Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Securities registered pursuant to Section 12(b) of the Act: For the transition period from to Commission File Number 1-13754 THE HANOVER INSURANCE GROUP, INC. (Exact name o ...

The Hanover Insurance Group, Inc. (NYSE:THG) Q1 2023 Earnings Conference Call May 3, 2023 10:30 AM ET Company Participants Oksana Lukasheva - SVP Corp Finance Jack Roche - President and Chief Executive Officer Jeffrey Farber - Chief Financial Officer Dick Lavey - President of Agency Markets Bryan Salvatore - President of Specialty Lines Conference Call Participants Matthew Carletti - JMP Paul Newsome - Piper Sandler Michael Zaremski - BMO Grace Carter - Bank of America Bob Farnam - Janney Meyer Shields - KB ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-13754 THE HANOVER INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 04-32636 ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to . Commission file number: 1-13754 THE HANOVER INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 04-3263626 (State or ...

Financial Data and Key Metrics Changes - The company reported operating income per share of $5.53 and an operating return on equity of 6.7% for the full year, reflecting the inflationary economic environment and significant catastrophe activity in Q4 [13][35] - The full year combined ratio, excluding catastrophes, was 92.1%, towards the lower end of the guidance provided in the previous quarter [14][35] - The expense ratio improved to 30.8% for the full year, a 50 basis point improvement from 2021, driven by fixed cost leverage from growth and lower-than-expected variable compensation [36][35] Business Line Data and Key Metrics Changes - Personal Lines achieved a pricing increase of 10% in Q4, with retention solidly above 86% [21][22] - Core Commercial pricing increased by 11% in Q4, with expectations for even higher increases in 2023 [23][49] - Specialty Lines delivered a combined ratio of 89.3% for the full year, with an 11% increase in annual premiums [29][52] Market Data and Key Metrics Changes - The company experienced catastrophe losses of $190 million in Q4, with winter storm Elliott accounting for approximately $165 million [43] - The underlying loss ratio increased to 63.3% in Q4, reflecting higher loss costs due to inflation and property large losses [45] - The company expects net written premium growth in the mid-single digits for 2023, driven by growth in profitable businesses [68] Company Strategy and Development Direction - The company is focused on regaining top-tier margins in Personal and Core Commercial property lines through enhanced pricing, insurance-to-value adjustments, and targeted underwriting measures [20][27] - The strategic priorities for 2022 included expanding the specialty business, investing in technology, and deepening agency partnerships [28] - The company aims to leverage innovative technology for risk solutions and mitigation, enhancing underwriting decisions and preventing claims [17][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by inflation, supply chain disruptions, and changing weather patterns, emphasizing the need for disciplined underwriting and pricing strategies [12][16] - The outlook for 2023 includes expectations for solid operating performance and meaningful improvement from 2022, with a focus on margin growth [72] - Management expressed confidence in the company's ability to navigate the dynamic environment and deliver long-term value for stakeholders [33][72] Other Important Information - The company completed its multi-line casualty reinsurance renewals with limited changes and at acceptable prices [61][129] - The Board of Directors approved an 8% increase in the company's quarterly dividend, reinforcing commitment to shareholder value [67] Q&A Session Summary Question: Update on loss cost inflation - Management noted no material lift in medical inflation but is monitoring liability trends closely, incorporating increased lawyer involvement and medical procedure costs into their expectations for 2023 [75][77] Question: Changes in property inflation - Management indicated that there has not been a material step down in property inflation and is watching for any potential changes [78] Question: Guidance on catastrophe loss ratio - The company is comfortable with the 5.1% catastrophe load for 2023, attributing it to actions taken to reduce volatility [97] Question: Premium growth expectations - Management expects slower growth in Personal Lines due to pricing changes but remains optimistic about Specialty Lines and Small Commercial [99][101] Question: Retention metrics in Personal Lines - Management emphasized the importance of monitoring retention metrics closely and adjusting pricing as necessary to maintain stability [105][106] Question: New money rates - Management estimated new money rates to be in the range of 4.75% to 5% [107] Question: Outlook for umbrella loss cost trends - Management has not observed significant changes in umbrella loss costs but is monitoring the implications of social inflation [131]

(1) Combined ratio, excluding catastrophes, and current accident year combined ratio, excluding catastrophes, are non-GAAP measures. The combined ratio (which includes catastrophe losses and prior-year loss reserve development) is the most directly comparable GAAP measure. This and other non-GAAP measures are used throughout this document. See the disclosure on the use of this and other non-GAAP measures under the heading "Forward-Looking Statements and Non-GAAP Financial Measures." A reconciliation of the ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-13754 THE HANOVER INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 04-3 ...

Financial Data and Key Metrics Changes - For Q3 2022, after-tax operating income was $35.7 million or $0.99 per share, with a combined ratio of 101% reflecting higher than expected inflation and supply chain pressures [22][40] - The combined ratio excluding catastrophes was 94.2%, with catastrophe losses of $90 million impacting net earned premium [22][40] - The company achieved a return on equity (ROE) of 10.5% year-to-date, with net written premium growth of 9.5% in the quarter [14][22] Business Line Data and Key Metrics Changes - Core commercial business grew by 5.9%, driven by renewable price increases of 11.2% [14][25] - Specialty segment achieved growth of 12.6%, with robust rate increases of 8% across its portfolio [15][29] - Personal Lines grew net written premiums by 11.3%, with an average renewal pricing increase of 7.3% [16][30] Market Data and Key Metrics Changes - The company noted that inflation and supply chain issues were pervasive, impacting all primary insurers [20][22] - The market for Personal Lines is experiencing one of the hardest conditions in history, with expectations for continued firming [20][22] Company Strategy and Development Direction - The company is focused on restoring underwriting margins to target levels and achieving long-term financial targets [41][40] - Strategic actions include aggressive pricing increases, insurance to value adjustments, and targeted underwriting measures to address current market challenges [18][19][20] - The company aims to leverage its strong agent partnerships and diversified portfolio to enhance profitability [15][20] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the impact of Hurricane Ian and ongoing macroeconomic challenges, including inflation and supply chain disruptions [11][12] - The company remains confident in its ability to manage risks and achieve long-term profitability despite short-term challenges [13][21] - Future expectations include a combined ratio excluding catastrophes in the range of 92% to 92.5% for the full year 2022 [40] Other Important Information - The company reported net investment income of $73 million for the quarter, benefiting from higher new money yields [36][39] - Statutory capital remained relatively unchanged at $2.7 billion, with a disciplined approach to capital management [39] Q&A Session Summary Question: Can you expand on the improvement in the expense ratio? - The improvement was driven by earned premium growth and reduced incentives, with some elements being sustainable and others potentially one-time [46][48] Question: Update on the Specialty business and cross-selling opportunities? - Success in Specialty comes from both existing and new customers, with significant cross-selling opportunities being realized [49][51] Question: Clarification on inflationary pressures and their impact? - Inflation assumptions were revised, particularly in auto and home segments, leading to higher loss ratios [54][55] Question: Expectations for claims inflation moderation? - The company is cautious but optimistic about managing claims inflation through pricing and underwriting actions [57][60] Question: Risks in the Specialty segment due to inflation? - The diversified nature of the Specialty portfolio helps mitigate risks associated with inflationary pressures [68][69] Question: Core commercial lines pricing acceleration? - The company is seeing good pricing across property coverages, with a focus on maintaining strong rates [76][78] Question: Specialty retention trends? - Retention remains robust, though there may be slight quarter-over-quarter variances due to the nature of the products [86][87] Question: Barriers to taking rate in difficult states? - The company feels confident in its ability to take rate in various states without significant barriers [88][89]

The Hanover Insurance Group, Inc. Third Quarter 2022 Results November 2, 2022 To be read in conjunction with the press release dated November 1, 2022, and conference call scheduled for November 2, 2022 Third Quarter 2022 Operating Highlights • Combined ratio of 101.0%; combined ratio, excluding catastrophes(1), of 94.2% • Catastrophe losses of $90.1 million, or 6.8 points of the combined ratio, including the impact from Hurricane Ian of $28.0 million • Net premiums written increase of 9.5%*, with contributi ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited interim consolidated financial statements of The Hanover Insurance Group, Inc. and its subsidiaries for the periods ended June 30, 2022, including statements of income, comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, investment performance, fair value measurements, segment information, and other critical accounting policies [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) The company experienced a significant decrease in net income for both the three and six months ended June 30, 2022, primarily driven by net realized and unrealized investment losses, despite an increase in premiums Consolidated Statements of Income (in millions) | Metric (in millions) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Premiums | $1,293.8 | $1,179.8 | $2,557.6 | $2,341.6 | | Net investment income | $70.5 | $75.6 | $147.4 | $152.4 | | Total net realized and unrealized investment gains (losses) | $(77.9) | $31.1 | $(93.8) | $68.6 | | Total revenues | $1,292.9 | $1,292.3 | $2,623.6 | $2,574.4 | | Net income | $22.6 | $128.5 | $127.4 | $221.2 | | Basic EPS | $0.64 | $3.58 | $3.58 | $6.12 | | Diluted EPS | $0.63 | $3.52 | $3.52 | $6.03 | - Net income decreased significantly for both the three and six months ended June 30, 2022, primarily due to **net realized and unrealized investment losses**[8](index=8&type=chunk) [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) The company reported a comprehensive loss for both the three and six months ended June 30, 2022, primarily driven by substantial net unrealized losses on available-for-sale investment securities Consolidated Statements of Comprehensive Income (in millions) | Metric (in millions) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $22.6 | $128.5 | $127.4 | $221.2 | | Total other comprehensive income (loss), net of tax | $(263.3) | $62.8 | $(642.1) | $(122.0) | | Comprehensive income (loss) | $(240.7) | $191.3 | $(514.7) | $99.2 | - The company experienced a **comprehensive loss of $(240.7) million** for the three months and **$(514.7) million** for the six months ended June 30, 2022, a significant decline from comprehensive income in the prior year, mainly due to changes in net unrealized gains (losses) on available-for-sale securities[10](index=10&type=chunk) [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) As of June 30, 2022, total assets and shareholders' equity decreased compared to December 31, 2021, primarily due to a reduction in investments and accumulated other comprehensive income (loss) Consolidated Balance Sheets (in millions) | Metric (in millions) | June 30, 2022 | December 31, 2021 | | :------------------- | :------------ | :---------------- | | Total investments | $8,468.1 | $9,152.6 | | Total assets | $13,600.9 | $14,254.3 | | Loss and loss adjustment expense reserves | $6,606.9 | $6,447.6 | | Unearned premiums | $2,804.1 | $2,734.9 | | Total liabilities | $11,029.1 | $11,109.4 | | Total shareholders' equity | $2,571.8 | $3,144.9 | - Total assets decreased by **$653.4 million (4.6%)** and total shareholders' equity decreased by **$573.1 million (18.2%)** from December 31, 2021, to June 30, 2022, largely due to a decline in investment fair values[13](index=13&type=chunk) [Consolidated Statements of Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) Shareholders' equity significantly decreased for the six months ended June 30, 2022, primarily due to a substantial decline in accumulated other comprehensive income (loss) driven by net unrealized depreciation on available-for-sale securities Consolidated Statements of Shareholders' Equity (in millions) | Metric (in millions) | June 30, 2022 | June 30, 2021 | | :------------------- | :------------ | :------------ | | Total accumulated other comprehensive income (loss) | $(519.9) | $250.5 | | Retained earnings | $3,056.7 | $2,837.9 | | Treasury Stock | $(1,862.4) | $(1,808.4) | | Total shareholders' equity | $2,571.8 | $3,154.0 | - Accumulated Other Comprehensive Income (Loss) shifted from a gain of **$250.5 million** in June 2021 to a loss of **$(519.9) million** in June 2022, primarily due to net unrealized depreciation on available-for-sale securities[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities decreased for the six months ended June 30, 2022, compared to the same period in 2021, while net cash used in investing activities increased, leading to a net decrease in cash and cash equivalents Consolidated Statements of Cash Flows (in millions) | Metric (in millions) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $208.7 | $309.0 | | Net cash used in investing activities | $(217.6) | $(160.6) | | Net cash used in financing activities | $(76.1) | $(162.6) | | Net change in cash and cash equivalents | $(85.0) | $(14.2) | | Cash and cash equivalents, end of period | $145.9 | $106.4 | - Net cash provided by operating activities decreased by **$100.3 million**, from **$309.0 million** in 2021 to **$208.7 million** in 2022[18](index=18&type=chunk) - Net cash used in investing activities increased by **$57.0 million**, from **$(160.6) million** in 2021 to **$(217.6) million** in 2022[18](index=18&type=chunk) [Notes to Interim Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Interim%20Consolidated%20Financial%20Statements) The notes provide detailed disclosures on the company's accounting policies, investment portfolio, fair value measurements, income taxes, pension plans, comprehensive income, segment performance, stock-based compensation, earnings per share, loss reserves, and commitments and contingencies, offering crucial context to the interim financial statements [Note 1. Basis of Presentation and Principles of Consolidation](index=8&type=section&id=Note%201.%20Basis%20of%20Presentation%20and%20Principles%20of%20Consolidation) The interim consolidated financial statements are prepared in accordance with U.S. GAAP for interim information, including the accounts of The Hanover Insurance Group, Inc. and its subsidiaries, with all intercompany transactions eliminated. Estimates and assumptions are used, and results for the six months ended June 30, 2022, are not necessarily indicative of the full year - Financial statements are unaudited and prepared under U.S. GAAP for interim reporting, omitting some annual disclosures[20](index=20&type=chunk) - Consolidated entities include principal property and casualty insurance companies (Hanover Insurance, Citizens Insurance) and other subsidiaries, including discontinued operations[21](index=21&type=chunk) - The preparation of financial statements involves estimates and assumptions, and actual results may differ[22](index=22&type=chunk) [Note 2. New Accounting Pronouncements](index=8&type=section&id=Note%202.%20New%20Accounting%20Pronouncements) The company did not adopt any new accounting standards during the first six months of 2022, and no recently issued standards are expected to materially affect its financial position or results of operations - No new accounting standards were adopted during the six months ended June 30, 2022[24](index=24&type=chunk) - No new accounting standards issued in the period are expected to have a material effect on the Company's financial position or results of operations[24](index=24&type=chunk) [Note 3. Investments](index=8&type=section&id=Note%203.%20Investments) The company's investment portfolio, primarily fixed maturities, experienced a significant increase in gross unrealized losses at June 30, 2022, compared to December 31, 2021, mainly due to rising interest rates. Despite these losses, the company does not intend to sell these securities before recovery of their amortized cost Fixed Maturities Fair Value and Unrealized Losses (in millions) | Metric (in millions) | June 30, 2022 | December 31, 2021 | | :------------------- | :------------ | :---------------- | | Total fixed maturities (Fair Value) | $7,244.7 | $7,723.9 | | Gross Unrealized Losses (June 30, 2022) | $596.7 | | | Gross Unrealized Losses (Dec 31, 2021) | | $48.0 | - Gross unrealized losses on fixed maturities increased significantly from **$48.0 million** at December 31, 2021, to **$596.7 million** at June 30, 2022, primarily due to higher interest rates[29](index=29&type=chunk) - The company views gross unrealized losses as non-credit related and does not intend to sell these securities before recovery of their amortized cost[30](index=30&type=chunk) [Note 4. Fair Value](index=11&type=section&id=Note%204.%20Fair%20Value) The company categorizes its financial instruments into a three-level fair value hierarchy, with the majority of fixed maturities and equity securities valued using observable market data (Level 2 and Level 1, respectively). Level 3 assets, which use unobservable inputs, represent a small portion of the total investment assets at fair value - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[35](index=35&type=chunk)[36](index=36&type=chunk) Total Investment Assets at Fair Value by Level (June 30, 2022, in millions) | (in millions) | Total | Level 1 | Level 2 | Level 3 | | :------------ | :---- | :------ | :------ | :------ | | Fixed maturities | $7,244.7 | $228.3 | $6,997.2 | $19.2 | | Equity securities | $429.8 | $419.7 | $— | $10.1 | | Other investments | $4.3 | $— | $— | $4.3 | | Total investment assets at fair value | $7,678.8 | $648.0 | $6,997.2 | $33.6 | - Level 3 assets, which rely on significant unobservable inputs, totaled **$33.6 million** at June 30, 2022, representing a small fraction of total investment assets at fair value[52](index=52&type=chunk) [Note 5. Income Taxes](index=16&type=section&id=Note%205.%20Income%20Taxes) Income tax expense for the six months ended June 30, 2022, decreased compared to 2021, with effective tax rates remaining consistent. The company is subject to ongoing tax examinations in various jurisdictions Income Tax Expense (in millions) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :----------------------------- | :----------------------------- | | Total income tax expense | $30.1 | $51.6 | - The U.S. federal income tax expense decreased from **$51.6 million** in 2021 to **$30.1 million** in 2022 for the six months ended June 30[59](index=59&type=chunk) - The company and its subsidiaries are subject to U.S. federal and state income tax examinations for years after 2017[60](index=60&type=chunk) [Note 6. Pension Plans](index=16&type=section&id=Note%206.%20Pension%20Plans) Net periodic pension cost for defined benefit plans increased for both the three and six months ended June 30, 2022, primarily due to higher recognized net actuarial losses Net Periodic Pension Cost (Benefit) (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net periodic pension cost (benefit) | $0.8 | $(0.1) | $1.6 | $(0.2) | - Net periodic pension cost shifted from a benefit of **$(0.1) million** in Q2 2021 to a cost of **$0.8 million** in Q2 2022, and from a benefit of **$(0.2) million** in H1 2021 to a cost of **$1.6 million** in H1 2022[61](index=61&type=chunk) [Note 7. Other Comprehensive Income (Loss)](index=17&type=section&id=Note%207.%20Other%20Comprehensive%20Income%20(Loss)) Other comprehensive income (loss) significantly deteriorated for both the three and six months ended June 30, 2022, primarily due to substantial net unrealized losses on available-for-sale investment securities Other Comprehensive Income (Loss), Net of Tax (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net unrealized gains (losses) | $(264.4) | $62.1 | $(644.3) | $(123.4) | | Other comprehensive income (loss) | $(263.3) | $62.8 | $(642.1) | $(122.0) | - Net unrealized gains (losses) on investment securities, net of tax, shifted from a gain of **$62.1 million** in Q2 2021 to a loss of **$(264.4) million** in Q2 2022, and from a loss of **$(123.4) million** in H1 2021 to a loss of **$(644.3) million** in H1 2022[63](index=63&type=chunk) [Note 8. Segment Information](index=18&type=section&id=Note%208.%20Segment%20Information) The company operates through four segments: Core Commercial, Specialty, Personal Lines, and Other. During Q1 2022, the former Commercial Lines segment was disaggregated into Core Commercial and Specialty. Operating income before interest expense and income taxes increased for the six months ended June 30, 2022, driven by Specialty and Core Commercial, while Personal Lines saw a significant decrease - The company disaggregated its former Commercial Lines segment into Core Commercial and Specialty segments in Q1 2022[65](index=65&type=chunk) Operating Income Before Interest Expense and Income Taxes by Segment (in millions) | Segment | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------ | :----------------------------- | :----------------------------- | | Core Commercial | $134.4 | $55.1 | | Specialty | $95.2 | $51.5 | | Personal Lines | $39.1 | $114.0 | | Other | $0.7 | $1.8 | | Total | $269.4 | $222.4 | - Operating income before interest expense and income taxes increased by **$47.0 million** for the six months ended June 30, 2022, primarily driven by Core Commercial and Specialty segments, while Personal Lines operating income decreased significantly[69](index=69&type=chunk) [Note 9. Stock-based Compensation](index=20&type=section&id=Note%209.%20Stock-based%20Compensation) Shareholders approved a new 2022 Long-Term Incentive Plan, replacing the 2014 plan, authorizing 3,380,000 new shares for various stock awards. Stock-based compensation expense increased for both the three and six months ended June 30, 2022 - The Hanover Insurance Group 2022 Long-Term Incentive Plan was approved, authorizing **3,380,000 shares** for new awards[70](index=70&type=chunk) Stock-based Compensation Expense (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock-based compensation expense | $7.4 | $5.4 | $14.1 | $11.0 | - Stock-based compensation expense increased by **$2.0 million (37.0%)** for the three months and **$3.1 million (28.2%)** for the six months ended June 30, 2022, compared to the prior year periods[71](index=71&type=chunk) [Note 10. Earnings Per Share and Shareholders' Equity Transactions](index=21&type=section&id=Note%2010.%20Earnings%20Per%20Share%20and%20Shareholders'%20Equity%20Transactions) Basic and diluted earnings per share decreased significantly for the three and six months ended June 30, 2022. The company repurchased common stock under its $1.3 billion authorization, with approximately $341 million remaining available Earnings Per Common Share | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic Net income per share | $0.64 | $3.58 | $3.58 | $6.12 | | Diluted Net income per share | $0.63 | $3.52 | $3.52 | $6.03 | - The Board of Directors authorized a stock repurchase program of up to **$1.3 billion**, with approximately **$341 million** available at June 30, 2022[78](index=78&type=chunk) - Weighted average shares outstanding for basic EPS were **35.6 million** for both periods in 2022, slightly lower than **35.9 million** (Q2 2021) and **36.2 million** (H1 2021)[77](index=77&type=chunk) [Note 11. Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses](index=22&type=section&id=Note%2011.%20Liabilities%20for%20Outstanding%20Claims,%20Losses%20and%20Loss%20Adjustment%20Expenses) Gross reserve for losses and LAE increased to $6,606.9 million at June 30, 2022. The company experienced net favorable loss and LAE development of $27.2 million for the six months ended June 30, 2022, primarily from Core Commercial and Specialty, partially offset by unfavorable Personal Lines development Gross Reserve for Losses and LAE (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Gross reserve for losses and LAE, end of period | $6,606.9 | $6,447.6 | - Net favorable loss and LAE development was **$27.2 million** for the six months ended June 30, 2022, compared to **$35.8 million** in 2021[82](index=82&type=chunk) - Favorable development in 2022 was primarily due to Core Commercial (**$20.1 million**) and Specialty (**$17.5 million**), partially offset by unfavorable Personal Lines development (**$10.4 million**)[83](index=83&type=chunk) [Note 12. Commitments and Contingencies](index=23&type=section&id=Note%2012.%20Commitments%20and%20Contingencies) The company is involved in various legal proceedings and regulatory examinations in the normal course of business, which are not expected to materially affect its financial position but could impact results of operations for a particular period. It also participates in residual markets for high-risk insureds - The company is a defendant in various legal proceedings and subject to governmental and self-regulatory agency examinations[86](index=86&type=chunk) - The ultimate resolution of legal and regulatory proceedings is not expected to have a material effect on financial position, but could impact results of operations for a specific period[86](index=86&type=chunk) - The company is required to participate in residual markets for high-risk insureds, which are significant to personal and commercial automobile lines[87](index=87&type=chunk) [Note 13. Subsequent Events](index=23&type=section&id=Note%2013.%20Subsequent%20Events) There were no subsequent events requiring adjustment to the financial statements or additional disclosure in the notes - No subsequent events requiring adjustment or additional disclosure occurred[88](index=88&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting a decrease in net income due to investment losses, an increase in operating income driven by lower catastrophe losses, and challenges from inflation and supply chain disruptions affecting claims costs - Net income for the six months ended June 30, 2022, decreased by **$93.8 million** to **$127.4 million**, primarily due to changes in the fair value of equity securities[97](index=97&type=chunk) - Operating income before interest expense and income taxes increased by **$47.0 million** to **$269.4 million** for the six months ended June 30, 2022, driven by lower catastrophe losses and earned premium growth[98](index=98&type=chunk) - The company is experiencing higher claims costs, particularly in automobile and homeowners lines, due to persistent supply chain disruptions and significant inflation[100](index=100&type=chunk) [Introduction](index=25&type=section&id=Introduction) This introduction outlines the purpose of the Management's Discussion and Analysis, emphasizing its role in assisting readers to understand the interim consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and its subsidiaries, prepared in accordance with U.S. GAAP - The Management's Discussion and Analysis aims to help readers understand the interim consolidated results of operations and financial condition[93](index=93&type=chunk) - Consolidated results are prepared in accordance with U.S. GAAP[93](index=93&type=chunk) - The discussion should be read in conjunction with interim consolidated financial statements and the Annual Report on Form 10-K[93](index=93&type=chunk) [Executive Overview](index=25&type=section&id=Executive%20Overview) The company's strategy focuses on profitable growth through independent agency distribution, with increased capabilities in specialty markets. Net income decreased significantly due to investment losses, while operating income increased due to lower catastrophe losses and premium growth, despite higher current accident year losses from inflation and supply chain issues - The company's strategy focuses on generating profitable growth through the independent agency distribution channel, including expansion in underpenetrated geographies and investments in specialty markets[96](index=96&type=chunk) Key Financial Highlights (in millions) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----- | | Net income | $127.4 | $221.2 | $(93.8) | | Operating income before interest expense and income taxes | $269.4 | $222.4 | $47.0 | | Pre-tax catastrophe losses | $122.9 | $210.1 | $(87.2) | | Net favorable development on prior years' loss reserves | $15.2 | $20.8 | $(5.6) | - Higher current accident year losses are primarily due to increased severity in personal automobile lines, driven by inflation and supply chain disruptions[98](index=98&type=chunk) [Description of Operating Segments](index=26&type=section&id=Description%20of%20Operating%20Segments) The company operates through four segments: Core Commercial, Specialty, Personal Lines, and Other. Core Commercial and Specialty were disaggregated from the former Commercial Lines segment in Q1 2022, reflecting how management evaluates performance and allocates resources - Primary business operations are conducted through four operating segments: Core Commercial, Specialty, Personal Lines, and Other[107](index=107&type=chunk) - Core Commercial includes commercial multiple peril, commercial automobile, workers' compensation, and other commercial lines for small and mid-sized businesses[107](index=107&type=chunk) - Specialty includes Professional and Executive Lines, Specialty P&C, Marine, and Surety and Other divisions[107](index=107&type=chunk) [Results of Operations - Consolidated](index=26&type=section&id=Results%20of%20Operations%20-%20Consolidated) Consolidated net income significantly decreased for both the three and six months ended June 30, 2022, primarily due to substantial after-tax net realized and unrealized investment losses, mainly from equity securities. This was partially offset by an increase in operating income before interest expense and income taxes, driven by lower catastrophe losses and earned premium growth Consolidated Net Income (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $22.6 | $128.5 | $127.4 | $221.2 | - The decrease in consolidated net income was primarily due to after-tax net realized and unrealized investment losses of approximately **$60.8 million** (Q2 2022) and **$73.2 million** (H1 2022), mainly from changes in the fair value of equity securities[109](index=109&type=chunk)[110](index=110&type=chunk) - Operating income before interest expense and income taxes increased by **$47.0 million** for the six months ended June 30, 2022, primarily due to lower catastrophe losses and earned premium growth, partially offset by higher current accident year losses in Personal Lines[110](index=110&type=chunk) [Results of Operations - Segments](index=28&type=section&id=Results%20of%20Operations%20-%20Segments) Operating income before interest expense and income taxes increased for the six months ended June 30, 2022, driven by strong performance in Core Commercial and Specialty segments due to earned premium growth and lower catastrophe losses. Personal Lines, however, experienced a significant decrease in underwriting profit due to higher current accident year losses from inflation and increased severity Operating Income Before Interest Expense and Income Taxes by Segment (in millions) | Segment | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change | | :------------------- | :----------------------------- | :----------------------------- | :----- | | Core Commercial | $134.4 | $55.1 | $79.3 | | Specialty | $95.2 | $51.5 | $43.7 | | Personal Lines | $39.1 | $114.0 | $(74.9) | | Other | $0.7 | $1.8 | $(1.1) | | Total | $269.4 | $222.4 | $47.0 | - Core Commercial underwriting profit for the six months ended June 30, 2022, was **$66.5 million**, a favorable change of **$82.7 million** from a **$16.2 million** loss in 2021, primarily due to lower catastrophe losses[146](index=146&type=chunk) - Personal Lines underwriting loss for the six months ended June 30, 2022, was **$7.6 million**, a decrease of **$76.0 million** from a **$68.4 million** profit in 2021, mainly due to higher current accident year loss severity in personal automobile and homeowners lines[152](index=152&type=chunk)[153](index=153&type=chunk) [Investments](index=35&type=section&id=Investments) Net investment income decreased due to lower partnership income and fixed maturity yields. The total cash and investments declined by 8.2% due to market value depreciation. Gross unrealized losses on fixed maturities significantly increased to $596.7 million, primarily from higher interest rates and wider credit spreads, though the company expects recovery and does not intend to sell these assets prematurely Net Investment Income (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net investment income | $70.5 | $75.6 | $147.4 | $152.4 | | Earned yield, total portfolio | 3.19% | 3.65% | 3.35% | 3.70% | - Total cash and investments decreased by **$769.5 million**, or **8.2%**, for the six months ended June 30, 2022, primarily due to net market value depreciation[172](index=172&type=chunk) - Gross unrealized losses on fixed maturities increased by **$548.7 million** to **$596.7 million** at June 30, 2022, primarily due to higher interest rates and wider credit spreads[183](index=183&type=chunk) [Other Items](index=39&type=section&id=Other%20Items) Net realized and unrealized investment results shifted from gains in 2021 to significant losses in 2022, primarily due to changes in equity security fair values. Discontinued operations continued to incur losses, mainly from the long-term care pool Net Realized and Unrealized Investment Gains (Losses) (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net realized and unrealized investment gains (losses) | $(77.9) | $31.1 | $(93.8) | $68.6 | | Discontinued life businesses | $(0.2) | $(1.1) | $(0.7) | $(1.2) | - Net realized and unrealized investment results shifted from gains of **$31.1 million** (Q2 2021) and **$68.6 million** (H1 2021) to losses of **$(77.9) million** (Q2 2022) and **$(93.8) million** (H1 2022), primarily due to changes in equity security fair values[192](index=192&type=chunk)[193](index=193&type=chunk) - Losses from discontinued life businesses primarily reflect adverse loss trends related to the long-term care pool[194](index=194&type=chunk) [Income Taxes](index=42&type=section&id=Income%20Taxes) The provision for income taxes from continuing operations decreased for both the three and six months ended June 30, 2022, compared to 2021, with consolidated effective federal tax rates remaining stable around 19% Income Tax Provision from Continuing Operations (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Provision for income taxes from continuing operations | $5.4 | $30.3 | $30.1 | $51.6 | | Consolidated effective federal tax rates | 19.1% | 18.9% | 19.0% | 18.8% | - The income tax provision on operating income was an expense of **$50.8 million** for the six months ended June 30, 2022, compared to **$40.0 million** in 2021, with effective tax rates of **20.1%** and **19.5%** respectively[199](index=199&type=chunk) [Critical Accounting Estimates](index=43&type=section&id=Critical%20Accounting%20Estimates) The company identifies several critical accounting estimates that involve significant judgment and uncertainty, including reserves for losses and loss expenses, reinsurance recoverable balances, pension benefit obligations, and investment credit losses. These estimates are subject to change based on new information and different assumptions - Critical accounting estimates include reserves for losses and loss expenses, reinsurance recoverable balances, pension benefit obligations, and investment credit losses[201](index=201&type=chunk) - These estimates involve significant judgment and uncertainty, and different assumptions could produce materially different results[201](index=201&type=chunk) [Statutory Surplus of Insurance Subsidiaries](index=43&type=section&id=Statutory%20Surplus%20of%20Insurance%20Subsidiaries) Statutory capital and surplus for insurance subsidiaries decreased by $26.5 million during the first six months of 2022, primarily due to unrealized investment losses and a $100 million dividend payment to the parent company, partially offset by underwriting profits Total Statutory Capital and Surplus (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Total Statutory Capital and Surplus | $2,693.5 | $2,720.0 | - The decrease in statutory capital and surplus was primarily driven by unrealized investment losses and a **$100 million** dividend payment to the parent company[202](index=202&type=chunk) RBC Ratios for The Hanover Insurance Company (June 30, 2022) | Metric | Value | | :----- | :---- | | Company Action Level | $1,201.5 million | | Authorized Control Level | $600.7 million | | RBC Ratio (Industry Scale) | 223% | | RBC Ratio (Regulatory Scale) | 447% | [Liquidity and Capital Resources](index=43&type=section&id=Liquidity%20and%20Capital%20Resources) Net cash provided by operating activities decreased by $100.3 million for the first six months of 2022, while net cash used in investing activities increased. The company maintains sufficient liquidity through holding company assets, investment portfolios, and access to credit facilities, despite market value declines in securities and ongoing stock repurchases - Net cash provided by operating activities decreased to **$208.7 million** in H1 2022 from **$309.0 million** in H1 2021, primarily due to increased loss and LAE payments and higher federal income tax payments[206](index=206&type=chunk) - Net cash used in investing activities increased to **$217.6 million** in H1 2022 from **$160.6 million** in H1 2021, mainly due to net purchases of fixed maturities[207](index=207&type=chunk) - The company has approximately **$341 million** available for additional common stock repurchases under its **$1.3 billion** authorization[213](index=213&type=chunk) [Contingencies and Regulatory Matters](index=45&type=section&id=Contingencies%20and%20Regulatory%20Matters) Regulatory responses to the Pandemic, including premium adjustments and payment grace periods, continue to impact the insurance industry. Proposed legislation seeking retroactive payment for business interruption claims and mandating prospective pandemic coverage could pose significant solvency risks. The company is also monitoring federal proposals for government-funded pandemic insurance programs - Regulators have issued orders or guidance pertaining to premium refunds, payment grace periods, and reassessment of rates in response to the Pandemic[217](index=217&type=chunk) - Draft legislation proposes requiring insurers to retroactively pay unfunded Pandemic business interruption claims, which could create substantial solvency risks for the property and casualty insurance sector[218](index=218&type=chunk) - Proposals for government-funded pandemic insurance programs are being considered at the federal level[219](index=219&type=chunk) [Risks and Forward-Looking Statements](index=45&type=section&id=Risks%20and%20Forward-Looking%20Statements) This section highlights various risks and uncertainties that could cause actual results to differ materially from forward-looking statements, including changes in demand, claims experience, regulatory conditions, market volatility, and economic factors like inflation and potential recession - Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially[235](index=235&type=chunk) - Key risk factors include changes in demand, ability to retain profitable policies, adverse claims experience (including catastrophes), changes in regulation, market volatility, and economic conditions (inflation, recession)[236](index=236&type=chunk) - The company operates in a continually changing and competitive business environment, with new risk factors potentially emerging[235](index=235&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's market risks, management strategies, and sensitivity to interest rate and equity price risk remain consistent with those disclosed in its 2021 Annual Report on Form 10-K, with no material changes identified in the first six months of 2022 - No material changes occurred in market risks or their management during the first six months of 2022[225](index=225&type=chunk) - Market risks, management strategies, and sensitivity to interest rates and equity price risk are summarized in the 2021 Annual Report on Form 10-K[225](index=225&type=chunk) [Item 4. Controls and Procedures](index=46&type=section&id=Item%204.%20Controls%20and%20Procedures) The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2022, providing reasonable assurance that required information is recorded, processed, and reported timely. No material changes to internal control over financial reporting were identified during the quarter - Disclosure controls and procedures were effective as of June 30, 2022, providing reasonable assurance of timely and accurate information disclosure[229](index=229&type=chunk) - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2022[230](index=230&type=chunk) - Control systems provide reasonable, not absolute, assurance and can be subject to inherent limitations like error, collusion, or management override[228](index=228&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=47&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings and regulatory actions arising in the normal course of business. While the ultimate liability is difficult to predict, these are not expected to materially affect the company's financial position, though they could impact results of operations for a specific period - The company is a defendant in various legal proceedings and subject to governmental and self-regulatory agency examinations[233](index=233&type=chunk) - The ultimate resolution of such proceedings is not expected to have a material effect on the company's financial position[233](index=233&type=chunk) - Legal proceedings could have a material effect on the results of operations for a particular quarterly or annual period[233](index=233&type=chunk) [Item 1A. Risk Factors](index=47&type=section&id=Item%201A.%20Risk%20Factors) This section reiterates that the document contains forward-looking statements subject to various risks and uncertainties, including changes in demand, claims experience, regulatory conditions, market volatility, and economic factors. These factors could cause actual results to differ materially from projections, and new risks may emerge - All statements, other than statements of historical facts, may be forward-looking statements, subject to risks and uncertainties[235](index=235&type=chunk) - Key risk factors include changes in demand for products, ability to retain profitable policies, adverse claims experience (including catastrophes), changes in regulation, market volatility, and economic conditions (inflation, recession)[236](index=236&type=chunk) - The company operates in a continually changing and competitive business environment, and new risk factors may emerge over time[235](index=235&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 33,657 shares of its common stock during the second quarter of 2022 at an average price of $150.36 per share, as part of its publicly announced repurchase program. Approximately $341 million remained available under this program as of June 30, 2022 Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----- | :------------------------------- | :--------------------------- | | April 1 - 30, 2022 | 20,465 | $151.60 | | May 1 - 31, 2022 | 13,078 | $148.44 | | June 1 - 30, 2022 | 114 | $145.64 | | Total | 33,657 | $150.36 | - Approximately **$341 million** remained available for repurchases under the publicly announced program as of June 30, 2022[241](index=241&type=chunk) [Item 6. Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including various stock option and restricted stock unit agreements under the 2022 Long-Term Incentive Plan, certifications from the CEO and CFO, and financial statements formatted in iXBRL - Exhibits include forms of Non-Qualified Stock Option Agreement and Restricted Stock Unit Agreements under The Hanover Insurance Group 2022 Long-Term Incentive Plan[245](index=245&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer are included pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[245](index=245&type=chunk) - Financial statements for the quarter ended June 30, 2022, are provided in Inline eXtensible Business Reporting Language (iXBRL) format[245](index=245&type=chunk) SIGNATURES