30, 2020, a decrease of $63.3 million.

Catastrophe losses for the three months ended September 30, 2021 were $78.7 million, compared to $32.3 million for the three months ended September 30, 2020, an increase of $46.4 million.

The higher catastrophe losses in 2021 were primarily due to Hurricane Ida and several wind and hailstorms throughout the Midwest.

Net favorable development on prior year’s loss reserves for the three months ended September 30, 2021 was $9.9 million, compared to $1.0 million unfavorable development for the three months ended September 30, 2020, a favorable change of $10.9 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $48.5 million for the three months ended September 30, 2021, compared to $76.3 million for the three months ended September 30, 2020.

This $27.8 million decrease was primarily due to higher current accident year losses in our personal automobile line due to fewer accidents and decreased claim activity in 2020 resulting from changes in driving patterns as a result of the Pandemic.

Additionally, the personal automobile current accident year losses reflected an increase in property severity associated with supply chain issues and limited availability of new vehicles due to chip shortage, higher used vehicle prices and higher cost of parts.

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

3 unchanged sentences

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.

Our Other segment had operating income of $0.7 million for the three months ended June 30, 2021, compared to $1.0 million for the three months ended June 30, 2020, a decrease of $0.3 million.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Operating income before interest expense and income taxes was $222.4 million for the six months ended June 30, 2021, compared to $206.0 million for the six months ended June 30, 2020, an increase of $16.4 million.

This increase was primarily due to higher net investment income, earned premium growth, and net favorable development on prior years’ loss reserves, partially offset by higher catastrophe losses and expenses.

The higher expenses were primarily due to a 2020 non-recurring premium tax benefit.

Net premiums written increased by $185.4 million for the six months ended June 30, 2021, compared to the six months ended June 30, 2020.

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

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

Operating income before interest expense and income taxes was $269.4 million for the nine months ended September 30, 2021, compared to $334.4 million for the nine months ended September 30, 2020, a decrease of $65.0 million.

The higher Personal Lines non-catastrophe losses was primarily due to higher personal automobile losses due to fewer accidents and decreased claim activity in 2020 resulting from changes in driving patterns as a result of the Pandemic.

Net premiums written increased by $292.1 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

This was primarily due to pricing increases, a reduction in insured business activity in 2020, and the aforementioned 2020 premium refund.

3 unchanged sentences

These items are not meaningful for our Other segment.

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

(dollars in millions)

1 unchanged sentence

Personal Lines

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

(dollars in millions)

6 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in millions)

10 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions)

12 unchanged sentences

Other operating expenses

Operating income (loss) before

Operating income before

interest expense and income taxes

Commercial Lines

Commercial Lines net premiums written were $1,444.2 million for the six months ended June 30, 2021, compared to $1,322.5 million for the six months ended June 30, 2020.

Commercial Lines net premiums written were $2,271.0 million for the nine months ended September 30, 2021, compared to $2,083.0 million for the nine months ended September 30, 2020.

This $188.0 million increase was primarily driven by pricing increases and a reduction in insured business activity in 2020 as a result of the Pandemic.

Commercial Lines underwriting income for the six months ended June 30, 2021 was $4.5 million, compared to $31.7 million for the six months ended June 30, 2020, a decrease of $27.2 million.

Catastrophe losses for the six months ended June 30, 2021 were $137.0 million, compared to $88.6 million for the six months ended June 30, 2020.

The $48.4 million increase was primarily due to first quarter freeze events in Texas and surrounding states associated with record low temperatures.

Favorable development on prior years’ loss reserves for the six months ended June 30, 2021 was $11.2 million, compared to $8.8 million for the six months ended June 30, 2020, an increase of $2.4 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $130.3 million for the six months ended June 30, 2021, compared to $111.5 million for the six months ended June 30, 2020, an increase of $18.8 million primarily due to earned premium growth and lower expenses.

Commercial Lines underwriting loss for the nine months ended September 30, 2021 was $5.7 million, compared to $50.4 million profit for the nine months ended September 30, 2020, a decrease of $56.1 million.

Catastrophe losses for the nine months ended September 30, 2021 were $211.8 million, compared to $122.2 million for the nine months ended September 30, 2020.

The $89.6 million increase was primarily due to freeze events in Texas and surrounding states associated with record low temperatures in the first quarter and Hurricane Ida and several wind and hailstorms in the Midwest in the third quarter.

Favorable development on prior years’ loss reserves for the nine months ended September 30, 2021 was $22.6 million, compared to $12.7 million for the nine months ended September 30, 2020, an increase of $9.9 million.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $183.5 million for the nine months ended September 30, 2021, compared to $159.9 million for the nine months ended September 30, 2020, an increase of $23.6 million, primarily due to earned premium growth.

Within non-catastrophe current accident year losses, higher large property loss activity in our specialty and commercial multiple peril lines were partially offset by lower loss activity in our inland marine, miscellaneous property, commercial automobile and surety lines.

Personal Lines

Personal Lines net premiums written were $959.1 million for the six months ended June 30, 2021, compared to $895.4 million for the six months ended June 30, 2020, an increase of $63.7 million.

Personal Lines net premiums written were $1,507.5 million for the nine months ended September 30, 2021, compared to $1,403.4 million for the nine months ended September 30, 2020, an increase of $104.1 million.

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

In addition, 2021 net written premiums grew due to rate increases.

Personal Lines underwriting profit for the six months ended June 30, 2021 was $68.4 million, compared to $61.5 million for the six months ended June 30, 2020, an increase of $6.9 million.

Catastrophe losses for the six months ended June 30, 2021 were $73.1 million, compared to $97.1 million for the six months ended June 30, 2020.

The decrease of $24.0 million was primarily due to several wind and hail storms throughout the Midwest and Southeast in 2020.

Favorable development on prior years’ loss reserves for the six months ended June 30, 2021 was $10.2 million, compared to $1.7 million for the six months ended June 30, 2020, an increase of $8.5 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $131.3 million for the six months ended June 30, 2021, compared to $156.9 million for the six months ended June 30, 2020.

This $25.6 million decrease was primarily due to a 2020 non-recurring premium tax benefit and higher current accident year large losses in our homeowners line.

Our Other segment had operating income of $1.8 million for the six months ended June 30, 2021, compared to an operating loss of $1.4 million for the six months ended June 30, 2020, a favorable change of of $3.2 million.

This change was primarily due to prior year’s results including a $3.3 million reserve increase, based on the receipt of an updated third-party actuarial study for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool.

In addition, 2021 net premiums written grew due to increased new business, retention and, to a lesser extent, renewal rate increases.

Personal Lines underwriting profit for the nine months ended September 30, 2021 was $48.1 million, compared to $104.5 million for the nine months ended September 30, 2020, a decrease of $56.4 million.

Catastrophe losses for the nine months ended September 30, 2021 were $151.8 million, compared to $126.2 million for the nine months ended September 30, 2020.

The increase of $25.6 million was primarily due to several wind and hailstorms throughout the Midwest and Hurricane Ida during the third quarter.

Favorable development on prior years’ loss reserves for the nine months ended September 30, 2021 was $20.1 million, compared to $0.7 million for the nine months ended September 30, 2020, an increase of $19.4 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $ 179.8 million for the nine months ended September 30, 2021, compared to $ 233.2 million for the nine months ended September 30, 2020.

This $ 53.4 million de crease was primarily due to higher current accident year losses and higher expenses, primarily due to a 2020 non-recurring premium tax benefit , partially offset by earned premium growth .

The higher current accident year losses were primarily due to fewer accidents and decreased claim activity for the personal automobile line in 2020 resulting from changes in driving patterns as a result of the Pandemi c and increased weather-related losses in the homeowners line in 2021.

Our Other segment had operating income of $2.8 million for the nine months ended September 30, 2021, compared to $0.5 million for the nine months ended September 30, 2020, an increase of $2.3 million.

This increase was primarily due to prior year’s results including a $3.3 million reserve increase, based on the receipt of an updated third-party actuarial study for the legacy Excess and Casualty Reinsurance Association (“ECRA”) pool.

Reserve for Losses and Loss Adjustment Expenses

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

Six Months Ended

Nine Months Ended

September 30,

(in millions)

12 unchanged sentences

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

September 30,

(in millions)

17 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions)

3 unchanged sentences

Total prior year favorable development

It is not possible to know whether the factors that affected loss reserves in the first six months of 2021 will also occur in future periods.

It is not possible to know whether the factors that affected loss reserves in the first nine months of 2021 will also occur in future periods.

We encourage you to read our 2020 Annual Report on Form 10-K for more information about our reserving process and the judgments, uncertainties and risks associated therewith.

Catastrophe Loss Development

For the six months ended June 30, 2021 and 2020, favorable catastrophe development was $15.0 and $7.0 million, respectively.

The favorable catastrophe during the six months ended June 30, 2021 was primarily due to lower than expected losses related to certain 2018 through 2020 hurricanes, tornadoes, and other storms.

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

For the nine months ended September 30, 2021 and 2020, favorable catastrophe development was $15.0 and $16.6 million, respectively.

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

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

2021 Loss and LAE Development, excluding catastrophes

For the six months ended June 30, 2021, net favorable loss and LAE development, excluding catastrophes, was $20.8 million, primarily due to lower than expected losses in the workers’ compensation line, primarily in accident years 2014 through 2019, and in the personal automobile line, driven by lower bodily injury and personal injury protection losses primarily in accident year 2020.

For the nine months ended September 30, 2021, net favorable loss and LAE development, excluding catastrophes, was $41.7 million, primarily due to lower than expected losses in the personal automobile line of $19.1 million, driven by lower personal injury protection and bodily injury losses, primarily in accident year 2020, lower than expected losses in the workers’ compensation line of $13.1 million, primarily in accident years 2014 through 2019, and lower than expected losses in other commercial lines.

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

2020 Loss and LAE Development, excluding catastrophes

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

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

Within other commercial lines, lower than expected losses in our marine line of $11.5 million, in accident years 2017 through 2019, and commercial miscellaneous property line were partially offset by higher than expected losses in the general liability lines.

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

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

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

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

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

Reinsurance Recoverables

Reinsurance recoverables were $1,932.3 million and $1,874.3 million at June 30, 2021 and December 31, 2020, respectively, of which $82.7 million and $88.4 million, respectively, represent billed recoverables.

Reinsurance recoverables were $2,002.8 million and $1,874.3 million at September 30, 2021 and December 31, 2020, respectively, of which $84.1 million and $88.4 million, respectively, represent billed recoverables.

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

Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $38.5 million and $35.5 million at June 30, 2021 and December 31, 2020, respectively, and billed non-MCCA reinsurance recoverables totaled $44.2 million and $52.9 million at June 30, 2021 and December 31, 2020, respectively.

At June 30, 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.

Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $45.3 million and $35.5 million at September 30, 2021 and December 31, 2020, respectively, and billed non-MCCA reinsurance recoverables totaled $38.8 million and $52.9 million at September 30, 2021 and December 31, 2020, respectively.

At September 30, 2021, $1.1 million of the billed non-MCCA recoverables were outstanding greater than 90 days, whereas at December 31, 2020, there were no balances outstanding greater than 90 days.

Investment Results

Net investment income before income taxes was as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in millions)

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Earned yield, total portfolio

The increase in net investment income for the three months and six months ended June 30, 2021 was primarily due to higher limited partnership income and the continued investment of operational cash flows, partially offset by the impact of lower new money yields.

The increase in net investment income for the three months and nine months ended September 30, 2021 was primarily due to higher limited partnership income and, to a lesser degree, the continued investment of operational cash flows, partially offset by the impact of lower new money yields.

Higher income from our limited partnerships primarily reflects increased market valuation due to positive valuation changes in the funds’ equity holdings.

In addition, limited partnership results in the second quarter of 2020 reflect low valuations due to Pandemic-related business and financial market disruptions.

Income from partnerships can vary significantly from period to period and neither the elevated results during the first half of 2021, nor the weak results in the first half of 2020, reflect expected returns for this asset class.

In addition, limited partnership results for the nine months ended September 30, 2020 include low valuations, particularly in the second quarter, due to Pandemic-related business and financial market disruptions.

Income from partnerships can vary significantly from period to period and neither the elevated results during 2021, nor the weak results in 2020, reflect expected returns for this asset class.

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

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

June 30, 2021

September 30, 2021

December 31, 2020

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Cash and Investments

Total cash and investments increased $95.6 million, or 1.1%, for the six months ended June 30, 2021 as compared to December 31, 2020.

Total cash and investments increased $307.5 million, or 3.4%, for the nine months ended September 30, 2021 as compared to December 31, 2020.

This increase was primarily due to the continued investment of operational cash flows, partially offset by the funding of financing activities, including our stock repurchases and dividend payments, and by net market value depreciation.

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

June 30, 2021

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

September 30, 2021

(in millions)

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

June 30, 2021

September 30, 2021

December 31, 2020

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Total fixed maturities

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

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

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The duration of our fixed maturity portfolio was as follows:

June 30, 2021

September 30, 2021

December 31, 2020

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Although we expect to invest new funds primarily in investment grade fixed maturities, we have invested, and expect to continue to invest, a portion of funds in limited partnerships, common equity securities, below investment grade fixed maturities and other investment assets.

For the three and six months ended June 30, 2021, we recognized impairments of $0.2 million on corporate fixed maturities.

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

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

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

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

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

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

Impairments on fixed maturities included $16.5 million categorized as intend-to-sell and $2.6 million of credit-related losses.

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

At June 30, 2021, we held no fixed maturities on non-accrual status.

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

At September 30, 2021, we held no fixed maturities on non-accrual status.

At December 31, 2020, the carrying values of fixed maturities on non-accrual status were not material.

The effects of non-accruals for the six months ended June 30, 2021 and 2020, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were also not material.

The effects of non-accruals for the nine months ended September 30, 2021 and 2020, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were also not material.

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

Unrealized Losses

Gross unrealized losses on fixed maturities at June 30, 2021 were $22.6 million, an increase of $19.3 million compared to December 31, 2020, primarily attributable to higher interest rates, partially offset by tighter credit spreads.

At June 30, 2021, gross unrealized losses consisted primarily of $8.2 million on corporate fixed maturities, $6.7 million on U.

government securities and $4.2 million on residential mortgage-backed securities.

Gross unrealized losses on fixed maturities at September 30, 2021 were $35.2 million, an increase of $31.9 million compared to December 31, 2020, primarily attributable to higher interest rates, partially offset by tighter credit spreads.

At September 30, 2021, gross unrealized losses consisted primarily of $11.4 million on corporate fixed maturities, $7.7 million on residential mortgage-backed

securities, $ 7.3 million on U.

government securities and $5.3 million on municipals.

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

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

the global econom ic recovery following the Pandemic take s longer than current 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;

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Although unrealized losses on fixed maturities are not reflected in the results of financial operations until they are realized, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets.

The following table sets forth gross unrealized losses for fixed maturities by maturity period at June 30, 2021 and December 31, 2020.

The following table sets forth gross unrealized losses for fixed maturities by maturity period at September 30, 2021 and December 31, 2020.

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

September 30,

(in millions)

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

Signs of an economic recovery in the U.S.

continue as progress on vaccinations has reduced the spread of COVID-19 domestically.

Positive economic growth in the U.S.

continues as the vaccination roll-out has reduced the spread and severity of COVID-19.

Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.

The sectors most adversely affected by the Pandemic, such as the lodging and hospitality sectors, have shown improvement, but still remain below pre-Pandemic levels of economic activity.

The sectors most adversely affected by the Pandemic, such as lodging and hospitality, have shown improvement, but remain below pre-Pandemic levels of economic activity.

Inflation has risen and overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S.

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Unemployment rates remain somewhat elevated and while the U.S.

government and its agencies have taken extraordinary measures to stabilize the economy through fiscal and monetary policy actions which have muted typical recessionary dynamics, the recovery in the labor market has been uneven.

government and its agencies have taken extraordinary measures to stabilize the economy through fiscal and monetary policy actions, the recovery in the labor market has been uneven.

It is unclear how such actions and inflationary pressures will affect the continued economic recovery and our investment portfolio.

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.

However, the Fed has signaled an increased likelihood to begin raising interest rates in 2023 as indicators of economic recovery have strengthened above previous expectations.

The Fed seeks to achieve maximum employment and inflation of 2% over the long term, and has noted that the federal funds target range will be maintained until labor market conditions have reached levels consistent with the Fed’s goals.

If the economic recovery continues as expected, an adjustment to monetary policy may be warranted as early as later this year, likely beginning with a moderation in the Fed’s pace of asset purchases.

The Fed’s asset purchase program represents a significant source of demand for certain sectors of the fixed income market and even a well-telegraphed, gradual winding down of the program may result in market disruption.

In addition, the Fed’s most recent projections released in September signaled the greatest likelihood to begin raising interest rates would be in 2023, assuming forecasts for growth, unemployment and inflation are achieved.

Regarding fiscal policy in the U.S., failure to reach a long-term agreement to raise the federal borrowing limit could have negative implications for certain issuers, sectors, or the economy at large.

Fundamental conditions in certain corporate sectors remain challenging, such as the lodging and hospitality sectors, which still face lower than pre-Pandemic levels of demand.

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Net income also included the following items:

Three Months Ended June 30,

Three Months Ended September 30,

(in millions)

Net realized and unrealized investment gains (losses)

Net realized and unrealized investment gains

Discontinued life businesses

Net realized and unrealized investment gains (losses)

Net realized and unrealized investment gains

Loss from repayment of debt

Discontinued life businesses

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions)

2 unchanged sentences

Net realized and unrealized investment losses

Loss from repayment of debt

Discontinued life businesses

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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 $31.1 million for the three months ended June 30, 2021, compared to $63.7 million for the three months ended June 30, 2020.

For the three months ended June 30, 2021 and 2020, net realized and unrealized investment gains were primarily due to changes in the fair value of equity securities.

Net realized and unrealized investment gains were $68.6 million for the six months ended June 30, 2021, compared to $97.9 million of net realized and unrealized investment losses for the six months ended June 30, 2020.

For the six months ended June 30, 2021, net realized and unrealized investment gains were primarily due to changes in the fair value of equity securities.

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

Net realized and unrealized investment gains were $4.0 million for the three months ended September 30, 2021, compared to $37.7 million for the three months ended September 30, 2020.

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

Net realized and unrealized investment gains were $72.6 million for the nine months ended September 30, 2021, compared to $60.2 million of net realized and unrealized investment losses for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, net realized and unrealized investment gains were primarily due to changes in the fair value of equity securities.

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

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

Losses of $1.2 million and $1.4 million for the six months ended June 30, 2021 and 2020, respectively, primarily reflect adverse loss trends related to the long-term care pool.

Losses of $2.0 million for both the nine months ended September 30, 2021 and 2020, primarily reflect adverse loss trends related to the long-term care pool.

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

The provision for income taxes from continuing operations was an expense of $30.3 million and $27.8 million for the three months ended June 30, 2021 and 2020, respectively.

These provisions resulted in consolidated effective federal tax rates of 18.9% and 19.4% for the three months ended June 30, 2021 and 2020, respectively.

The provision for 2021 includes a net benefit related to prior years’ federal tax credits of $1.7 million.

In addition, these provisions reflect benefits related to tax planning strategies implemented in prior years of $1.0 million and $2.5 million in the three months end June 30, 2021 and 2020, respectively.

Finally, the provision for 2021 also includes excess tax benefits related to stock-based compensation of $0.8 million for the three months ended June 30, 2021.

Absent these items, the provision for income taxes would have been an expense of $33.8 million, or 21.1%, and $30.3 million, or 21.2%, for the three months ended June 30, 2021 and 2020, respectively.

The income tax provision on operating income was an expense of $24.8 million and $16.8 million for the three months ended June 30, 2021 and 2020, respectively.

These provisions resulted in effective tax rates for operating income of 19.3% and 21.1% for the three months ended June 30, 2021 and 2020, respectively.

The provision for 2021 includes a net benefit related to prior years’ federal tax credits of $1.7 million.

In addition, the provision for 2021 also includes excess tax benefits related to stock-based compensation of $0.8 million for the three months ended June 30, 2021.

Absent these items, the provision for income taxes for 2021 would have been an expense of $27.3 million, or 21.2%, for the three months ended June 30, 2021.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

The provision for income taxes from continuing operations was an expense of $51.6 million and $12.6 million for the six months ended June 30, 2021 and 2020, respectively.

These provisions resulted in consolidated effective federal tax rates of 18.8% and 14.1% for the six months ended June 30, 2021 and 2020, respectively.

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

The provision for income taxes from continuing operations was an expense of $7.7 million and $29.1 million for the three months ended September 30, 2021 and 2020, respectively.

These provisions resulted in consolidated effective federal tax rates of 18.1% and 19.6% for the three months ended September 30, 2021 and 2020, respectively.

These provisions reflect benefits related to tax planning strategies implemented in prior years of $0.8 million and $2.5 million in the three months ended September 30, 2021 and 2020, respectively.

In addition, these provisions also include excess tax benefits related to stock-based compensation of $0.8 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively.

Absent these items, the provision for income taxes would have been an expense of $9.3 million, or 21.9%, and $31.7 million, or 21.3%, for the three months ended September 30, 2021 and 2020, respectively.

The increase in 2021 is due to lower underwriting income.

The income tax provision on operating income was an expense of $7.7 million and $25.1 million for the three months ended September 30, 2021 and 2020, respectively.

These provisions resulted in effective tax rates for operating income of 20.0% and 21.2% for the three months ended September 30, 2021 and 2020, respectively.

These provisions include excess tax benefits related to stock-based compensation of $0.8 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively.

Absent this item, the provisions for income taxes would have been an expense of $8.5 million, or 22.1%, and $25.2 million, or 21.2%, for the three months ended September 30, 2021 and 2020, respectively.

The increase in 2021 is due to lower underwriting income.

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

The provision for income taxes from continuing operations was an expense of $59.3 million and $41.7 million for the nine months ended September 30, 2021 and 2020, respectively.

These provisions resulted in consolidated effective federal tax rates of 18.7% and 17.5% for the nine months ended September 30, 2021 and 2020, respectively.

The provision for 2021 includes a net benefit related to prior years’ federal tax credits of $1.7 million.

In addition, these provisions reflect benefits related to tax planning strategies implemented in prior years of $2.9 million and $4.4 million for the six months ended June 30, 2021 and 2020, respectively.

Finally, these provisions also include excess tax benefits related to stock-based compensation of $1.8 million and $1.9 million for the six months ended June 30, 2021 and 2020, respectively.

Absent these items, the provision for income taxes would have been an expense of $58.0 million and $18.9 million for the six months ended June 30, 2021 and 2020, respectively, or 21.2% for both periods.

The income tax provision on operating income was an expense of $40.0 million and $37.7 million for the six months ended June 30, 2021 and 2020, respectively.

These provisions resulted in effective tax rates for operating income of 19.5% and 20.1% for the six months ended June 30, 2021 and 2020, respectively.

In addition, these provisions reflect benefits related to tax planning strategies implemented in prior years of $3.7 million and $6.9 million for the nine months ended September 30, 2021 and 2020, respectively.

Finally, these provisions also include excess tax benefits related to stock-based compensation of $2.6 million and $2.0 million for the nine months ended September 30, 2021 and 2020, respectively.

Absent these items, the provision for income taxes would have been an expense of $67.3 million and $50.6 million for the nine months ended September 30, 2021 and 2020, respectively, or 21.3% for both periods.

The income tax provision on operating income was an expense of $47.7 million and $62.8 million for the nine months ended September 30, 2021 and 2020, respectively.

These provisions resulted in effective tax rates for operating income of 19.6% and 20.5% for the nine months ended September 30, 2021 and 2020, respectively.

The provision for 2021 includes a net benefit related to prior years’ federal tax credits of $1.7 million.

In addition, these provisions include excess tax benefits related to stock-based compensation of $1.8 million and $1.9 million for the six months ended June 30, 2021 and 2020, respectively.

Absent these items, the provision for income taxes would have been an expense of $43.5 million and $39.6 million for the six months ended June 30, 2021 and 2020, respectively, or 21.2% for both periods.

In addition, these provisions include excess tax benefits related to stock-based compensation of $2.6 million and $2.0 million for the nine months ended September 30, 2021 and 2020, respectively.

Absent these items, the provision for income taxes would have been an expense of $52.0 million, or 21.3%, and $64.8 million, or 21.2%, for the nine months ended September 30, 2021 and 2020, respectively.

Critical Accounting Estimates

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The following table reflects statutory surplus for our insurance subsidiaries:

September 30,

(in millions)

Total Statutory Capital and Surplus

The statutory capital and surplus for our insurance subsidiaries decreased $41.4 million during the first six months of 2021.

The statutory capital and surplus for our insurance subsidiaries decreased $40.1 million during the first nine months of 2021.

This decrease was primarily due the payment of a $255 million dividend, primarily offset by an increase in underwriting profits and from net realized and unrealized investment gains, primarily due to changes in the fair value of equity securities.

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however, in the insurance industry, RBC ratios are widely expressed as a percentage of the Company Action Level.

The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other insurance subsidiaries), as of June 30, 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):

The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other insurance subsidiaries), as of September 30, 2021, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):

(dollars in millions)

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

During the second quarter of 2021, Hanover Insurance paid $255.0 million in dividends to the holding company.

During the third quarter of 2021, Hanover Insurance paid $255.0 million in dividends to the holding company.

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

2 unchanged sentences

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 $309.0 million during the first six months of 2021, as compared to $225.8 million during the first six months of 2020.

The $83.2 million increase in cash provided was primarily due to an increase in premiums received, partially offset by higher federal income tax payments in the first six months of 2021, compared to the first six months of 2020 and, to a lesser extent, an increase in loss payments.

Net cash used in investing activities was $160.6 million during the first six months of 2021, as compared to $156.7 million during the first six months of 2020.

During the first six months of 2021 and 2020, cash used in investing activities primarily related to net purchases of fixed maturities.

Net cash used in financing activities was $162.6 million during the first six months of 2021, as compared to $102.2 million during the first six months of 2020.

During the first six months of 2021, cash used in financing activities primarily resulted from the repurchase of common stock and, to a lesser extent, from two quarterly dividend payments to our shareholders.

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

Net cash provided by operating activities was $595.4 million during the first nine months of 2021, as compared to $546.6 million during the first nine months of 2020.

The $48.8 million increase in cash provided was primarily due to an increase in premiums received, partially offset by an increase in loss payments.

Net cash used in investing activities was $337.7 million during the first nine months of 2021, as compared to $480.3 million during the first nine months of 2020.

During the first nine months of 2021 and 2020, cash used in investing activities primarily related to net purchases of fixed maturities.

Net cash used in financing activities was $207.1 million during the first nine months of 2021, as compared to $50.5 million during the first nine months of 2020.

During the first nine months of 2021, cash used in financing activities primarily resulted from the repurchase of common stock and, to a lesser extent, from three quarterly dividend payments to our shareholders.

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

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

During the first six months of 2021, as declared by the Board, we paid two quarterly dividends, each for $0.70 per share, to our shareholders totaling approximately $50.6 million.

During the first nine months of 2021, as declared by the Board, we paid three quarterly dividends, each for $0.70 per share, to our shareholders totaling approximately $75.6 million.

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

At June 30, 2021, THG, as a holding company, held approximately $449.3 million of fixed maturities and cash.

At September 30, 2021, THG, as a holding company, held approximately $371.7 million of fixed maturities and cash.

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

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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 six months of 2021 we repurchased approximately 0.9 million shares at an aggregate cost of $118.6 million.

As of June 30 , 2021, we had repurchased 7.3 million shares under this $1.3 billion program and had approximately $405 million available for additional repurchases.

In addition to the shares repurchased under the October 2020 ASR, during the first nine months of 2021 we repurchased approximately 1.1 million shares at an aggregate cost of $142.6 million.

As of September 30 , 2021, we had repurchased 7.5 million shares under this $1.3 billion program and had approximately $381 million available for additional repurchases.

We maintain our membership in the Federal Home Loan Bank (“FHLB”) to provide access to additional liquidity based on our holdings of FHLB stock and pledged collateral.

At June 30 , 2021, we had borrowing capacity of $118.5 million.

There were no outstanding borrowings under this short-term facility at June 30 , 2021;

At September 30 , 2021, we had borrowing capacity of $109.6 million.

There were no outstanding borrowings under this short-term facility at September 30 , 2021;

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

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The agreement also contains certain financial covenants such as maintenance of specified levels of consolidated equity and leverage ratios, and requires that certain of our subsidiaries maintain minimum RBC ratios.

We currently have no borrowings under this agreement and had no borrowings under this agreement during the first six months of 2021.

We currently have no borrowings under this agreement and had no borrowings under this agreement during the first nine months of 2021.

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

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

At June 30, 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.

At September 30, 2021, we were in compliance with the covenants of our debt and credit agreements.

Contingencies and Regulatory Matters

14 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis