July 28, 2016 To be read in conjunction with the press release dated - - PowerPoint PPT Presentation

The Hanover Insurance Group, Inc.

Second Quarter 2016 Results

July 28, 2016 To be read in conjunction with the press release dated July 28, 2016 and conference call scheduled for July 29, 2016

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Forward-Looking Statements and Non-GAAP Financial Measures

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Forward-looking statements: Certain statements in this release or in the above-referenced conference call may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Use of the words "believes," "anticipates," "expects," “projections,” “forecast”, “outlook,” “should,” “could,” “confident,” “plan,” “guidance,” “on track to” and similar expressions is intended to identify forward-looking statements. In particular, statements in this presentation or in such conference call regarding our ability to achieve financial goals and generate strong earnings; profitable growth and target returns; long-term success; continued momentum; ability to succeed; future profitability prospects for margin expansion, growth, shareholder value creation; ability to leverage agency distribution network, business consolation, to generate growth; pricing ahead of long-term loss trends in commercial multi-peril liability; future trends of commercial multi-peril liability claims; use of underwriting and claims management to manage impact of commercial lines development on results; ability to leverage pricing, business mix, expense ratio improvement and reserving actions to drive commercial underwriting improvement; Commercial Lines account size and agency strategy to help manage competitive rate pressure; ability to achieve scale, expense leverage, and expand capabilities in Specialty; ability to return commercial auto line to acceptable profitability; Specialty business as a source of profitable growth; confidence in Personal Lines underwriting and pricing to generate margin accretion; Personal Lines expense ratio; success of technology investments in Personal Lines; state expansion, including success and timing of Personal Lines’ entry into Pennsylvania; ability to penetrate near-affluent market; potential impact of macroeconomic trends on auto frequency; pricing and retention trends (including whether pricing will exceed loss costs); impact of bodily injury and collision severity trends on auto rates; cost leverage for growth; the potential impact of capital actions and business investments; balance sheet position; future margin improvement; implications of Brexit and the effects and volatility of pound sterling on earnings; and the balance sheet impact of commodity prices on future earnings; success of the application to create non-Lloyd’s platform in Dublin; the ability to manage the cyclical nature of Chaucer’s business, challenging market conditions, and long-term financial targets; maintain long-term profitability and leverage underwriting intellectual property, reinsurance relationships, and international reach to uphold relevancy and leadership position at Chaucer; ability to create growth opportunities via new platforms and penetrating U.S. non-admitted markets; success of Chaucer’s business initiatives to offset topline headwinds; impact of foreign exchange movements on earnings; ability to continue earnings growth and improvement through 2016; increased income from expected “higher yielding assets;” impact of low new money yields and low interest rates on earnings; changes to investment approach, including participation in tax- exempt space; ability of energy investment holdings to manage through the cycle; transition and timing of new CFO; financial results and earnings guidance for the full year 2016, 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 July 28, 2016 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 June 30, 2016. 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 July 28, 2016 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 2015 Annual Report on pages 78-80.

We reported net income of $0.05 per diluted share and

• perating income(1) of $1.24 per diluted share
• Combined ratio of 97.3%, including 4.5 points of catastrophe losses
• Chaucer segment results impacted by catastrophe and large losses, as well as movement in foreign

exchange rates

• Net premiums written(2) of $1.2 billion; down 5.6%, driven by the sale of the Chaucer U.K. motor business

in June 2015; U.S. net premiums written grew 2.9%

• Continued price increases in Commercial and Personal Lines
• Net investment income of $69.1 million
• Repurchased approximately 230,000 shares of common stock for $19.1 million, at an average price of

$83.19 per share

• Issued $375.0 million of Senior Unsecured Notes due in 2026 with a coupon of 4.50% and repurchased
• utstanding 7.50% notes due March 1, 2020 and 6.375% notes due June 15, 2021 with a combined

carrying value of $375.2 million

• Book value per share of $70.58, up 1.8% from March 31, 2016, and up 6.6% from December 31, 2015;

book value per share excluding net unrealized gains on investments of $62.99, down 0.8% and up 0.4%, respectively

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Second Quarter 2016 Highlights

(1) Non-GAAP measure. See page 2. These measures are used throughout this presentation. (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.

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Consolidated Financial Results Snapshot

June 30, September 30, December 31, March 31, June 30, June 30, ($ in millions, except per share amounts) 2015 2015 2015 2016 2016 2015 2016 Operating Income after taxes per share

$1.56 $1.61 $1.82 $1.64 $1.24 $2.83 $2.89

Net Income per share

$2.68 $1.74 $1.76 $1.80 $0.05 $3.90 $1.84

Book value per share

$66.28 $66.55 $66.21 $69.30 $70.58 $66.28 $70.58

Shareholders' equity

$2,909 $2,878 $2,844 $2,957 $3,010 $2,909 $3,010

Debt

$825 $803 $803 $803 $798 $825 $798

Total capital

$3,734 $3,681 $3,647 $3,760 $3,808 $3,734 $3,808

Debt/total capital

22.1% 21.8% 22.0% 21.4% 21.0% 22.1% 21.0%

Total assets

$14,135 $14,031 $13,781 $14,028 $14,164 $14,135 $14,164

Average equity, excluding net unrealized appreciation (depreciation) on investments, net of tax(3)

$2,624 $2,678 $2,687 $2,703 $2,698 $2,609 $2,690

Operating income after tax

$70 $72 $80 $72 $54 $128 $125

Operating return on equity

10.7% 10.8% 12.0% 10.6% 8.0% 9.8% 9.3%

Three Months Ended

(3) Non-GAAP measure. Shareholder’s equity as of June 30, 2016 of $3,010 million, as reported above, is the closest GAAP measure.

Six Months Ended

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Consolidated Underwriting Performance

Three Months Ended June 30 Six Months Ended June 30 ($ in millions) 2015 2016 2015 2016 Premiums: Net Written

$1,293 $1,222 $2,509 $2,366

Change

1.3%

• 5.6%

2.5%

• 5.7%

Net Earned

$1,206 $1,146 $2,417 $2,297

Change

2.6%

• 5.0%

3.4%

• 5.0%

Loss and LAE ratio: Current accident year, ex-cat

60.3% 57.9% 60.5% 58.5%

Prior year (favorable) unfavorable reserve development, ex-cat

(2.4)% 1.3% (2.2)% 0.2%

Catastrophe losses

3.9% 4.5% 4.5% 3.6%

Loss and LAE ratio

61.8% 63.7% 62.8% 62.3%

Expense ratio

33.9% 33.6% 33.6% 33.9%

Combined ratio

95.7% 97.3% 96.4% 96.2%

Combined ratio, ex-cat(4)

91.8% 92.8% 91.9% 92.6%

Accident year combined ratio, ex-cat(4)

94.2% 91.5% 94.1% 92.4%

Underwriting income

$48.3 $27.3 $80.7 $81.4

Catastrophe losses

46.5 51.0 108.8 82.2

Ex-cat, underwriting income

$94.8 $78.3 $189.5 $163.6

(4) Combined ratio, excluding catastrophes, is a non-GAAP measure. This measure and measures excluding prior-year reserve development (“accident-year” ratios) are used throughout this

• document. The combined ratio (which includes catastrophe losses and prior-year loss reserve development) is the closest GAAP measure. See the disclosure on the use of non-GAAP measures

under the heading “Forward-Looking Statements and Non-GAAP Financial Measures.”

94.8% 94.1% 95.8% 100.8% 95.9% 94.4% 90% 92% 94% 96% 98% 100% 102% Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Commercial Lines Second Quarter 2016 Underwriting Highlights

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Calendar Year CR, Ex-Cat

• All-in combined ratio increased from 98.3% to 98.9%

driven by unfavorable development in certain areas within commercial liability coverages, partially offset by improved accident year loss ratios, principally in property coverages

• Higher unfavorable loss development principally driven by:
• CMP liability, AIX, and commercial auto
• Partially offset by favorable development in workers'

compensation

• Accident year loss ratio improved in all lines, primarily

driven by favorable property experience in CMP and Other commercial lines

Accident Year Loss Ratio, Ex-Cat(5) FY 2015 96.4%

(5) Loss ratio, excluding catastrophes, is a non-GAAP measure. This measure and measures excluding prior-year reserve development (“accident-year” ratios) are used throughout this document. The loss ratio (which includes catastrophe losses and prior-year loss reserve development) is the closest GAAP measure. See the disclosure on the use of non-GAAP measures under the heading “Forward-Looking Statements and Non-GAAP Financial Measures.”

50.5% 70.5% 69.4% 54.0% 46.9% 69.1% 68.6% 51.9% 0% 10% 20% 30% 40% 50% 60% 70% 80%

CMP Auto WC Other Q2 2015 Q2 2016

YTD 2016 95.1%

36.1% 35.8% 37.4% 36.2% 36.1% 56.9% 57.9% 58.7% 56.2% 54.5% 0% 20% 40% 60% 80% 100%

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Accident Year Combined Ratio (CR), Ex-Cat

93.0% 96.1% 92.4% 93.7% 90.6%

Expense Ratio Loss Ratio

$569 $618 $513 $604 $580 $0 $100 $200 $300 $400 $500 $600 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Pricing

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Commercial Lines Second Quarter 2016 Growth Highlights

Retention Pricing

($ in millions)

• Net premiums written growth of 2% driven by

solid pricing and retention

• Top-line growth was somewhat offset by a

slowdown in new business and lower premiums at AIX

• Focused on balancing price and retention,

and continue to leverage strong distribution partnerships and business consolidation expertise to generate profitable growth going forward

Net Premiums Written

Retention

Core Commercial Lines

83.2% 84.1% 82.1% 82.7% 83.5% 5.5% 5.4% 5.2% 4.3% 4.1% 0.0% 2.0% 4.0% 6.0% 8.0% 60% 65% 70% 75% 80% 85% Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

FY 2015 88.9%

91.2% 89.8% 88.6% 86.2% 88.1% 88.2% 82% 84% 86% 88% 90% 92% 94% Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Personal Lines Second Quarter 2016 Underwriting Highlights

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Accident Year Loss Ratio, Ex-Cat

• All-in combined ratio decreased from 95.7% to

91.3% driven by lower than usual catastrophe and non-catastrophe weather losses in the homeowner’s line

• The decrease in the expense ratio was driven by

a one-time tax adjustment

Calendar Year CR, Ex-Cat

52.2% 69.4% 36.7% 46.1% 69.7% 42.2% 0% 10% 20% 30% 40% 50% 60% 70% 80% Home Auto Other Q2 2015 Q2 2016

YTD 2016 88.1%

27.9% 28.1% 29.1% 28.1% 27.3% 62.4% 61.2% 60.8% 60.2% 60.7% 0% 20% 40% 60% 80% 100% Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Accident Year CR, Ex-Cat

89.9% Expense Ratio Loss Ratio 89.3% 90.3% 88.3% 88.0%

*Retention is defined as ratio of net retained policies for noted period to those policies available to renew over the same period. $378 $383 $358 $337 $395 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

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Retention

• Net premiums written growth of 4.5% driven by

consistent rate increases, improved retention and new business momentum

• Account business represents 81% of total

policies in force and 88% of new business writings

• Focused on profitable growth by leveraging

headroom within existing agency plant, and by targeting account business

Applied Rate PIF Retention Applied Rate

Personal Lines Second Quarter 2016 Growth Highlights

($ in millions)

Net Premiums Written

82.5% 81.8% 82.0% 83.1% 83.5% 5% 5% 5% 5% 5% 0.0% 2.0% 4.0% 6.0% 8.0% 60% 65% 70% 75% 80% 85% Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

• All-in combined ratio of 103.2% up from 90.6% driven by

higher than usual catastrophe, large loss activity, as well as the impact from foreign exchange movements

• Catastrophe losses, including the Alberta wildfires and

Ecuador and Japan earthquakes, contributed 6.7 points to the combined ratio

• Favorable development moderated by impact of foreign

exchange movements

• Adjusting for U.K. motor, current accident year loss ratio,

excluding catastrophes, deteriorated 2.3 points, driven primarily by large loss events including Jubilee Oil, Brussels Airport terrorist attack, as well as trade credit

60.6% 53.4% 54.9% 64.1% 62.9% 1.1% 5.1% 6.7% (12.8)% (13.9)% (14.3)% (13.4)% (4.0)% 39.1% 42.6% 41.6% 38.9% 37.6% 88.0% 87.2% 82.0% 89.8% 103.2% Expenses DEV CAT LR Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

CR, Ex-U.K. motor

100.5% 99.7% 96.0%

Accident Year CR, Ex-Cat, Ex- U.K. motor

96.5%

Chaucer Second Quarter 2016 Underwriting Highlights

Pro Forma Results, excluding U.K. motor business

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103.0%

Expense Ratio Loss Ratio

($ in millions) Q2 2015 Q2 2016 Net premiums written $269.3 $246.4 Net premiums earned $226.9 $206.1 CAY Loss and LAE ratio 60.6% 62.9% PY favorable reserve development (12.8)% (4.0)% Catastrophe losses 1.1% 6.7% Loss ratio 48.9% 65.6% Expense ratio 39.1% 37.6% Combined ratio 88.0% 103.2%

39.1% 42.6% 41.6% 38.9% 37.6% 60.6% 53.4% 54.9% 64.1% 62.9% 0% 20% 40% 60% 80% 100% Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Net Premiums Written

$269 $199 $175 $203 $246 $77 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

U.K. motor Ex-U.K. motor

$346(6)

Chaucer Second Quarter 2016 Growth Highlights

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($ in millions)

• Excluding the impact of U.K. motor, net premiums

written declined 8.5% over the prior-year quarter, primarily driven by increased use of reinsurance

• Gross premiums written remained relatively flat

from the second quarter 2015, as premium reductions in response to market conditions were

• ffset by new business initiatives, including the

partnership with AXA

(6) Net premiums written 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.

$269 $246

• 7.8%
• 1.8%
• 1.6%

1.5% 1.2%

($ in millions)

Drivers of Net Premiums Written Ex- U.K. motor

2015 Q2 Increased Energy Casualty & Other Marine & Aviation Property 2016 Q2 Net Premiums Reinsurance Use Net Premiums Written Written

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Foreign Exchange Impact on Chaucer Segment Income

• During the three and six months ended June 30, 2016, the GBP weakened meaningfully

against most currencies, due to the uncertainty surrounding Brexit. Effect of Chaucer’s foreign exchange gains and losses on it’s U.S. dollar based financial results is as follows:

$ in millions Favorable / (Unfavorable) Q2 2016 YTD 2016 Income Statement Effect of revaluing loss and LAE reserves $(15.1) $(33.2) Effect of revaluing overseas deposits and cash 3.9 9.7 Effect of revaluing premium receivables 2.2 2.8 Total FX effect on segment income $(9.0) $(20.7) FX losses reflected in realized losses (0.2) (0.7) Total FX effect on pre-tax income $(9.2) $(21.4) Unrealized FX gains from investment securities 2.8 7.5 Tax benefit 2.2 4.9 Total effect of transactional FX gains (losses) on comprehensive income $(4.2) $(9.0)

$7.8B $8.0B $8.1B $8.2B $8.0B $7.9B $8.0B $8.0B $8.1B 3.42% 3.39% 3.39% 3.41% 3.48% 3.45% 3.47% 3.40% 3.39% $67.0M $67.5M $68.8M $70.1M $70.7M $68.3M $70.0M $68.3M $69.1M 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%

Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Average Invested Assets Total Earned Yield Net Investment Income

$3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Fixed Maturities Equities & Other Cash & Cash Equivalents $63.6 $62.5 $63.0 $61.1 $61.3 $7.1 $5.8 $7.0 $7.2 $7.8 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Fixed Maturities Equities and Other Investments

Net Investment Income*

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Net Investment Income Trends

$8,356 $8,292 $8,541

($ in millions)

Investment Portfolio Trends Cash and Invested Assets

$68.3 $69.1 *Net Investment Income from fixed maturities is presented net of investment expenses.

• Net investment income was down $1.6 million

compared to the prior-year quarter, due to the sale of the U.K. motor business and its associated investment assets, and to a lesser extent, lower prevailing interest rates

$8,294

($ in millions)

84% 84% 85% 82% 5% 4% 12% 7% 11% 10% 12% 4% $70.7 $68.3 $70.0 11% 5% $8,417 84%

28% 26% 2% 25% 9% 9% 1% Equities Commercial Mortgage and Other Loans Overseas Deposits Partnerships Other

Exchange Traded Funds (ETF)

35% 14% 6% 2% 7% 5% 3% 15% 13%

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Investment Portfolio Holdings Breakdown as of June 30, 2016

• 94% of fixed income securities are investment grade
• Weighted average quality A+
• Duration: 4.0 years

Fixed Income Characteristics: Equities & Other $1.0 Billion

Corporates Municipals (Tax-exempt) RMBS/ABS U.S. Gov’t/Agencies Municipals (Taxable) CMBS Foreign Gov’t

Fixed Income $7.1 Billion

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