What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-10-28 · 214 added, 332 removed, 300 unchanged (65% of the section changed)

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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.

Our results of operations also include the results of our discontinued operations, consisting primarily of our former 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.

Business operations consist of four operating segments:

Core Commercial, Specialty, Personal Lines and Other.

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

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 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, 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 September 2021.

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.

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 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.

During the three months ended March 31, 2022, our net income was $104.8 million, compared to $92.7 million for the three months ended March 31, 2021, an increase of $12.1 million, primarily due to higher operating income, partially offset by changes in the fair value of equity securities.

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

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

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 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.

see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $154.4 million for the three months ended March 31, 2022, compared to $85.1 million for the three months ended March 31, 2021, an increase of $69.3 million.

This increase was primarily due to lower catastrophe losses and earned premium growth, partially offset by higher personal automobile current accident year losses.

The higher personal automobile losses were primarily due to higher severity, as a result of inflation and to supply chain disruptions.

Pre-tax catastrophe losses were $45.5 million for the three months ended March 31, 2022, compared to $133.3 million during the same period of 2021, a decrease of $87.8 million.

The higher level of catastrophe losses in 2021 was primarily due to the freeze events in Texas and surrounding states.

Net favorable development on prior years’ loss reserves was $6.0 million for the three months ended March 31, 2022, compared to $8.2 million for the three months ended March 31, 2021, a decrease of $2.2 million.

As vaccination efforts and other factors have mitigated the ongoing severity of the COVID-19 pandemic (“Pandemic”), states are lifting restrictions, businesses that ceased operations are re-opening, new businesses are being created, and companies that shifted to remote work environments have begun transitioning back to the workplace.

Nevertheless, the impact of the Pandemic on U.S.

and global financial markets and economies continues to evolve, is complex and uncertain, and is outside our control.

These complexities have been compounded by a substantial increase in inflation and supply chain disruptions.

As a result, we are experiencing higher claims costs, particularly in our automobile and homeowners lines of business.

Several other uncertainties persist, including, among others, return to workplace initiatives, virus variants, vaccination rates, driving patterns and court caseload backlogs.

We continue to believe that the effect of these uncertainties on our near-term results should be manageable.

However, they 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).

Core Commercial

Core Commercial entails two distinct businesses, small commercial and middle market, both of which focus on account business, including commercial multiple peril, commercial automobile, workers’ compensation and other (general liability, ancillary professional, commercial umbrella, and monoline property).

Small commercial focuses on small businesses, with annual policy premiums up to $50,000.

Small commercial recently launched TAP sales, a quoting platform, that has generated a 20% increase in new business submissions during the quarter, enhancing the ease of doing business.

Middle market provides coverage to mid-sized businesses with annual policy premiums between $50,000 and $500,000.

Middle market offers coverage in distinct industry segments, including technology, manufacturing, human services, retail, real estate, and others.

We believe that our account-focused approach to the small commercial market and distinctiveness in the middle market 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 relationships with retail agents, enhanced franchise value through selective distribution, distinctive products and coverages, and through continued investment in industry segmentation.

Net premiums written increased 9.6% in the first three months of 2022, compared to the same period in 2021, primarily driven by pricing and exposure increases and continued strong retention.

Underwriting results increased in the first three months of 2022 , primarily due to lower catastrophe losses .

The competitive nature of the Core Commercial 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.

Specialty offers a competitive set of products that is focused predominately on small to mid-sized businesses.

This includes numerous specialized product areas that are organized into four distinct divisions – Professional and Executive Lines, Specialty Property and Casualty (“Specialty P&C”), Marine, and Surety and Other.

We believe that this distribution of Specialty products, primarily with retail agents supplemented by select specialists, serves as a complement to our Core Commercial business and helps to enhance our overall agent value and increase growth opportunities.

Net premiums written increased 9.4% in the first three months of 2022, compared to the same period in 2021, primarily due to pricing increases.

Underwriting results increased in the first three months of 2022, primarily due to lower catastrophe losses and higher favorable development of prior years’ loss reserves.

The competitive nature of the Specialty 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.

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).

Personal Lines focuses on working 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 87% of our policies in force have been issued to customers with multiple policies and/or coverages with us.

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

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.

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.

Net premiums written increased by 10.1% in the first three months of 2022, compared to the same period in 2021, primarily due to increased new business production and improved retention.

Underwriting results decreased in the first three months of 2022, primarily due to higher current accident year personal automobile losses and unfavorable development of prior years’ loss reserves in our homeowners line, partially offset by earned premium growth.

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.

Primary business operations include insurance products and services currently provided through four operating segments:

Core Commercial, Specialty, Personal Lines and Other.

Core Commercial includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial lines coverages provided to small and mid-sized businesses.

Specialty includes four divisions of business:

Professional and Executive Lines, Specialty P&C, Marine, and Surety and Other.

Specialty P&C includes coverages such as program business (provides commercial insurance to markets with specialized coverage or risk management needs related to groups of similar businesses), specialty industrial and commercial property, and excess and surplus lines.

Personal Lines includes personal automobile, homeowners and other personal coverages, such as umbrella.

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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.

and our run-off voluntary assumed property and casualty pools and run-off direct asbestos and environmental businesses.

During the first quarter of 2022, we disaggregated our former Commercial Lines segment into the aforementioned Core Commercial and Specialty segments.

Prior periods reflect this new presentation.

This presentation is 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.

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Results of Operations – Consolidated

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 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.

Consolidated net income for the three months ended March 31, 2022 was $104.8 million, compared to $92.7 million for the three months ended March 31, 2021, an increase of $12.1 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 March 31, 2022, partially offset by higher after-tax net realized and unrealized investment losses of approximately $43.8 million, primarily related to the change in the fair value of equity securities.

Operating income before interest expense and income taxes increased $69.3 million primarily due to lower catastrophe losses and earned premium growth, partially offset by higher current accident year losses in our Personal Lines segment.

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

Nine Months Ended

September 30,

(in millions)

Operating income before interest expense and income taxes:

Commercial Lines

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

Core Commercial

Personal Lines

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Net realized and unrealized investment gains (losses)

Net loss from repayment of debt

Other non-operating

Income tax (expense) benefit on non-operating items

Income tax benefit (expense) on non-operating items

Income from continuing operations, net of taxes

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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.

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 four 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.

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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.

Results of Operations – Segments

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Three Months Ended

Nine Months Ended

September 30,

(in millions)

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Operating income before interest expense and income taxes

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.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Operating income before interest expense and income taxes was $154.4 million for the three months ended March 31, 2022, compared to $85.1 million for the three months ended March 31, 2021, an increase of $69.3 million.

This increase was primarily due to lower catastrophe losses and earned premium growth, partially offset by higher personal automobile current accident year losses.

Net premiums written increased $116.2 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to rate and exposure increases and continued strong retention.

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 September 30, 2021

(dollars in millions)

Commercial Lines

Personal Lines

Three Months Ended September 30, 2020

Three Months Ended March 31, 2022

(dollars in millions)

Commercial Lines

Core Commercial

Personal Lines

The following table summarizes net premiums written, and loss and LAE and catastrophe loss ratios by line of business for the Commercial Lines and Personal Lines segments.

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

Three Months Ended September 30,

Three Months Ended March 31, 2021

(dollars in millions)

Commercial Lines:

Commercial multiple peril

Commercial automobile

Workers’ compensation

Other commercial

Total Commercial Lines

Core Commercial

Personal Lines

Personal automobile

Other personal

Total Personal Lines

The following table summarizes U.S.

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 September 30,

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

Three Months Ended March 31,

(in millions)

Core Commercial

Underwriting profit, excluding

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on non-catastrophe losses

Prior year favorable

Prior year favorable (unfavorable)

catastrophe development

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Other operating expenses

Operating income before

Operating income (loss) before

interest expense and income taxes

Commercial Lines

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.

Core Commercial

Core Commercial net premiums written were $526.6 million for the three months ended March 31, 2022, compared to $480.6 million for the three months ended March 31, 2021.

This $46.0 million increase was primarily driven by pricing and exposure increases and continued strong retention.

Core Commercial underwriting profit for the three months ended March 31, 2022 was $32.2 million, compared to a $51.3 million loss for the three months ended March 31, 2021, a favorable change of $83.5 million.

Catastrophe losses for the three months ended March 31, 2022 were $19.7 million, compared to $94.4 million for the three months ended March 31, 2021, a decrease of $74.7 million.

The higher catastrophe losses in 2021 were primarily due to freeze events in Texas and surrounding states.

Net favorable development on prior year’s loss reserves for the three months ended March 31, 2022 was $6.4 million, compared to $2.7 million for the three months ended March 31, 2021, an increase of $3.7 million.

Core Commercial current accident year underwriting profit, excluding catastrophes, was $45.5 million for the three months ended March 31, 2022, compared to $40.4 million for the three months ended March 31, 2021.

This $5.1 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.

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 .

We continue 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 competitive pricing environment, particularly within the workers’ compensation line.

Due to uncertainty caused by the Pandemic and the increase in inflation, 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 these uncertainties are unknown and may result in an increase in claims costs and reduced premium levels.

Specialty net premiums written were $302.8 million for the three months ended March 31, 2022, compared to $276.8 million for the three months ended March 31, 2021.

This $26.0 million increase was primarily driven by improved retention and pricing, especially in our Professional and Executive and Specialty P&C divisions.

Specialty underwriting profit for the three months ended March 31, 2022 was $33.9 million, compared to $2.0 million for the three months ended March 31, 2021, an increase of $31.9 million.

Catastrophe losses for the three months ended March 31, 2022 were $7.6 million, compared to $24.4 million for the three months ended March 31, 2021, a decrease of $16.8 million.

The higher catastrophe losses in 2021 were primarily due to freeze events in Texas and surrounding states.

Net favorable development on prior year’s loss reserves for the three months ended March 31, 2022 was $13.2 million, compared to $0.6 million for the three months ended March 31, 2021, an increase of $12.6 million.

Specialty current accident year underwriting profit, excluding catastrophes, was $28.3 million for the three months ended March 31, 2022 , compared to $25.8 million for the three months ended March 31, 2021 .

This $2.5 million increase was primarily driven by earned premium growth .

We continue 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 competitive pricing environment.

The extent and duration of these uncertainties are unknown and may result in an increase in claims costs and reduced premium levels.

Personal Lines

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 Lines net premiums written were $482.9 million for the three months ended March 31, 2022, compared to $438.7 million for the three months ended March 31, 2021.

The premium growth of $44.2 million was primarily driven by increased new business and retention.

Net premiums written in the personal automobile line of business for the three months ended March 31, 2022 were $298.4 million, compared to $280.7 million for the three months ended March 31, 2021, an increase of $17.7 million.

Personal automobile policies in force increased by 8.0%.

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.

Net premiums written in the homeowners and other lines of business for the three months ended March 31, 2022 were $184.5 million, compared to $158.0 million for the three months ended March 31, 2021, an increase of $26.5 million.

Homeowners policies in force increased by 7.5%.

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.

Personal Lines underwriting profit for the three months ended March 31, 2022 was $12.3 million, compared to $58.9 million for the three months ended March 31, 2021, a decrease of $46.6 million.

Catastrophe losses for the three months ended March 31, 2022 were $18.2 million, compared to $14.5 million for the three months ended March 31, 2021, an increase of $3.7 million.

Net unfavorable development on prior year’s loss reserves for the three months ended March 31, 2022 was $13.6 million, compared to $5.2 million of favorable development for the three months ended March 31, 2021.

The 2022 unfavorable development was primarily related to a higher severity of losses in our homeowners line.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $44.1 million for the three months ended March 31, 2022, compared to $68.2 million for the three months ended March 31, 2021.

This $24.1 million decrease was primarily due to higher current accident year loss severity in our personal automobile line, partially offset by lower expenses and higher earned premium growth.

We experienced an increase in physical damage and property severity associated with supply chain issues and limited availability of new vehicles due to chip shortages, 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.

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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.

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.

Production and Underwriting Results

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

These items are not meaningful for our Other segment.

Nine Months Ended September 30, 2021

(dollars in millions)

Commercial Lines

Personal Lines

Nine Months Ended September 30, 2020

(dollars in millions)

Premiums Written

Premiums Earned

Commercial Lines

Personal Lines

The following table summarizes net premiums written, and loss and LAE and catastrophe loss ratios by line of business for the Commercial Lines and Personal Lines segments.

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

Nine Months Ended September 30,

(dollars in millions)

Commercial Lines:

Commercial multiple peril

Commercial automobile

Workers’ compensation

Other commercial

Total Commercial Lines

Personal Lines:

Personal automobile

Other personal

Total Personal Lines

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.

Nine Months Ended September 30,

(in millions)

Underwriting profit (loss),

excluding prior year reserve

development and catastrophes

Prior year favorable (unfavorable)

loss and LAE reserve development on

non-catastrophe losses

Prior year favorable (unfavorable)

catastrophe development

Current year catastrophe losses

Underwriting profit (loss)

Net investment income

Fees and other income

Other operating expenses

Operating income before

interest expense and income taxes

Commercial Lines

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 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 $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 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.

Due to uncertainty caused by the Pandemic and the increase in inflation, there is a level of uncertainty in our ability to retain or grow our business, and may result in an increase in claims costs.

Our Other segment had operating income of $0.6 million for the three months ended March 31, 2022, compared to $1.1 million for the three months ended March 31, 2021, a decrease of $0.5 million.

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.

Nine Months Ended

September 30,

Three Months Ended

(in millions)

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Prior year non-catastrophe loss development

Prior year catastrophe development

Total incurred losses and LAE

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Gross reserve for losses and LAE, end of period

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

September 30,

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

(in millions)

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Commercial automobile

Other commercial lines:

Hanover Programs

Management and professional liability

Monoline general liability

Specialty industrial and commercial property

Total other commercial lines

Total Commercial Lines

Other core commercial

Total Core Commercial

Specialty Property & Casualty

Professional and Executive Lines

Surety and Other

Total Specialty

Personal automobile

Homeowners and other personal

Homeowners and Other

Total Personal Lines

Total Other Segment

Total loss and LAE reserves

“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.

Loss and LAE reserves in our “Other core commercial” lines include general liability, commercial umbrella, and monoline property.

“Specialty Property & Casualty” includes program business, specialty industrial and commercial property, and excess and surplus lines.

“Professional and Executive Lines” includes professional and management liability, fidelity and crime, and other property and liability lines for healthcare firms.

Loss and LAE reserves in our “Total Other” segment relate to our run-off voluntary assumed property and casualty reinsurance pools business and our run-off direct asbestos and environmental business.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in millions)

Commercial Lines

Core Commercial

Personal Lines

Other Segment

Total prior year favorable development

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.

It is not possible to know whether the factors that affected loss reserves in the first three months of 2022 will also occur in future periods.

We encourage you to read our 2021 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 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.

For the three months ended March 31, 2022 and 2021, there was no net catastrophe loss development.

2022 Loss and LAE Development, excluding catastrophes

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.

For the three months ended March 31, 2022, net favorable loss and LAE development, excluding catastrophes, was $6.0 million.

Core Commercial favorable loss and LAE development of $6.4 million was primarily due to lower than expected losses in the workers’ compensation line, primarily in accident year 2020.

Specialty favorable loss and LAE development of $13.2 million was primarily due to lower than expected losses in our marine, specialty industrial and commercial property, professional and executive, and surety lines.

Personal Lines unfavorable loss and LAE development of $13.6 million was due to higher than expected loses in the homeowners line of $13.9 million.

The increase in homeowners losses was primarily due to higher severity and longer cycle times in repair activity, primarily related to claims incurred in the fourth quarter of 2021.

2021 Loss and LAE Development, excluding catastrophes

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.

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

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

Reinsurance 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.

Reinsurance recoverables were $1,940.3 million and $1,907.3 million at March 31, 2022 and December 31, 2021, respectively, of which $128.6 million and $100.4 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 $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.

Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $55.7 million and $49.8 million at March 31, 2022 and December 31, 2021, respectively, and billed non-MCCA reinsurance recoverables totaled $72.9 million and $50.6 million at March 31, 2022 and December 31, 2021, respectively.

At March 31, 2022, $0.3 million of the billed non-MCCA recoverables were outstanding greater than 90 days, whereas at December 31, 2021, there were no balances outstanding greater than 90 days.

Investment Results

Net investment income before income taxes was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in millions)

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Earned yield, total portfolio

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 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.

The increase in net investment income for the three months ended March 31, 2022 was primarily due to the continued investment of operational cash flows, partially offset by the impact of lower new money yields and lower mortgage income.

Investment Portfolio

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

September 30, 2021

March 31, 2022

December 31, 2021

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Cash and Investments

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.

Total cash and investments decreased $336.2 million, or 3.6%, for the three months ended March 31, 2022 as compared to December 31, 2021.

The decrease was primarily due to net market value depreciation, partially offset by cash received from the MCCA to refund policyholders.

Through March 31, 2022, $34.4 million of the MCCA refund was paid to policyholders and $148.9 million is expected to be paid during the second quarter of 2022.

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

September 30, 2021

March 31, 2022

(in millions)

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Amortized Cost, Net of Allowance for Credit Losses

Net Unrealized

Net Unrealized Gain (Loss)

Change in Net

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Total fixed maturities

The decrease in net unrealized gains on fixed maturities was primarily due to higher prevailing interest rates, partially offset by tighter credit spreads.

The change in net unrealized gain (loss) on fixed maturities was primarily due to higher prevailing interest rates and, to a lesser extent, wider credit spreads.

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

September 30, 2021

March 31, 2022

December 31, 2021

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Caa and lower

In or near default

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 September 30, 2021 and December 31, 2020.

Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 95% of the fixed maturity portfolio consisted of investment grade securities at both March 31, 2022 and December 31, 2021.

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:

September 30, 2021

March 31, 2022

December 31, 2021

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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 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 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 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.

For the three months ended March 31, 2022, we recognized net impairments on fixed maturities of $0.9 million, consisting of $0.6 million of credit-related losses and $0.3 million categorized as intend-to-sell.

For the three months ended March 31, 2021, we did not recognize any impairments.

At March 31, 2022 and December 31, 2021, the allowance for credit losses on mortgage loans was $7.1 million and the allowance for credit losses on available-for-sale debt securities was $0.9 million and $0.3 million, respectively.

At March 31, 2022 and December 31, 2021 we held no fixed maturity securities on non-accrual status.

At March 31, 2021, fixed maturities on non-accrual status were not material and the effect of non-accruals for the three months ended March 31, 2021, 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 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.

Gross unrealized losses on fixed maturities at March 31, 2022 were $312.2 million, an increase of $264.2 million compared to December 31, 2021, primarily attributable to higher interest rates and, to a lesser extent, wider credit spreads.

At March 31, 2022, gross unrealized losses consisted primarily of $123.1 million on corporate fixed maturities, $62.6 million on residential mortgage-backed securities, $62.4 million on municipals, $29.6 million on commercial mortgage-backed securities, and $24.4 million on U.S.

government securities.

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

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

the global 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 September 30, 2021 and December 31, 2020.

The following table sets forth gross unrealized losses for fixed maturities by maturity period at March 31, 2022 and December 31, 2021.

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.

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 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.

households and businesses.

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, 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.

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.

Economic growth in the U.S.

remains positive, driven by strength in the overall labor market and consumer spending.

However, a number of risks have created greater uncertainty in the near-term.

The spike in interest rates has led to a tightening of financial conditions for businesses and consumers which may impact consumer spending and corporate profitability.

Lingering effects of the Pandemic, such as supply chain interruptions and labor market imbalances, have yet to be fully resolved.

In addition, implications of the invasion of Ukraine by Russia and the impact of recently imposed sanctions, higher energy and commodity prices, as well as broad global trade disruptions impose additional risks.

Despite this uncertainty, indicators of economic activity and employment have remained strong in the U.S.

It is unclear how these risks will affect the continued economic recovery and our investment portfolio.

With inflation having exceeded their 2 percent target for some time, combined with improvement in the labor market, the Federal Reserve (the “Fed”) raised the federal funds rate by 0.25% in March and anticipates that ongoing increases in the target range will be appropriate.

Additionally, it expects to reduce its holdings of Treasury and agency securities in coming months.

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, accelerated winding down of the program may result in market disruptions.

In assessing the appropriate stance of monetary policy, the Fed will continue to monitor the implications of incoming information on its economic outlook.

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

We may experience defaults on fixed income securities, particularly with respect to non-investment grade debt securities.

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Net income also included the following items:

Three Months Ended September 30,

(in millions)

Net realized and unrealized investment gains

Discontinued life businesses

Net realized and unrealized investment gains

Loss from repayment of debt

Discontinued life businesses

Nine Months Ended September 30,

Three Months Ended March 31,

(in millions)

Core Commercial

Net realized and unrealized investment gains (losses)

Discontinued life businesses

Net realized and unrealized investment losses

Loss from repayment of debt

Net realized and unrealized investment gains

Discontinued life businesses

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 $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.

We manage investment assets for our Core Commercial, Specialty, 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 Core Commercial, Specialty, Personal Lines and Other segments based on actuarial information related to the underlying businesses.

Net realized and unrealized investment losses were $15.9 million for the three months ended March 31, 2022, compared to net realized and unrealized gains of $37.5 million for the three months ended March 31, 2021.

For the three months ended March 31, 2022 and 2021, net realized and unrealized investment gains (losses) were primarily due to changes in the fair value of equity securities.

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

Losses of $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.

Losses of $0.5 million and $0.1 million the three months ended March 31, 2022 and 2021, 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 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 $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 $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.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

The provision for income taxes from continuing operations was an expense of $24.7 million and $21.3 million for the three months ended March 31, 2022 and 2021, respectively.

These provisions resulted in consolidated effective federal tax rates of 19.0% and 18.7% for the three months ended March 31, 2022 and 2021, respectively.

These provisions include excess tax benefits related to stock-based compensation of $2.8 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively.

In addition, the provision for 2021 reflects benefits related to tax planning strategies implemented in prior years of $1.9 million.

Absent these items, the provision for income taxes would have been an expense of $27.5 million and $24.2 million for the three months ended March 31, 2022 and 2021, respectively, or 21.2% for both periods.

The income tax provision on operating income was an expense of $28.2 million and $15.2 million for the three months ended March 31, 2022 and 2021, respectively.

These provisions resulted in effective tax rates for operating income of 19.3% and 19.8% for the three months ended March 31, 2022 and 2021, respectively.

These provisions include excess tax benefits related to stock-based compensation of $2.8 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively.

Absent this item, the provisions for income taxes would have been an expense of $31.0 million, or 21.2%, and $16.2 million, or 21.1%, for the three months ended March 31, 2022 and 2021, respectively.

Critical Accounting Estimates

7 unchanged sentences

Investment credit losses

Deferred taxes

For a more detailed discussion of these critical accounting estimates, see our 2021 Annual Report on Form 10-K.

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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 $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.

The statutory capital and surplus for our insurance subsidiaries increased $89.6 million during the first three months of 2022.

This increase was primarily driven by an increase in underwriting profits and net realized investment gains, partially offset by net unrealized investment losses, primarily due to changes in the fair value of equity securities.

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

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

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

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, 2022, 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 third quarter of 2021, Hanover Insurance paid $255.0 million in dividends to the holding company.

During the first quarter of 2022, 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.

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We periodically adjust our investment policy to respond to changes in short-term and long-term cash requirements.

Net cash provided by operating activities was $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.

Net cash provided by operating activities was $200.1 million during the first three months of 2022, as compared to $141.8 million during the first three months of 2021.

The $58.3 million increase in cash provided was primarily due to the receipt of $183.3 million of surplus funds received from the MCCA, partially offset by $34.4 million that were remitted to policyholders in the first quarter of 2022.

We expect to remit the remainder of these funds to policyholders in the second quarter of 2022.

Additionally, cash was provided by an increase in premiums received, partially offset by an increase in loss and LAE payments.

Net cash used in investing activities was $112.2 million during the first three months of 2022, as compared to $78.6 million during the first three months of 2021.

During the first three months of 2022 and 2021, cash used in investing activities primarily related to net purchases of fixed maturities.

Net cash used in financing activities was $ 46.8 million during the first three months of 202 2 , as compared to $ 71.7 million during the first three months of 202 1 .

During the first three months of 202 2 , cash used in financing activities primarily resulted from the quarterly dividend payment to our shareholders and, to a lesser extent, the repurchase of common stock.

During the first three months of 202 1 , cash used in financing activities primarily resulted from the repurchase of common stock and from the quarterly dividend payment to shareholders.

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

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.

During the first three months of 2022, as declared by the Board, we paid a quarterly dividend of $0.75 per share to our shareholders totaling $26.7 million.

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

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

At March 31, 2022, THG, as a holding company, held approximately $333.1 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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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 $1.3 billion, including a $400 million increase to the program on May 11, 2021.

The Board of Directors authorized a stock repurchase program which provides for aggregate repurchases of our common stock of up to $1.3 billion.

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

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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 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 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.

During the first three months of 2022 we repurchased approximately 0.1 million shares at an aggregate cost of $16.3 million.

As of March 31 , 2022, we had repurchased 7.8 million shares under this $1.3 billion program and had approximately $345 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 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.

At March 31 , 2022, we had borrowing capacity of $116.6 million.

There were no outstanding borrowings under this short-term facility at March 31 , 2022 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).

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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 nine months of 2021.

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

We currently have no borrowings under this agreement and had no borrowings under this agreement during the first three months of 2022.

The LIBOR rate, upon which Adjusted LIBOR is based, is in process of being discontinued.

During 2021, certain key tenors of LIBOR were extended with a new cessation date of June 20, 2023.

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

At March 31, 2022, we were in compliance with the covenants of our debt and credit agreements.

Contingencies and Regulatory Matters

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis