The Hanover Insurance Group, Inc.
Third Quarter 2015 Results
October 28, 2015
To be read in conjunction with the press release dated
October 28, 2015 and conference call scheduled for October 29, 2015
1
Forward-Looking Statements and
Non-GAAP Financial Measures
2
Forward-Looking Statements: Certain statements in this presentation, including responses to questions, contain or may contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Use of the words “believes,” “anticipates,” “expects,” “projections,” “forecasts,” “outlook,” “should,” “plan,” “confident,” “guidance,” “on track or target to,” “promise,” “line of sight,” “will,” “on the right path to” and similar expressions are intended to identify forward-looking statements. In particular, this presentation and related earnings call include or may include forward-looking statements with respect to the ability to achieve financial goals and generate strong earnings, profitable growth and target returns, deliver value to shareholders, long-term success, continued momentum, ability to succeed, future profitability, ability to leverage commercial lines account size and agency strategy to hold rates, commercial lines expense ratio improvement, Specialty business development opportunities, success of strategic initiatives and planned state expansion in Personal Lines, ability to gain market share, potential impact of macroeconomic trends on auto frequency, pricing and retention trends (including whether pricing will exceed loss costs); the potential impact of capital actions and business investments; future margin improvement; the ability to manage the challenging market conditions related to Chaucer’s business; strategic direction; ability to continue earnings growth and improvement through 2016, increased income from “higher yielding assets,” ability to deliver on promises through agency distribution, product offerings, leadership and employees; transition of new CEO and CFO, financial results and earnings guidance for the full year 2015, are all forward-looking statements.
The company cautions investors that neither historical results and trends nor forward-looking statements are guarantees of or necessarily indicate future performance, and actual results could differ materially. Investors are directed to consider the risks and uncertainties in our business that may affect future performance and that are discussed in readily available documents, including the company’s earnings press release dated October 28, 2015 and the Annual Report, Form 10-Q and other documents filed by The Hanover with the Securities and Exchange Commission, which are available at www.hanover.com under “Investors.” We assume no obligation to update this presentation, which, unless otherwise noted, as of September 30, 2015.
These uncertainties include the uncertain U.S. and global economic environment, the possibility of adverse catastrophe experience (including terrorism) and severe weather, the uncertainties in estimating catastrophe and non-catastrophe weather-related losses, the uncertainties in estimating property and casualty losses, accident year picks, and incurred but not reported loss and LAE reserves, the ability to increase or maintain certain property and casualty insurance rates in excess of loss trends, the impact of new product introductions, adverse loss and LAE development for prior years, changes in frequency and loss trends, the ability to improve renewal rates and increase new property and casualty policy counts, adverse selection in underwriting activities, investment impairments and returns, the impact of competition (including rate pressure), adverse and evolving state, federal and, with respect to Chaucer, international, legislation or regulation, adverse regulatory or litigation actions, financial ratings actions, and those risks inherent in Chaucer’s business.
Non-GAAP Measures: The discussion in this presentation of The Hanover’s financial performance includes reference to certain financial measures that are not derived from generally accepted accounting principles, or GAAP, such as operating income, operating income before taxes, combined ratios and loss ratios, excluding catastrophes and/or development and accident year loss ratios, excluding catastrophes and book value per share excluding net unrealized gains and losses. A reconciliation of non-GAAP measures to the closest GAAP measure is included in either the press release dated October 28, 2015 or financial supplement, which are posted on our website. The reconciliation of accident year loss ratio and combined ratio excluding catastrophes to the nearest GAAP measure, total loss ratio and combined ratio, is found on pages 7, 10, 13 and 16 of the financial supplement. Operating income (operating income per diluted share) is a non-GAAP measure. It is defined as net income excluding the after-tax impact of net realized investment gains (losses), as well as results from discontinued operations divided by, in the case of per share reported figures, the average number of diluted shares of common stock. Book value per share, excluding net unrealized gains and losses, is calculated as total shareholders’ equity excluding the after-tax effect of unrealized investment gains and losses, divided by the number of common shares outstanding. The definition of other financial measures and terms can be found in the 2014 Annual Report on pages 78-80.
Financial Priorities
3
• Growth in domestic businesses through increased rate and improved retention
• Prudently managing through the cycle at Chaucer
• Agency and broker penetration
• Continued investment in product development
• Business mix improvement
• Rate above loss cost trends
• Expense leverage through growth and operating efficiencies
• Improved underwriting performance
• Efficiency from growth and scale
• Growth in net investment income
• Effective capital management
We have a strong market position and multiple earnings improvement levers to drive top quartile returns
Target
ROE
• Geographic diversification
• Macro level
• Micro level
• Balanced portfolio
• Property/casualty
• Diversified mix
Targeted
Growth
Earnings
Stability
Margin
Expansion
We reported third quarter net income of $1.74 per diluted share; operating earnings per diluted
share(1) of $1.61, up 51.9% from the prior-year quarter, translating into an operating ROE of 10.8%.
• Combined ratio of 94.9%; combined ratio excluding catastrophes(1) of 90.9%
• Net premiums written of $1.2 billion; excluding the effect of exiting the U.K. motor business, net premiums
written were up 2.8%, led by growth in Commercial Lines of 7.1%
• Continued price increases in Commercial and Personal Lines
• Net investment income of $68.3 million, up 1.2% from the prior-year quarter
• Book value per share of $66.55, up 0.4% from June 30, 2015, and up 2.6% from December 31, 2014
• Repurchased approximately 783,000 shares of common stock for $61.8 million during the third quarter
• The company’s board of directors authorized a $300 million increase to its existing common stock
repurchase program
4
Third Quarter 2015 Highlights
(1) Non-GAAP measure. See page 2. These measures are used throughout this presentation.
5
Strong Consolidated Financial Results
September 30, December 31, March 31, June 30, September 30, September 30,
($ in millions, except per share amounts) 2014 2014 2015 2015 2015 2014 2015
Operating Income after taxes per
share $1.06 $1.77 $1.27 $1.56 $1.61 $3.41 $4.43
Net Income per share $1.22 $2.00 $1.22 $2.68 $1.74 $4.28 $5.64
Book value per share $63.37 $64.85 $65.92 $66.28 $66.55 $63.37 $66.55
Shareholders' equity $2,772 $2,844 $2,900 $2,909 $2,878 $2,772 $2,878
Debt $903 $904 $841 $835 $812 $903 $812
Total capital $3,675 $3,748 $3,741 $3,744 $3,690 $3,675 $3,690
Debt/total capital 24.6% 24.1% 22.5% 22.3% 22.0% 24.6% 22.0%
Total assets $13,960 $13,760 $13,926 $14,145 14,041 $13,960 $14,041 Average equity, excluding net
unrealized appreciation (depreciation)
on investments and derivatives, net of
tax $2,465 $2,511 $2,558 $2,624 $2,678 $2,407 $2,611
Operating income after tax $48 $80 $57 $70 $72 $153 $200
Operating return on equity 7.7% 12.7% 8.9% 10.7% 10.8% 8.5% 10.2%
Three Months Ended Nine Months Ended
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Improved Underwriting Performance
Three Months Ended
September 30
Nine Months Ended
September 30
($ in millions) 2014 2015 2014 2015
Premiums:
Net Written $1,244.8 $1,199.6 $3,693.3 $3,708.1(2)
Change 5.3% (3.6)% 5.5% 0.4%
Net Earned $1,184.0 $1,150.1 $3,521.7 $3,566.9
Change 5.3% (2.9)% 6.4% 1.3%
Loss and LAE ratio:
Current accident year,
ex-cat 58.2% 58.0% 59.6% 59.7%
Prior year favorable reserve development (1.8%) (1.9)% (2.0%) (2.1)%
Catastrophe losses 7.4% 4.0% 5.7% 4.3%
Loss and LAE ratio 63.8% 60.1% 63.3% 61.9%
Expense ratio 34.4% 34.8% 34.4% 34.0%
Combined ratio 98.2% 94.9% 97.7% 95.9%
Combined ratio, ex-cat 90.8% 90.9% 92.0% 91.6%
Accident year combined ratio, ex-cat 92.6% 92.8% 94.0% 93.7%
Underwriting income $18.0 $54.9 $69.1 $135.6
Catastrophe losses 88.1 45.8 201.7 154.6
Ex-cat, underwriting income $106.1 $100.7 $270.8 $290.2
(2) Net premiums written do not reflect the June 30, 2015 transfer of $137.4 million of unearned premium reserves previously written by the U.K. motor business. This transfer of unearned
premium reserves is part of the disposition of the U.K. motor business and has no impact on net premiums earned.
$577
$499
$582 $569
$618
$200
$300
$400
$500
$600
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
Core Commercial Pricing 7
Commercial Lines Financial Highlights
Retention Pricing
($ in millions)
Expense Ratio Loss Ratio
94.6% 96.8%
Accident Year Combined Ratio, Ex-Cat
• Strong net premiums written growth of 7.1% compared to prior-
year quarter, driven by growth in all segments.
• Core Commercial pricing held at 5.4% for the quarter, while
retention was strong at 84.1%.
• New business remained on an upward trajectory as we
continued to capitalize on opportunities within this business
segment.
• Accident year combined ratio, excluding catastrophes,
improved by approximately one point compared to prior-year
quarter, driven by expense ratio improvement of 1.3 points due
to growth leverage as well as favorable timing in recognizing
certain expenses.
Net Premiums Written
94.6%
Retention
93.0% 93.7% 83.5% 82.0%
83.6% 83.2%
7% 7% 6.6%
5.5% 5.4%
0%
2%
4%
6%
8%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
84.1%
37.1% 37.9% 36.2% 36.1% 35.8%
57.5% 58.9% 58.4% 56.9% 57.9%
0%
20%
40%
60%
80%
100%
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
Commercial Lines
Profitability Continues to Improve
8
Calendar Year Combined Ratio (CR), Ex-Cat
• Accident year loss ratio improved in most lines, driven by
continued efforts in both rate and business mix
management.
• Other Commercial Lines loss ratio increased
approximately 2 points compared to prior-year quarter,
due to some property volatility, in otherwise profitable
lines of business.
• Combined ratio, excluding catastrophes, increased one
point compared to the prior-year quarter, driven by
unfavorable loss development in commercial auto and
CMP lines.
Accident Year Loss Ratio, Ex-Cat
FY 2013 CR 98.4%
FY 2014 CR 96.0%
52.5%
68.8% 71.6%
53.6% 52.3%
69.2% 68.2%
55.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
CMP Auto WC Other
Q3 2014 Q3 2015
98.9% 98.7% 97.5%
98.6%
96.2% 95.1% 94.8%
97.9%
94.8% 94.1%
95.8%
91%
92%
93%
94%
95%
96%
97%
98%
99%
100%
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
27.9% 28.3% 27.7% 27.9% 28.1%
60.5% 60.5% 64.1% 62.4% 61.2%
0%
20%
40%
60%
80%
100%
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
9
Retention
Accident Year Combined Ratio, Ex-Cat
• Net premiums written grew 1.1%, compared to prior-year quarter.
• Rates held at 5% in both home and auto. Retention improved by
approximately one point, compared to prior-year quarter. Continued
to leverage our Platinum product and agency engagement programs
to further penetrate the market in the bundled account sector.
• Account business represents 80% of policies in force, helping to
drive a strong business mix.
• Accident year combined ratio, excluding catastrophes, increased
slightly compared to the prior year, due to some isolated large loss
activity in homeowners.
Applied Rate
PIF Retention Applied Rate
Personal Lines
Financial Highlights
91.8% 89.3% 88.4% 88.8%
Expense Ratio Loss Ratio
90.3%
*Retention is defined as ratio of net retained policies for noted period
to those policies available to renew over the same period.
($ in millions) Net Premiums Written
$379
$354
$326
$378 $383
$200
$250
$300
$350
$400
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
81.0% 81.8% 82.6% 82.5% 81.8%
6% 5% 5% 5%
5%
0%
2%
4%
6%
8%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
Personal Lines
Profitability Continues to Improve
10
Accident Year Loss Ratio, Ex-Cat
• Accident year loss ratios were slightly elevated compared
to the prior year quarter, driven by large losses in
homeowner’s line in the month of July.
• Combined ratio, excluding catastrophes, continued to
show year-to-date improvement. The first nine months of
2015 demonstrated an approximate one point
improvement compared to the same period last year, in
line with expectations.
Calendar Year Combined Ratio (CR), Ex-Cat
FY 2013 CR 92.1%
FY 2014 CR 90.1%
46.7%
69.2%
40.0%
48.4%
69.6%
31.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Home Auto Other
Q3 2014 Q3 2015
93.3%
90.5% 91.5%
92.9% 93.4%
90.5%
88.2% 88.5%
91.2% 89.8%
88.6%
85%
86%
87%
88%
89%
90%
91%
92%
93%
94%
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
37.0% 40.4% 34.1% 37.1% 42.6%
56.9% 58.0%
61.4% 64.0% 53.4%
0%
20%
40%
60%
80%
100%
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
• Net premiums written were down 4%, excluding the
impact of foreign exchange translations and the
transfer of the U.K. motor business.
• Strong underwriting performance with a combined
ratio of 87%, despite continued competition in many
lines of business.
• The exit from the U.K. motor business resulted in the
increase in expense ratio and decrease in the loss
ratio. Ex- U.K. motor, loss ratio increased compared to
the third quarter 2015, due to higher loss experience
in Energy.
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Chaucer Financial Highlights
($ in millions) Net Premiums Written
98.4% 95.5% 101.1%
96.0% 93.9%
Accident Year Combined Ratio, Ex-Cat
Expense Ratio Loss Ratio
$289 $264
$307
$346
$199
$100
$150
$200
$250
$300
$350
$400
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
(2)
$60.7 $61.5 $62.0 $61.2 $60.1
$6.8 $7.3 $8.1 $9.5 $8.2
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
Fixed Maturities Equities and Other Investments
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
Fixed Income Equities & Other Cash & Cash Equivalents
85%
9%
6%
Net Investment Income*
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Net Investment Income Trends
$8,356 $8,533 $8,624 $8,616
($ in millions)
Investment Portfolio Trends Cash and Invested Assets
$70.7 $68.3 $67.5 $68.8 $70.1
*Net Investment Income from fixed maturities is presented net of investment expenses
• Net investment income was $68.3 million, an increase of $0.8
million, or 1.2% compared to the prior-year quarter.
• Net investment income growth was achieved despite
transferring $385 million of the portfolio as a part of the U.K.
motor exit in the second quarter 2015.
• The gradual shift in the investment portfolio towards higher
yielding asset classes such as limited partnerships and
commercial mortgage loan participations, helped to offset
continuing fixed income yield pressures.
5%
$8,294
($ in millions)
4%
10%
86%
5%
10%
85%
7%
11%
82%
10%
85%
$7.3B
$7.6B $7.7B $7.8B
$8.0B $8.1B $8.2B
$8.0B $7.9B
3.61% 3.59% 3.47% 3.42% 3.39% 3.39% 3.41% 3.48% 3.45%
$65.7M $68.1M $67.0M $67.0M $67.5M $68.8M
$70.1M $70.7M $68.3M
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Average Invested Assets Earned Yield Net Investment Income
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Portfolio Holdings Breakdown
as of September 30, 2015
• 94% of fixed income securities are investment grade
• Weighted average quality A+
• Duration: 4.2 years
Fixed Income Characteristics:
Equities & Other $885.6 Million
Corporates
Municipals (Tax-exempt)
RMBS/ABS
U.S. Gov’t/Agencies
Municipals (Taxable)
CMBS
Foreign Gov’t
Fixed Income $7.1 Billion
34%
14%
5%
2% 8%
6%
4%
14%
13%
26%
34%
2%
18%
11%
8%
1%
Equities Commercial Mortgageand Other Loans
Overseas Deposits
Partnerships Other
Exchange Traded
Fund (ETF)
High Dividend
Yield Equities
Other Equities
Industrials
Financials
Utilities
The Hanover Insurance Group, Inc., based in Worcester, Mass., is the holding company for several
property and casualty insurance companies, which together constitute one of the largest insurance
businesses in the United States. For more than 160 years, The Hanover has provided a wide range of
property and casualty products and services to businesses, individuals, and families. The Hanover
distributes its products through a select group of independent agents and brokers. Together with its
agents, the company offers specialized coverages for small and mid-sized businesses, as well as
insurance protection for homes, automobiles, and other personal items. Through its international member
company, Chaucer, The Hanover also underwrites business at Lloyd's of London in several major
insurance and reinsurance classes, including marine, casualty, property and energy. For more information,
please visit hanover.com
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About The Hanover