10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

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 other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
440 Lincoln Street, Worcester, Massachusetts	01653
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (508) 855-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $.01 par value	New York Stock Exchange
7 5/8% Senior Debentures due 2025	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Based on the closing sales price of June 30, 2010, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $1,927,289,946.

The number of shares outstanding of the registrant’s common stock, $.01 par value, was 45,247,059 shares as of February 18, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of The Hanover Insurance Group, Inc.’s Proxy Statement relating to the 2011 Annual Meeting of Shareholders to be held May 17, 2011 to be filed pursuant to Regulation 14A are incorporated by reference in Part III.

PART I

ITEM 1 — BUSINESS

ORGANIZATION

The Hanover Insurance Group, Inc. (“THG”) is a holding company organized as a Delaware corporation in 1995. Our consolidated financial statements include the accounts of THG; The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), which are our principal property and casualty subsidiaries; and certain other insurance and non-insurance subsidiaries. Our results of operations also included the results of our former life insurance company, First Allmerica Financial Life Insurance Company (“FAFLIC”), through December 31, 2008. On January 2, 2009, we sold FAFLIC to Commonwealth Annuity and Life Insurance Company (“Commonwealth Annuity”), a subsidiary of The Goldman Sachs Group, Inc. (“Goldman Sachs”). The results of operations for FAFLIC are reported as discontinued operations.

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

Our primary business operations include insurance products and services in three property and casualty operating segments. These segments are Commercial Lines, Personal Lines, and Other Property and Casualty. We report interest expense related to our corporate debt separately from the earnings of our operating segments. Corporate debt consists of our senior debentures, our junior subordinated debentures, advances under our collateralized borrowing program with the Federal Home Loan Bank of Boston (“FHLBB”), and surplus notes.

Information with respect to each of our segments is included in “Segment Results” on pages 37 to 54 in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 14 on pages 119 and 120 of the Notes to the Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.

DESCRIPTION OF BUSINESS BY SEGMENT

Following is a discussion of each of our operating segments.

PROPERTY AND CASUALTY

GENERAL

Our Property and Casualty group manages its operations principally through three segments: Commercial Lines, Personal Lines and Other Property and Casualty. We underwrite commercial and personal property and casualty insurance through Hanover Insurance, Citizens and other THG subsidiaries, primarily through an independent agent network concentrated in the Northeast, Midwest and Southeast United States. In 2010, we expanded our geographic network of independent agents into the western part of the United States primarily through the renewal rights transaction with OneBeacon Insurance Group (“OneBeacon”). Our Other Property and Casualty segment consists of: Opus Investment Management, Inc. (“Opus”), which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; and a run-off voluntary pools business.

Our strategy focuses on strong agency relationships and active agency management, disciplined underwriting, pricing, quality claim handling, and customer service. In Commercial Lines, we are increasingly segmenting our business into industry groups and coverages, which require higher levels of industry underwriting and claims expertise and specialized coverage forms. In Personal Lines, we are focusing on account business. Overall, we seek to diversify our underwriting risks on a geographic and line of business basis. Taken as a group, THG ranks among the top 25 property and casualty insurers in the United States based on direct premiums written for the first nine months of 2010.

RISKS

The industry’s profitability and cash flow can be significantly affected by: price; competition; volatile and unpredictable developments such as extreme weather conditions and natural disasters, including catastrophes; legal and regulatory developments affecting insurer and insureds’ liability; extra-contractual liability; size of jury awards; acts of terrorism; fluctuations in interest rates or the value of investments; and other general economic conditions and trends, such as inflationary pressure or unemployment, that may affect the adequacy of reserves or the demand for insurance products. Our investment portfolio and its future returns may be further impacted by the capital markets and current economic conditions, which could affect our liquidity, the amount of realized losses and impairments that will be recognized, credit default levels, our ability to hold such investments until recovery and other factors. Additionally, the economic conditions in geographic locations where we conduct business, especially those locations where our business is concentrated, may affect

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the growth and profitability of our business. The regulatory environments in those locations, including any pricing, underwriting or product controls, shared market mechanisms or mandatory pooling arrangements, and other conditions, such as our agency relationships, affect the growth and profitability of our business. In addition, our loss and loss adjustment expense (“LAE”) reserves are based on our estimates, principally involving actuarial projections, at a given time, of what we expect the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity and judicial theories of liability, costs of repairs and replacement, legislative activity and other factors. Changes to the estimates may affect our profitability.

Reference is also made to Item 1A – “Risk Factors” on pages 16 to 27 and “Risks and Forward-Looking Statements” on page 74 of Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-K.

LINES OF BUSINESS

We underwrite commercial and personal property and casualty insurance coverage.

Commercial Lines

Our Commercial Lines segment accounted for $1.5 billion, or 48.8%, of consolidated segment revenues; $1.6 billion, or 52.0%, of net written premiums and $111.2 million, or 48.8%, of segment income before federal income taxes for the year ended December 31, 2010. The following table provides net written premiums by line of business for our Commercial Lines segment.

FOR THE YEAR ENDED DECEMBER 31, 2010 (In millions, except ratios)	GAAP Net Premiums Written		% of Total
Commercial multiple peril	$	559.8		35.3	%
Commercial automobile		246.1		15.5
Workers’ compensation		161.3		10.2
Inland marine		148.9		9.4
AIX program business		143.8		9.1
Bonds		89.4		5.6
Other		235.5		14.9
Total	$	1,584.8		100.0	%

We continue to develop our segmentation of Commercial Lines, including our specialty lines, which on average are expected to generate higher margins over time and enable us to deliver a more complete product portfolio to our agents and policyholders. In our specialty lines, including our program business, inland marine and bond lines, net written premiums grew by over $100 million in 2010 and now accounts for approximately one-third of our Commercial Lines net premiums written. Growth in our specialty lines continues to be a significant part of our strategy. Our ongoing focus to expand our product offerings in our specialized businesses is evidenced by our acquisitions.

In December 2009, we entered into a renewal rights agreement with OneBeacon, further strengthening our competitive position and advancing our expansion efforts in the western states. Through the agreement, we acquired access to a portion of OneBeacon’s small and middle market commercial business at renewal, a significant portion of which is consistent with our current industry specific programs and middle market niches. Additionally, the transaction allowed for the development of new segment, niche and industry-specific program business. On January 1, 2010, we began renewing these policies through a reinsurance arrangement with OneBeacon. These policies were underwritten on OneBeacon policy forms and using OneBeacon systems, but were based on our underwriting and pricing guidelines. During the second quarter of 2010, we began converting a portion of renewals to our policy forms. We expect this conversion process to continue until late 2011. As a result of this transaction, our net written premiums grew by approximately $300 million in 2010, split approximately 57% commercial multiple peril, 18% commercial automobile, 14% workers’ compensation and 11% other commercial lines.

Over the past four years, we have acquired several specialized businesses, including Professionals Direct, Inc. (“PDI”), which we market as Hanover Professionals, a professional liability insurance carrier for small to medium-sized legal practices; Verlan Holdings, Inc. (“Verlan”), which we market as Hanover Specialty Industrial, a property insurer of small and medium-sized chemical, paint, solvent and other manufacturing and distribution companies; and AIX Holdings, Inc. (“AIX”), a specialty property and casualty insurance carrier that focuses on underwriting and managing program business.

In January 2010, we acquired Benchmark Professional Insurance Services, Inc. (“Benchmark”), which we market as Hanover Professionals, a provider of insurance solutions to the design professionals industry, including architects and engineers. In March 2010, we acquired Campania Holding Company, Inc. (“Campania”), which we market as Hanover Healthcare, a provider of insurance solutions for selected portions of the healthcare industry, including durable medical equipment suppliers, behavioral health specialists, eldercare providers, and podiatrists. Most recently, in July 2010, we entered into a renewal rights agreement with the Insurance Company of the West (“ICW”) that is expected to build our surety capabilities in our western expansion states.

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In addition to these businesses, we have developed several niche insurance programs, such as for schools, religious institutions, moving and storage companies and human services organizations, such as non-profit youth and community service organizations, and we have added additional segmentation to our core middle market commercial products, including real estate, hospitality and wholesale distributors. As a complementary initiative, we have introduced products focused on management liability, specifically non-profit directors and officers liability and employment practices liability, and coverage for private company directors and officers liability.

We also have made a number of enhancements to our core products and technology platforms that are intended to drive more total account placements in our small commercial business, which we believe will enhance margins. Our focus continues to be on improving and expanding our partnerships with a limited number of agents.

We believe our small commercial capabilities, distinctiveness in the middle market, and continued development of specialty business provides us with a more diversified portfolio of products and enables us to deliver significant value to our agents and policyholders. We believe these efforts will enable us to improve the overall mix of our business and ultimately our underwriting profitability.

Products

Avenues^®, our Commercial Lines product suite, provides agents and customers with products designed for small, middle, and specialized markets. Commercial Lines coverages include:

Commercial multiple peril coverage insures businesses against third party liability from accidents occurring on their premises or arising out of their operations, such as injuries sustained from products sold. It also insures business property for damage, such as that caused by fire, wind, hail, water damage (except for flooding), theft and vandalism.

Commercial automobile coverage insures businesses against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured’s vehicle, and property damage to other vehicles and property.

Workers’ compensation coverage insures employers against employee medical and indemnity claims resulting from injuries related to work. Workers’ compensation policies are often written in conjunction with other commercial policies.

Other commercial lines is comprised of inland marine, which insures businesses against physical losses to property, such as contractor’s equipment, builders’ risk and goods in transit. We also offer, through AIX, underwriting and managing of program business, including to under-served markets where there are specialty coverage or risk management needs. Other commercial lines also includes bonds, which provides businesses with contract surety coverage in the event of performance or payment claims, and commercial surety coverage related to fiduciary or regulatory obligations. Also included in other commercial lines coverages are umbrella, general liability, fire, specialty property, and professional and management liability.

Personal Lines

Our Personal Lines segment accounted for $1.6 billion, or 50.7%, of consolidated segment revenues; $1.5 billion, or 48.0%, of net written premiums and $113.0 million, or 49.6%, of segment income before federal income taxes for the year ended December 31, 2010. The following table provides net written premiums by line of business for our Personal Lines segment.

FOR THE YEAR ENDED DECEMBER 31, 2010 (In millions, except ratios)	GAAP Net Premiums Written		% of Total
Personal automobile	$	935.1		63.9	%
Homeowners		485.5		33.2
Other		42.3		2.9
Total	$	1,462.9		100.0	%

In our Personal Lines business, the market continues to be very competitive, with continued pressure on agents from direct writers, as well as from the increased usage of real time comparative rating tools. We maintain our focus on partnering with high quality, value added agencies that stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and/or additional coverages), and consultative selling. We are focused on making investments that are intended to help us maintain profitability, build a distinctive position in the market, and provide us with profitable growth opportunities. We continue to refine our products and to work closely with these high potential agents to increase the percentage of business they place with us and to ensure that it is consistent with our preferred mix of business. Additionally, we remain focused on further diversifying our state mix beyond our four core states of Michigan, Massachusetts, New York and New Jersey. During 2010, we wrote 65.4% of our Personal Lines business in these four core states compared to 77.5% during 2005. We expect these efforts to contribute to improved profitability and retention in our Personal Lines segment over time.

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Products

Personal Lines coverages include:

Personal automobile coverage insures individuals against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured’s vehicle, and property damage to other vehicles and other property. The majority of our new personal automobile business and approximately 60% of our personal automobile policies-in-force were written through Connections^® Auto, our multivariate automobile product. Connections Auto utilizes a multivariate rating application which calculates rates based upon the magnitude and correlation of multiple risk factors and is intended to improve both our and our agents’ competitiveness in our target market segments by offering policies that are more appropriately priced to be commensurate with the underlying risks.

Homeowners coverage insures individuals for losses to their residences and personal property, such as those caused by fire, wind, hail, water damage (except for flooding), theft and vandalism, and against third party liability claims. Our homeowners product, Connections^® Home, is available in seventeen states. It is intended to improve our competitiveness for total account business by making it easier and more efficient for our agents to write business with us and by providing more comprehensive coverage options for policyholders. In addition, in fifteen states we have introduced a more sophisticated, multivariate pricing approach to our homeowners product which is designed to better align rates with the underlying risk of each customer. We plan to continue to roll out this improved price segmentation to our remaining states.

Other personal lines are comprised of personal inland marine (jewelry, art, etc.), umbrella, fire, personal watercraft, earthquake and other miscellaneous coverages.

Other Property and Casualty

The Other Property and Casualty segment consists of: Opus, which provides investment advisory services to affiliates and also manages approximately $1.4 billion of assets for unaffiliated institutions such as insurance companies, retirement plans and foundations; earnings on holding company assets; and voluntary pools business in which we have not actively participated since 1999. See also “Voluntary Pools” on page 10 of this Form 10-K.

MARKETING AND DISTRIBUTION

Our Property and Casualty group’s structure allows us to maintain a strong focus on local markets and the flexibility to respond to specific market conditions while achieving operational effectiveness. During 2010, we wrote 23.6% of our business in Michigan and 10.3% in Massachusetts. Our structure is a key factor in the establishment and maintenance of productive, long-term relationships with mid-sized, well-established independent agencies. We maintain thirty-one local branch sales and underwriting offices and maintain a presence in twenty-seven states, reflecting our strong regional focus. Processing support for these locations is provided from Worcester, Massachusetts; Howell, Michigan; Atlanta, Georgia; Salem, Virginia; and Buffalo, New York. Corporate functions are centralized in our headquarters in Worcester, Massachusetts.

Independent agents account for substantially all of the sales of our property and casualty products. Agencies are appointed based on profitability, track record, financial stability, professionalism, and business strategy. Once appointed, we monitor each agency’s performance and, in accordance with applicable legal and regulatory requirements, take actions as necessary to change these business relationships, such as discontinuing the authority of the agent to underwrite certain products or revising commissions or bonus opportunities. We compensate agents primarily through base commissions and bonus plans that are tied to an agency’s written premium, growth and profitability.

We are licensed to sell property and casualty insurance in all fifty states in the United States, as well as in the District of Columbia. We actively market Commercial Lines policies in 36 states and Personal Lines policies in 19 states. The following table provides our top commercial and personal geographical markets based on total net written premium in the state in 2010.

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	Commercial Lines					Personal Lines					Total
FOR THE YEAR ENDED DECEMBER 31, 2010 (In millions, except ratios)	GAAP Net Premiums Written		% of Total			GAAP Net Premiums Written		% of Total			GAAP Net Premiums Written		% of Total
Michigan	$	131.3		8.3	%	$	588.4		40.2	%	$	719.7		23.6	%
Massachusetts		135.2		8.5			179.6		12.3			314.8		10.3
New York		186.1		11.7			107.4		7.3			293.5		9.6
New Jersey		97.0		6.1			81.6		5.6			178.6		5.9
California		140.8		8.9			—		—			140.8		4.6
Illinois		64.8		4.1			48.8		3.3			113.6		3.7
Florida		82.0		5.2			30.7		2.1			112.7		3.7
Connecticut		45.5		2.9			59.9		4.1			105.4		3.5
Maine		65.3		4.1			33.4		2.3			98.7		3.3
Virginia		47.6		3.0			34.2		2.3			81.8		2.7
Georgia		42.5		2.7			38.9		2.7			81.4		2.7
Texas		80.6		5.1			—		—			80.6		2.6
Louisiana		30.6		1.9			50.0		3.4			80.6		2.6
Oklahoma		27.1		1.7			41.9		2.9			69.0		2.3
Indiana		32.9		2.1			35.4		2.4			68.3		2.2
New Hampshire		33.1		2.1			28.5		1.9			61.6		2.0
Tennessee		27.0		1.7			30.8		2.1			57.8		1.9
Other		315.4		19.9			73.4		5.1			388.8		12.8
Total	$	1,584.8		100.0	%	$	1,462.9		100.0	%	$	3,047.7		100.0	%

We manage our Commercial Lines portfolio, which includes our core and specialty businesses, with a focus on growth from the most profitable industry segments within our underwriting expertise, which varies by line of business and geography. Our core business is composed of several coordinated commercial lines of business, including small and middle market accounts, which include segmented businesses and niches and certain large accounts. Approximately 87% of core Commercial Lines direct written premium is comprised of small and mid-sized accounts; such business is approximately evenly split between small accounts having less than $25,000 in premium and first-tier middle market accounts, those with premium between $25,000 and $200,000. Additionally, we have multiple specialty lines of business, which consist of program business, inland marine, surety and bonds, professional liability, healthcare, specialty property and management liability. The Commercial Lines segment seeks to maintain strong agency relationships as a strategy to secure and retain our agents’ best business. The quality of business written is monitored through an ongoing quality review program, accountability for which is shared at the local, regional and corporate levels.

We sponsor local and national agent advisory councils to gain the benefit of our agents’ insight and enhance our relationships. These councils provide feedback, input on the development of products and services, guidance on marketing efforts, support for our strategies, and assist us in enhancing our local market presence.

We manage Personal Lines business with a focus on acquiring and retaining quality accounts. More than 52% of our Personal Lines net written premium is generated in the combined states of Michigan and Massachusetts. In Michigan, according to SNL Financial, based upon direct written premium for 2009, we ranked 4th in the state for Personal Lines business, with approximately 8% of the state’s total market. Approximately 63% of our Michigan Personal Lines business is in the personal automobile line and 35% is in the homeowners line. Michigan business represents approximately 40% of our total personal automobile net written premium and 42% of our total homeowners net written premium. In Michigan, we are a principal provider with many of our agencies, averaging over $1.2 million of total direct written premium per agency in 2010.

Approximately 70% of our Massachusetts Personal Lines business is in the personal automobile line and 26% is in the homeowners line. Massachusetts business represents approximately 13% of our total personal automobile net written premium and approximately 10% of our total homeowners net written premium.

With respect to our Other Property and Casualty segment business, we market our investment advisory services directly through Opus.

PRICING AND COMPETITION

We seek to achieve targeted combined ratios in each of our product lines. Our targets vary by product and geography and change with market conditions. The targeted combined ratios reflect competitive market conditions, investment yield expectations, our loss payout patterns, and target returns on equity. This strategy is intended to enable

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us to achieve measured growth and consistent profitability. In addition, we seek to utilize our knowledge of local markets to achieve superior underwriting results. We rely on market information provided by our local agents and on the knowledge of our staff in the local branch offices. Since we maintain a strong regional focus and a significant market share in a number of states, we can apply our knowledge and experience in making underwriting and rate setting decisions. Also, we seek to gather objective and verifiable information at a policy level during the underwriting process, such as past driving records and, where permitted, credit histories.

The property and casualty industry is a very competitive market. Our competitors include national, regional and local companies that sell insurance through various distribution channels, including independent agencies, captive agency forces and direct to consumers through the internet or otherwise. We market primarily through independent agents and compete for business on the basis of product, price, agency and customer service, local relationships and ratings, and effective claims handling, among other things. We believe that our emphasis on maintaining strong agency relationships and a local presence in our markets, coupled with investments in products, operating efficiency, technology and effective claims handling will enable us to compete effectively. Our broad product offerings in Commercial Lines and total account strategy in Personal Lines are instrumental to our strategy to capitalize on these relationships. Our Property and Casualty group is not dependent on a single customer or even a few customers, for which the loss of any one or more would have an adverse effect upon the group’s insurance operation.

In our Michigan Personal Lines business, where we market our products under the Citizens Insurance brand name, we compete with a number of national direct writers and regional and local companies. Principal personal lines competitors in Michigan are AAA Auto Club of Michigan, State Farm Group and Auto–Owners Insurance Group. We believe our agency relationships, Citizens Insurance brand recognition, and Connections Auto product enable us to distribute our products competitively in Michigan.

CLAIMS

We utilize experienced claims adjusters, appraisers, medical specialists, managers and attorneys to manage our claims. Our Property and Casualty group has field claims adjusters strategically located throughout our operating territories. Claims staff members work closely with the agents and seek to settle claims rapidly, fairly and efficiently.

Claims office adjusting staff is supported by general adjusters for large property and large casualty losses, by automobile and heavy equipment damage appraisers for automobile material damage losses, and by medical specialists whose principal concentration is on workers’ compensation and automobile injury cases. In addition, the claims offices are supported by staff attorneys who specialize in litigation defense and claim settlements. We also maintain a special investigative unit that investigates suspected insurance fraud and abuse. We utilize claims processing technology which allows most of the smaller and more routine Personal Lines claims to be processed at centralized locations.

CATASTROPHES

We are subject to claims arising out of catastrophes, which may have a significant impact on our results of operations and financial condition. We may experience catastrophe losses in the future, which could have a material adverse impact on us. Catastrophes can be caused by various events, including snow, ice storm, hurricane, earthquake, tornado, wind, hail, terrorism, fire, explosion, or other extraordinary events. The incidence and severity of catastrophes are inherently unpredictable. We manage our catastrophe risks through underwriting procedures, including the use of deductibles and specific exclusions for floods and earthquakes, as allowed, and other factors, through geographic exposure management and through reinsurance programs. The catastrophe reinsurance program is structured to protect us on a per-occurrence basis. We monitor geographic location and coverage concentrations in order to manage corporate exposure to catastrophic events. Although catastrophes can cause losses in a variety of property and casualty lines, homeowners and commercial multiple peril property coverages have, in the past, generated the majority of catastrophe-related claims.

TERRORISM

Private sector catastrophe reinsurance is limited and generally unavailable for losses attributed to acts of terrorism, particularly those involving nuclear, biological, chemical and/or radiological events. As a result, our primary reinsurance protection against large-scale terrorist attacks is presently provided through a Federal program that provides compensation for insured losses resulting from acts of terrorism. Additionally, we are reinsured for certain terrorism related losses within existing Catastrophe, Property per Risk and Casualty Excess of Loss corporate treaties (see Reinsurance - on pages 13 to 15 of this Form 10-K).

The Terrorism Risk Insurance Act of 2002 established the Terrorism Risk Insurance Program (the “Program”). Coverage under the Program applies to workers’ compensation, commercial multiple peril and certain other Commercial Lines policies. The Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) extended the Program through December 31, 2014, and extended coverage to include both domestic and foreign acts of terrorism.

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In accordance with the current Program, we offer policyholders in specific lines of insurance the option to elect terrorism coverage. In order for a loss to be covered under the Program, the loss must meet aggregate industry loss minimums and must be the result of an act of terrorism as certified by the Secretary of the Treasury. The current Program requires us to retain 15% of any claims from a certified terrorist event in excess of our federally mandated deductible. Our deductible represents 20% of direct earned premium for the covered lines of business of the prior year. In 2010, the deductible was $184.4 million, which represents 10.6% of year-end 2009 statutory policyholder surplus, and is estimated to be $204.1 million in 2011, representing 11.7% of 2010 year-end statutory policyholder surplus. We may reinsure our retention and deductible under the Program, although at this time, we have not purchased additional specific terrorism-only reinsurance coverage.

Given the unpredictable nature of the frequency and severity of terrorism losses, future losses from acts of terrorism could be material to our operating results, financial position, and/or liquidity in the future. We manage our exposures on an individual line of business basis and in the aggregate by zip code.

REGULATION

Our property and casualty insurance subsidiaries are subject to extensive regulation in the various states in which they transact business and are supervised by the individual state insurance departments. Numerous aspects of our business are subject to regulatory requirements, including premium rates, mandatory risks that must be covered, limitations on the ability to non-renew or reject business, prohibited exclusions, licensing of agents, investments, restrictions on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the benefit of policyholders, policy forms and coverages, advertising, and other conduct, including restrictions on the use of credit information and other factors in underwriting, as well as other underwriting and claims practices. States also regulate various aspects of the contractual relationships between insurers and independent agents.

In addition, as a condition to writing business in certain states, insurers are required to participate in various pools or risk sharing mechanisms or to accept certain classes of risk, regardless of whether such risks meet its underwriting requirements for voluntary business. Some states also limit or impose restrictions on the ability of an insurer to withdraw from certain classes of business. For example, Massachusetts, New Jersey, New York, Louisiana and Florida each impose material restrictions on a company’s ability to materially reduce its exposures or to withdraw from certain lines of business in their respective states. The state insurance departments can impose significant charges on a carrier in connection with a market withdrawal or refuse to approve withdrawal plans on the grounds that they could lead to market disruption. Laws and regulations that limit cancellation and non-renewal of policies or that subject withdrawal plans to prior approval requirements may significantly restrict an insurer’s ability to exit unprofitable markets.

Over the past several years, other state-sponsored insurers, reinsurers or involuntary pools have increased significantly, particularly those states which have Atlantic or Gulf Coast storm exposures. As a result, the potential assessment exposure of insurers doing business in such states and the attendant collection risks have increased, particularly, in our case, in the states of Massachusetts, Louisiana and Florida. Such actions and related regulatory restrictions may limit our ability to reduce our potential exposure to hurricane related losses. At this time, we are unable to predict the likelihood or impact of any such potential assessments or other actions.

On August 1, 2010, the Michigan Supreme Court issued a decision in a case captioned McCormick v. Carrier, et. al, overturning the so-called Kreiner decision, and in so doing, we believe that the Court significantly expanded the circumstances under which claimants can sue for non-economic losses resulting from automobile accidents in Michigan. Although the full implications and application of the McCormick decision are not yet understood and may evolve in the future, we believe that the revised standard will adversely affect both past claims which are not finally resolved, as well as future claims. Although our reserves reflect our best estimate of the impact of this decision, in light of evolving law and the uncertain application of this new standard, we cannot be certain as to the adequacy of these reserves or of our ability to raise rates for liability coverage of Michigan personal and commercial automobile polices to reflect the additional losses we expect to incur.

The insurance laws of many states generally provide that property and casualty insurers doing business in those states be subject to statutory property and casualty guaranty funds. The purpose of these guaranty funds is to protect policyholders by requiring that solvent property and casualty insurers pay insurance claims of insolvent insurers. These guaranty associations generally pay these claims by assessing solvent insurers proportionately based on the insurer’s share of voluntary written premium in the state.

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While most guaranty associations provide for recovery of assessments through subsequent rate increases, surcharges or premium tax credits, there is no assurance that insurers will ultimately recover these assessments, which could be material, particularly following a large catastrophe or in markets which become disrupted.

We are subject to periodic financial and market conduct examinations conducted by state insurance departments. We are also required to file annual and other reports relating to the financial condition of our insurance subsidiaries and other matters.

From time to time, proposals have been made to establish a federal based insurance regulatory system and to allow insurers to elect either federal or state-based regulation (“optional federal chartering”). In light of the recent economic crisis and the focus on increased regulatory controls, particularly with regard to financial institutions, there has been renewed interest in such proposals.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Financial Reform Act”) was enacted. The Financial Reform Act includes a provision to establish a Federal Insurance Office with the primary purpose of collecting information to better understand insurance issues at the federal level and to monitor the extent to which traditional underserved communities and consumers, minorities and low and moderate income persons have access to affordable insurance products. The Financial Reform Act also contains provisions affecting financial institutions, credit rating agencies and other commercial and consumer businesses.

See also “Contingencies and Regulatory Matters” on pages 72 to 74 in Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

INVOLUNTARY RESIDUAL MARKETS

As a condition of our license to write business in various states, we are required to participate in mandatory property and casualty residual market mechanisms which provide various insurance coverages where such coverage may not otherwise be available at rates which are deemed reasonable. Such mechanisms provide coverage primarily for commercial and personal property, commercial and personal automobile, and workers’ compensation, and include assigned risk plans, reinsurance facilities and involuntary pools, joint underwriting associations, fair access to insurance requirements (“FAIR”) plans, and commercial automobile insurance plans. For example, since most states compel the purchase of a minimal level of automobile liability insurance, states have developed shared market mechanisms to provide the required coverages and in many cases, optional coverages, to those drivers who, because of their driving records or other factors, cannot find insurers who will insure them voluntarily. Also, FAIR plans and other similar property insurance shared market mechanisms increase the availability of property insurance in circumstances where homeowners are unable to obtain insurance at rates deemed reasonable, such as in coastal areas or in areas subject to other hazards.

Our participation in such shared markets or pooling mechanisms is generally proportional to our direct writings for the type of coverage written by the specific pooling mechanism in the applicable state. We experienced underwriting losses from participation in these mandatory residual market mechanisms of $12.9 million and $11.5 million in 2010 and 2008, respectively, compared to underwriting gains of $2.3 million in 2009. The underwriting loss in 2010 was primarily attributed to our mandatory participation in the Michigan Assigned Claims (“MAC”) facility. MAC is an assigned claim plan covering people injured in uninsured motor vehicle accidents. Our participation in the MAC facility is based on our share of personal and commercial automobile direct written premium in the state and resulted in underwriting losses of $10.1 million, $10.1 million and $ 11.2 million in 2010, 2009 and 2008, respectively. Our 2010 underwriting loss also includes unfavorable experience of $3.1 million in our workers’ compensation pools. For 2009, the loss attributed to the MAC facility was offset by favorable development from the runoff of the Massachusetts Commonwealth Automobile Reinsures (“CAR”) facility of $9.4 million and gains in other state mandated residual market mechanisms of $3.0 million. Other than the MAC and CAR facilities and workers’ compensation pools, mandatory residual market mechanisms were not significant to our 2010, 2009 or 2008 results of operations. With respect to FAIR plans and other similar property insurance shared market mechanisms that have experienced increased exposures in recent years due to the growing residual market for coastal property, it is difficult to accurately estimate our potential financial exposure for future events. A large coastal event, particularly affecting Louisiana, Massachusetts, Florida, New York or New Jersey, would likely be material to our results of operations.

The Michigan Catastrophic Claims Association (“MCCA”) is a reinsurance mechanism that covers no-fault first party medical losses of retentions in excess of $480,000. All automobile insurers doing business in Michigan are required to participate in the MCCA. Insurers are reimbursed for their covered losses in excess of this threshold, which increased from $460,000 to $480,000 on July 1, 2010, and will increase to $500,000 in 2011. Funding for MCCA comes from assessments

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against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders. At December 31, 2010, the MCCA was the only reinsurer or reinsurance facility that represented 10% or more of our total reinsurance assets. At December 31, 2010 and 2009, we had estimated reinsurance recoverables on paid and unpaid losses from the MCCA of $730.0 million and $652.8 million, respectively. We believe that we are unlikely to incur any material loss as a result of non-payment of amounts owed to us by MCCA, because (i) the payment obligations of the MCCA are extended over many years, resulting in relatively small current payment obligations in terms of MCCA’s total assets, (ii) the MCCA is supported by assessments permitted by statute, and (iii) we have not historically incurred losses as a result of non-payment of MCCA claims. Reference is made to Note 16 – “Reinsurance”, on pages 120 and 121 and Note 19 – “Commitments and Contingencies”, on pages 123 to 125 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.

VOLUNTARY POOLS

We have terminated our participation in virtually all voluntary pool business; however, we continue to be subject to claims related to years in which we were a participant. The most significant of these pools is a voluntary excess and casualty reinsurance pool known as the Excess and Casualty Reinsurance Association (“ECRA”), in which we were a participant from 1950 to 1982. In 1982, the pool was dissolved and since that time the business has been in runoff. Our participation in this pool has resulted in average paid losses of approximately $2 million annually over the past ten years. Because of the inherent uncertainty regarding the types of claims in this pool, there can be no assurance that the reserves will be sufficient. Loss and LAE reserves for our voluntary pools were $41.1 million and $52.9 million at December 31, 2010 and 2009, respectively, including $31.7 million and $39.8 million at December 31, 2010 and 2009, respectively, related to ECRA. Excluding the ECRA pool, the average annual paid losses and reserve balances at December 31, 2010 for other voluntary pools were not individually significant.

RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Reference is made to “Property and Casualty – Reserve for Losses and Loss Adjustment Expenses” on pages 42 to 51 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

The following table reconciles reserves determined in accordance with accounting principles and practices prescribed or permitted by insurance statutory authorities (“Statutory”) to reserves determined in accordance with generally accepted accounting principles (“GAAP”). The primary difference between the following Statutory reserves and our GAAP reserves is the requirement, on a GAAP basis, to present reinsurance recoverables as an asset, whereas Statutory guidance provides that reserves are reflected net of the corresponding reinsurance recoverables. We do not use discounting techniques in establishing GAAP reserves for losses and LAE in our Property and Casualty business, nor have we participated in any loss portfolio transfers or other similar transactions.

DECEMBER 31	2010			2009			2008
(In millions)
Statutory reserve for losses and LAE	$	2,285.3		$	2,218.3		$	2,211.0
GAAP adjustments:
Reinsurance recoverable on unpaid losses		1,115.5			1,060.2			988.2
Reserves of discontinued operations(1)		(125.1	)		(127.5	)		—
Other		0.1			1.1			2.1
GAAP reserve for losses and LAE	$	3,275.8		$	3,152.1		$	3,201.3

(1) Reserves on discontinued operations are included in liabilities of discontinued operations for GAAP and loss and loss adjustment expenses for Statutory.

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ANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSES RESERVE DEVELOPMENT

The following table sets forth the development of our GAAP reserves (net of reinsurance recoverables) for unpaid losses and LAE from 2000 through 2010:

DECEMBER 31	2010		2009		2008		2007		2006		2005		2004		2003		2002		2001		2000
(In millions)
Net reserve for losses and LAE(1)	$	2,160.3	$	2,091.9	$	2,213.1	$	2,225.3	$	2,274.4	$	2,351.1	$	2,161.5	$	2,078.9	$	2,083.8	$	2,056.9	$	1,902.2
Cumulative amount paid as of(2):
One year later		—		738.6		788.5		711.1		689.9		729.5		622.0		658.3		784.5		763.6		780.3
Two years later		—		—		1,126.8		1,050.5		1,061.8		1,121.9		967.0		995.4		1,131.7		1,213.6		1,180.1
Three years later		—		—		—		1,222.7		1,268.4		1,368.3		1,175.4		1,217.1		1,339.5		1,423.9		1,458.3
Four years later		—		—		—		—		1,364.7		1,499.6		1,312.9		1,351.6		1,478.9		1,551.5		1,567.8
Five years later		—		—		—		—		—		1,555.7		1,384.4		1,436.5		1,566.8		1,636.9		1,636.9
Six years later		—		—		—		—		—		—		1,416.2		1,486.5		1,629.3		1,696.3		1,689.0
Seven years later		—		—		—		—		—		—		—		1,508.9		1,668.9		1,742.3		1,731.0
Eight years later		—		—		—		—		—		—		—		—		1,685.7		1,773.6		1,768.5
Nine years later		—		—		—		—		—		—		—		—		—		1,785.8		1,793.6
Ten years later		—		—		—		—		—		—		—		—		—		—		1,802.6
Net reserve re-estimated as of(3):
End of year		2,160.3		2,091.9		2,213.1		2,225.3		2,274.4		2,351.1		2,161.5		2,078.9		2,083.8		2,056.9		1,902.2
One year later		—		1,980.8		2,057.8		2,073.7		2,138.0		2,271.1		2,082.0		2,064.4		2,124.2		2,063.3		2,010.8
Two years later		—		—		1,971.5		1,863.8		2,008.9		2,155.8		1,989.6		2,017.4		2,115.3		2,122.5		2,028.2
Three years later		—		—		—		1,791.8		1,850.6		2,072.0		1,899.6		1,971.5		2,093.9		2,124.3		2,066.6
Four years later		—		—		—		—		1,808.8		1,962.3		1,853.2		1,917.3		2,074.0		2,121.6		2,071.1
Five years later		—		—		—		—		—		1,933.4		1,776.0		1,896.1		2,041.6		2,121.7		2,078.3
Six years later		—		—		—		—		—		—		1,756.4		1,828.1		2,034.9		2,103.2		2,084.1
Seven years later		—		—		—		—		—		—		—		1,815.2		1,978.9		2,100.6		2,074.8
Eight years later		—		—		—		—		—		—		—		—		1,968.0		2,050.9		2,076.8
Nine years later		—		—		—		—		—		—		—		—		—		2,043.4		2,033.4
Ten years later		—		—		—		—		—		—		—		—		—		—		2,030.8
Redundancy (deficiency), net (4)	$	—	$	111.1	$	241.6	$	433.5	$	465.6	$	417.7	$	405.1	$	263.7	$	115.8	$	13.5	$	(128.6	)

(1) Sets forth the estimated net liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years; represents the estimated amount of net losses and LAE for claims arising in the current and all prior years that are unpaid at the balance sheet date, including incurred but not reported (“IBNR”) reserves.

(2) Cumulative loss and LAE payments made in succeeding years for losses incurred prior to the balance sheet date.

(3) Re-estimated amount of the previously recorded liability based on experience for each succeeding year; increased or decreased as payments are made and more information becomes known about the severity of remaining unpaid claims.

(4) Cumulative redundancy or deficiency at December 31, 2010 of the net reserve amounts shown on the top line of the corresponding column. A redundancy in reserves means the reserves established in prior years exceeded actual losses and LAE or were re-evaluated at less than the original reserved amount. A deficiency in reserves means the reserves established in prior years were less than actual losses and LAE or were re-evaluated at more than the original reserved amount.

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The following table sets forth the development of gross reserve for unpaid losses and LAE from 2001 through 2010:

DECEMBER 31	2010		2009		2008		2007		2006		2005		2004		2003		2002		2001
(In millions)
Reserve for losses and LAE:
Gross liability	$	3,275.8	$	3,152.1	$	3,201.3	$	3,165.8	$	3,163.9	$	3,458.7	$	3,068.6	$	3,018.9	$	2,961.7	$	2,921.5
Reinsurance recoverable		1,115.5		1,060.2		988.2		940.5		889.5		1,107.6		907.1		940.0		877.9		864.6
Net liability	$	2,160.3	$	2,091.9	$	2,213.1	$	2,225.3	$	2,274.4	$	2,351.1	$	2,161.5	$	2,078.9	$	2,083.8	$	2,056.9
One year later:
Gross re-estimated liability			$	3,129.6	$	3,116.2	$	3,037.1	$	3,047.0	$	3,409.9	$	3,005.9	$	2,972.2	$	3,118.6	$	2,926.4
Re-estimated recoverable				1,148.8		1,058.4		963.4		909.0		1,138.8		923.9		907.8		994.4		863.1
Net re-estimated liability			$	1,980.8	$	2,057.8	$	2,073.7	$	2,138.0	$	2,271.1	$	2,082.0	$	2,064.4	$	2,124.2	$	2,063.3
Two years later:
Gross re-estimated liability					$	3,112.1	$	2,901.9	$	2,960.5	$	3,334.1	$	2,941.5	$	2,970.7	$	3,113.5	$	3,118.9
Re-estimated recoverable						1,140.6		1,038.1		951.6		1,178.3		951.9		953.3		998.2		996.4
Net re-estimated liability					$	1,971.5	$	1,863.8	$	2,008.9	$	2,155.8	$	1,989.6	$	2,017.4	$	2,115.3	$	2,122.5
Three years later:
Gross re-estimated liability							$	2,919.6	$	2,871.1	$	3,288.8	$	2,897.7	$	2,951.0	$	3,129.4	$	3,146.6
Re-estimated recoverable								1,127.8		1,020.5		1,216.8		998.1		979.5		1,035.5		1,022.3
Net re-estimated liability							$	1,791.8	$	1,850.6	$	2,072.0	$	1,899.6	$	1,971.5	$	2,093.9	$	2,124.3
Four years later:
Gross re-estimated liability									$	2,917.5	$	3,254.7	$	2,886.8	$	2,935.1	$	3,128.6	$	3,178.8
Re-estimated recoverable										1,108.7		1,292.4		1,033.6		1,017.8		1,054.6		1,057.2
Net re-estimated liability									$	1,808.8	$	1,962.3	$	1,853.2	$	1,917.3	$	2,074.0	$	2,121.6
Five years later:
Gross re-estimated liability											$	3,306.8	$	2,878.0	$	2,946.1	$	3,134.4	$	3,197.0
Re-estimated recoverable												1,373.4		1,102.0		1,050.0		1,092.8		1,075.3
Net re-estimated liability											$	1,933.4	$	1,776.0	$	1,896.1	$	2,041.6	$	2,121.7
Six years later:
Gross re-estimated liability													$	2,934.9	$	2,940.7	$	3,163.9	$	3,213.9
Re-estimated recoverable														1,178.5		1,112.6		1,129.0		1,110.7
Net re-estimated liability													$	1,756.4	$	1,828.1	$	2,034.9	$	2,103.2
Seven years later:
Gross re-estimated liability															$	2,994.1	$	3,168.3	$	3,259.3
Re-estimated recoverable																1,178.9		1,189.4		1,158.7
Net re-estimated liability															$	1,815.2	$	1,978.9	$	2,100.6
Eight years later:
Gross re-estimated liability																	$	3,216.7	$	3,265.6
Re-estimated recoverable																		1,248.7		1,214.7
Net re-estimated liability																	$	1,968.0	$	2,050.9
Nine years later:
Gross re-estimated liability																			$	3,306.6
Re-estimated recoverable																				1,263.2
Net re-estimated liability																			$	2,043.4

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Reinsurance

We maintain a reinsurance program designed to protect against large or unusual loss and LAE activity. We utilize a variety of reinsurance agreements, which are intended to control our exposure to large property and casualty losses, stabilize earnings and protect capital resources, including facultative reinsurance, excess of loss reinsurance and catastrophe reinsurance. Catastrophe reinsurance serves to protect us, as the ceding insurer, from significant losses arising from a single event such as snow, ice storm, hurricane, earthquake, tornado, wind, hail, terrorism, fire, explosion, or other extraordinary events. We determine the appropriate amount of reinsurance based upon our evaluation of the risks insured, exposure analyses prepared by consultants and on market conditions, including the availability and pricing of reinsurance.

We cede to reinsurers a portion of our risk based upon insurance policies subject to such reinsurance. Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to us. We believe that the terms of our reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. We believe our reinsurers are financially sound, based upon our ongoing review of their financial statements, financial strength ratings assigned to them by rating agencies, their reputations in the reinsurance marketplace, our collections history with our reinsurers, and the analysis and guidance of our reinsurance advisors.

As described under “Terrorism” above, although we exclude coverage of nuclear, chemical or biological events from the personal and commercial policies we write, we are required under TRIPRA to offer this coverage in our workers’ compensation policies. We have reinsurance coverage under our casualty reinsurance treaty for losses that result from nuclear, chemical or biological events of approximately $30 million. All other treaties exclude such coverage. Further, under TRIPRA, our retention of losses in 2011 from such events, if deemed certified terrorist events, is limited to 15% of losses in excess of an approximate $204 million deductible, up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. There can be no assurance that such events would not be material to our financial position or results of operations.

As described above under “Involuntary Residual Markets”, we are subject to concentration of risk with respect to reinsurance ceded to various mandatory residual market mechanisms.

Reference is made to Note 16 – “Reinsurance” on pages 120 and 121 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K. Reference is also made to “Involuntary Residual Markets”, and “Voluntary Pools” on pages 9 and 10 of this Form 10-K.

Our 2011 reinsurance program is substantially consistent with our 2010 program. The following table summarizes significant components of both our 2010 and 2011 reinsurance programs (excluding coverage available under the federal terrorism reinsurance program which is described under “Terrorism” above).

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(in millions)
Treaty	Loss Amount	Loss Retention			Reinsurance Coverage,  Including Non-Certified Terrorism(1)			Certified Terrorism Coverage (as defined by  TRIPRA)(1)
Property catastrophe occurrence treaty (2), (3), (4)
All perils, per occurrence	< $150.0 $150.0 to $250.0 $250.0 to $700.0 $700.0 to $1,000.0 > $1,000.0		100 43 NA NA 100	%  %  %		NA 57 100 100 NA	%  %  %	NA 57%; Personal Lines only 100%; Personal Lines only 100%; Personal Lines only NA
Commercial property excess of loss treaty (5)
All perils, per occurrence, excludes NOAA named storms	< $10.0 $10.0 to $50.0 > $50.0		100 NA 100	%  %		NA 100 NA	%	NA NA NA
Property per risk treaty (2), (4), (6)
All perils, including commercial marine, per risk	< $2.0 $2.0 to $5.0 $5.0 to $100.0 > $100.0		100 NA NA 100	%  %		NA 100 100 N/A	%  %	NA 100% 100% NA
Casualty reinsurance (4), (7)
Each loss, per occurrence for general liability, automobile liability, workers’ compensation and umbrella	< $2.0 $2.0 to $5.0 $5.0 to $10.0 $10.0 to $30.0 > $30.0		100 25 NA NA 100	%  %  %		NA 75 100 100 NA	%  %  %	NA subject to $10M annual aggregate limit subject to $5M annual aggregate limit subject to $20M annual aggregate limit NA
Surety/fidelity bond reinsurance (2), (3)
Excess of loss treaty on bond business	< $5.0 $5.0 to $10.0 $10.0 to $20.0 $20.0 to $35.0 > $35.0		100 32.5 15 11 100	%  %  %  %  %		NA 67.5 85 89 NA	%  %  %	NA NA NA NA NA
Professional liability reinsurance(8)
Lawyers , miscellaneous professional and technology errors and omissions	< $1.0 $1.0 to $10.0 > $10.0		100 10 100	%  %  %		NA 90 NA	%	NA NA NA
Management liability reinsurance
Management liability and employment practices liability	< $1.0 $1.0 to $5.0 > $5.0		100 10 100	%  %  %		NA 90 NA	%	NA NA NA

NA – Not applicable

(1) This table does not illustrate coverage available under the federal terrorism reinsurance program, but reinsurers typically define coverage for terrorist events based upon whenever such event is “certified” or “non-certified”.

(2) The property per risk and surety/fidelity bond treaties have annual effective dates of July 1st. Additionally, our property catastrophe insurance treaty coverage of $300 million in excess of $700 million also has a July 1^st effective date. All other treaties have January 1st annual effective dates.

(3) Effective July 1, 2010, for a twelve month term, we renewed our property catastrophe occurrence treaty for those coverages in excess of $700 million. For our $200 million excess of $700 million property catastrophe coverage layer, we previously retained 50% of the losses associated with this layer. Beginning on July 1, 2010, 100% of losses in this layer will be covered by reinsurance. Also, effective July 1, 2010, for a twelve month term, we purchased an additional $100 million excess of $900 million property catastrophe coverage layer. Both of these layers only provide coverage for perils in the Northeast. For our surety/fidelity bond reinsurance coverage, effective July 1, 2010, we increased our retention related to the $5.0 million coverage in excess of $5.0 million from 8% to 32.5% and increased the retention related to the $25 million in excess of $10.0 million from 5% to 11% to 15%.

(4) In addition to certain layers of coverage from our reinsurance programs as described in this table, the AIX reinsurance program also includes surplus share, quota share, excess of loss, facultative and other forms of reinsurance that cover the writings from AIX specialty and proprietary programs. There are approximately 40 different AIX programs and the reinsurance program is customized to fit the exposure profile of each program.

(5) The commercial property excess of loss agreement reinsures commercial properties which have at least one location with multiple buildings covered by our policy. This agreement excludes catastrophe losses resulting from named storms as defined by the National Oceanic and Atmospheric Administration (“NOAA”). These “Named Storms” are excluded since losses from such storms are usually covered under property catastrophe occurrence treaties.

(6) The property per risk treaty $2 million to $5 million layer is subject to a $6 million annual aggregate deductible.

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(7) Coverage between $10 million and $30 million under this agreement is clash reinsurance. Clash reinsurance is a type of excess of loss reinsurance in which an insurance company is reinsured in the event there is a casualty loss affecting two or more of its insureds. Umbrella is covered under our casualty reinsurance treaty subject to separate limits as defined. Umbrella and casualty lines share coverage at the $2 million to $10 million layers with the maximum umbrella limit subject to the casualty treaty of $5 million. There is also a separate layer that provides umbrella coverage of $15 million excess of $5 million per occurrence.

(8) Effective January 1, 2011, Hanover Healthcare will be covered by a separate excess of loss treaty with coverage between $0.5 million and $2 million. Effective April 1, 2011, business from Benchmark will be included in the Professional liability reinsurance treaty.

DISCONTINUED OPERATIONS

Our discontinued operations are segregated into three components: Discontinued FAFLIC Business, Discontinued Operations of our Variable Life Insurance and Annuity Business, and Discontinued Accident and Health Business.

Results from our Discontinued FAFLIC Business, which was sold to Commonwealth Annuity on January 2, 2009, reflect recoveries or expenses related to our indemnification obligations arising out of the sale to Commonwealth Annuity. Our Discontinued Operations of our Variable Life Insurance and Annuity business reflects the net costs and recoveries associated with the 2005 sale of this business and primarily includes recoveries of indemnification costs. Our Discontinued Accident and Health Business includes interests in approximately 26 accident and health reinsurance pools and arrangements that were assumed by Hanover Insurance coincident with the sale of the FAFLIC business. We ceased writing new premiums in this business in 1999, subject to certain contractual obligations. The reinsurance pool business consists primarily of direct and assumed medical stop loss, the medical and disability portions of workers’ compensation risks, small group managed care, long-term disability and long-term care pools, student accident and special risk business. Our total reserves for the assumed accident and health business were $129.7 million at December 31, 2010. The total amount recoverable from third party reinsurers was $6.8 million at December 31, 2010. Total net reserves were $122.9 million at December 31, 2010. We will continue to account for this business as Discontinued Operations.

Loss estimates associated with substantially all of this business are provided by managers of each pool. We adopt reserve estimates for this business that considers this information, expected returns on assets assigned to this business and other facts. We update these reserves as new information becomes available and further events occur that may affect the ultimate resolution of unsettled claims. We believe that the reserves recorded related to this business are adequate. However, since reserve and loss cost estimates related to our Discontinued Accident and Health Business are dependent on several assumptions, including, but not limited to, future health care costs, persistency of medical care inflation, investment performance, claims, particularly in the long-term care business, morbidity and mortality assumptions, and these assumptions can be impacted by technical developments and advancements in the medical field and other factors, there can be no assurance that the reserves established for this business will prove sufficient. Revisions to these reserves could have a material adverse effect on our results of operations for a particular quarterly or annual period or on our financial position.

Our discontinued operations, in total, generated a net gain of $1.6 million during 2010. Reference is made to “Segment Results – Discontinued Operations” on pages 52 to 53 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

Assets and liabilities related to our Discontinued Accident and Health Business are reflected as assets and liabilities of discontinued operations.

INVESTMENT PORTFOLIO

We held $5.4 billion of investment assets at December 31, 2010, including $119.8 million of assets in our Discontinued Accident and Health Business. Approximately 91% of our investment assets are comprised of fixed maturities, which includes both investment grade and below investment grade public and private debt securities. An additional 6% of our investment assets are comprised of cash and cash equivalents, while the remaining 3% includes equity securities, and other long-term investments. These investments are generally of high quality and our fixed maturities are broadly diversified across sectors of the fixed income market.

Our investment strategy is intended to maximize investment income with consideration towards driving long-term growth of shareholders’ equity and book value. The determination of the appropriate asset allocation is a process that focuses on the types of business written and the level of surplus required to support our different businesses and the risk return profiles of the underlying asset classes. We look to balance the goals of capital preservation, stability, liquidity and after-tax return.

The majority of our assets are invested in the fixed income markets. Through fundamental research and credit analysis, our investment professionals seek to identify a portfolio of stable income producing higher quality U.S. government, municipal, corporate, residential and commercial mortgage-backed securities and asset-backed securities, as well as undervalued securities in the credit markets balanced by strong relative value characteristics. We have a general policy of diversifying investments both within and across major investment and industry sectors to

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mitigate credit and interest rate risk. We monitor the credit quality of our investments and our exposure to individual markets, borrowers, industries, sectors and, in the case of direct commercial mortgages and commercial mortgage-backed securities, property types and geographic locations.

Investments held by our insurance subsidiaries are subject to diversification requirements under state insurance laws. Our investment asset portfolio duration is approximately four and a half years and is generally maintained in the range of 1.5 to 3 times the duration of our insurance liabilities. We seek to maintain sufficient liquidity to support our cash flow requirements by monitoring the cash requirements associated with our insurance and corporate liabilities, laddering the maturities within the portfolio, closely monitoring our investment durations, holding high quality liquid public securities and managing the purchases and sales of assets.

Reference is made to “Investment Portfolio” on pages 55 to 60 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

RATING AGENCIES

Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers information on specific insurance companies. Higher ratings generally indicate the rating agencies’ opinion regarding financial stability and a stronger ability to pay claims.

We believe that strong ratings are important factors in marketing our products to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry. We believe that a rating of “A-”or higher from A.M. Best Co. is particularly important for our business. Insurance company financial strength ratings are assigned to an insurer based upon factors deemed by the rating agencies to be relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security.

See “Rating Agencies” on page 74 in Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

EMPLOYEES

We have approximately 4,400 employees located throughout the United States as of December 31, 2010. We believe our relations with employees are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to “Directors and Executive Officers of the Registrant” in Part III, Item 10 on pages 128 to 129 of this Form 10-K.

AVAILABLE INFORMATION

We file our annual report on Form 10-K, quarterly reports on Form 10-Q, periodic information on Form 8-K, our proxy statement, and other required information with the SEC. Shareholders may read and copy any materials on file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Shareholders may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, http://www.sec.gov, which contains reports, proxy and information statements and other information with respect to our filings.

Our website address is http://www.hanover.com. We make available free of charge on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Additionally, our Code of Conduct is also available, free of charge, on our website. The Code of Conduct applies to our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Controller. While we do not expect to grant waivers to our Code of Conduct, any such waivers granted to our Chief Executive Officer, Chief Financial Officer or Controller, or any amendments to our Code will be posted on our website as required by law or rules of the New York Stock Exchange. Our Corporate Governance Guidelines and the charters of our Audit Committee, Compensation Committee, Committee of Independent Directors and Nominating and Corporate Governance Committee, are available on our website. All documents are also available in print to any shareholder who requests them.

ITEM 1A–RISK FACTORS

We wish to caution readers that the following important factors, among others, in some cases have affected and in the future could affect our actual results and could cause our actual results and needs to differ materially from historical results and from those expressed in any forward-looking statements made from time to time by us on the basis of our then-current expectations. When used in this Form 10-K, the words “believes”, “anticipates”, “expects”, “projections”, “outlook”, “should”,” could”, “plan”, “guidance”, “likely”, “on track to”, “targeted” and similar expressions are intended to identify forward-looking statements. The businesses in which we engage are in rapidly changing and competitive markets and involve a high degree of risk and unpredictability. Accuracy with respect to forward-looking projections is difficult.

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Our results may fluctuate as a result of cyclical or non-cyclical changes in the property and casualty insurance industry.

We generate most of our total revenues and earnings through our property and casualty insurance subsidiaries. The results of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability could be affected significantly by the following items:

• increases in costs, particularly those occurring after the time our insurance products are priced and including construction, automobile repair, and medical and rehabilitation costs. This includes “cost shifting” from health insurers to casualty and liability insurers (whether as a result of an increasing number of injured parties without health insurance, coverage changes in health policies to make such coverage, in certain circumstances, secondary to other policies, the recent adoption of national healthcare legislation, lower reimbursement rates for the same procedure by health insurers or government-sponsored insurance, or the implementation of the Medicare Secondary Payer Act which requires reporting and imposes other requirements with respect to medical and related claims paid with respect to Medicare eligible individuals). As it relates to construction, there are often temporary increases in the cost of building supplies and construction labor after a significant event (for example, so called “demand surge” that causes the cost of labor, construction materials and other items to increase in a geographic area affected by a catastrophe);

• competitive and regulatory pressures, which may affect the prices of our products and the nature of the risks covered;

• volatile and unpredictable developments, including severe weather, catastrophes and terrorist actions;

• legal, regulatory and socio-economic developments, such as new theories of insured and insurer liability and related claims and extra-contractual awards such as punitive damages, and increases in the size of jury awards or changes in state laws and regulations (such as changes in the thresholds affecting “no fault” liability or when non-economic damages are recoverable for bodily injury claims or coverage requirements);

• fluctuations in interest rates, inflationary pressures, default rates and other factors that affect investment returns; and

• other general economic conditions and trends that may affect the adequacy of reserves.

The demand for property and casualty insurance can also vary significantly based on general economic conditions (either nationally or regionally), rising as the overall level of economic activity increases and falling as such activity decreases. Loss patterns also tend to vary inversely with local economic conditions, increasing during difficult economic times and moderating during economic upswings or periods of stability. The fluctuations in demand and competition could produce underwriting results that would have a negative impact on our results of operations and financial condition.

Actual losses from claims against our property and casualty insurance subsidiaries may exceed their reserves for claims.

Our property and casualty insurance subsidiaries maintain reserves to cover their estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent estimates, involving actuarial projections and judgments at a given time, of what we expect the ultimate settlement and administration of incurred claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity and judicial theories of liability, costs of repair and replacement, legislative activity and other factors.

The inherent uncertainties of estimating reserves are greater for certain types of property and casualty insurance lines. These include workers’ compensation, where a longer period of time may elapse before a definitive determination of ultimate liability may be made, environmental liability, where the technological, judicial and political climates involving these types of claims are changing, and various casualty coverages such as professional liability. There is also greater uncertainty in establishing reserves with respect to new business, particularly new business that is generated with respect to newly introduced product lines, such as our professional liability and healthcare lines, by newly appointed agents or in geographies where we have less experience in conducting business, such as in our Personal Lines “growth states” and the western states in Commercial Lines. In such cases, there is less historical experience or knowledge and less data upon which the actuaries can rely. Additionally, the introduction of new Commercial Lines products, including through recently acquired subsidiaries, and the development of new niche and specialty lines, presents new risks. Certain new specialty products, such as the new human services programs non-profit directors and officers liability and employment practices liability policies, lawyers and other professional liability policies, healthcare lines and private company directors and officers coverage may also require a longer period of time (the so-called “tail”) to determine the ultimate liability associated with the claims and may produce more volatility in our results and less certainty in our accident year reserves.

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We regularly review our reserving techniques, reinsurance and the overall adequacy of our reserves based upon, among other things:

• our review of historical data, legislative enactments, judicial decisions, legal developments in imposition of damages, changes in political attitudes and trends in general economic conditions;

• our review of per claim information;

• historical loss experience of our property and casualty insurance subsidiaries and the industry as a whole; and

• the provisions in our property and casualty insurance policies.

Underwriting results and segment income could be adversely affected by further changes in our net loss and LAE estimates related to significant events or emerging risks, such as “Chinese drywall” claims. Chinese drywall claims consist of individual and class action litigation related to the installation of drywall manufactured in China which allegedly emits a foul odor and gases which cause respiratory, sleep and other health problems and cause corrosion of metal substances. Although it is too soon to assess the merits of such claims or our potential liability for indemnity and defense costs, such claims involve or may involve drywall distributors and installers, contractors, homeowners and others.

The risks and uncertainties in our business that may affect net loss, LAE and reserve estimates and future performance, including the difficulties in arriving at such estimates, should be considered. Estimating losses following any major catastrophe or with respect to emerging issues is an inherently uncertain process. Factors that add to the complexity in these events include the legal and regulatory uncertainty, the complexity of factors contributing to the losses, delays in claim reporting and with respect to areas with significant property damage, the impact of “demand surge” and a slower pace of recovery resulting from the extent of damage sustained in the affected areas due, in part, to the availability and cost of resources to effect repairs. Emerging issues may involve complex coverage, liability and other costs which could significantly affect LAE. As a result, there can be no assurance that our ultimate costs associated with these events or issues will not be substantially different from current estimates.

Anticipated losses associated with business interruption exposure, the impact of wind versus water as the cause of loss, supplemental payments on previously closed claims caused by the development of latent damages or new theories of liability and inflationary pressures could have a negative impact on future loss reserve development.

Because of the inherent uncertainties involved in setting reserves, including those related to catastrophes, we cannot provide assurance that the existing reserves or future reserves established by our property and casualty insurance subsidiaries will prove adequate in light of subsequent events. Our results of operations and financial condition could therefore be materially affected by adverse loss development for events that we insured in prior periods.

Due to geographical concentration in our property and casualty business, changes in economic, regulatory and other conditions in the regions where we operate could have a significant negative impact on our business as a whole.

We generate a significant portion of our property and casualty insurance net premiums written and earnings in Michigan, Massachusetts and other states in the Northeast, including New Jersey and New York. For the year ended December 31, 2010, approximately 23.6% and 10.3% of our net written premium in our property and casualty business was generated in the states of Michigan and Massachusetts, respectively. Massachusetts and New Jersey, in particular with respect to personal automobile insurance, are highly regulated, but undergoing regulatory changes. These states impose significant rate control and residual market charges, and restrict a carrier’s ability to exit such markets. The revenues and profitability of our property and casualty insurance subsidiaries are subject to prevailing economic, regulatory, demographic and other conditions, including adverse weather in Michigan and the Northeast. Because of our strong regional focus, our business as a whole could be significantly affected by changes in the economic, regulatory and other conditions in the regions where we transact business.

Results may also be adversely affected by pricing decreases and market disruptions including any caused by the current economic environment in Michigan. Additionally, a recent decision by the Michigan Supreme Court to overturn the so-called Kreiner decision could expand the circumstances in which parties can recover non-economic damages for bodily claims in automobile accidents in Michigan. The introduction of “managed competition” in Massachusetts has resulted in overall rate level reductions and a highly competitive rate environment. Additionally, there is uncertainty regarding our ability to attract and retain customers in this market as new and larger carriers enter the state of Massachusetts as a result of “managed competition”.

Further, certain new catastrophe models assume an increase in frequency and severity of certain weather events, whether as a result of potential global warming or otherwise, and financial strength rating agencies are placing increased emphasis on capital and reinsurance adequacy for insurers with certain geographic concentrations of risk. These factors may result in insurers seeking to diversify their geographic exposure, which could result in increased regulatory restrictions in those markets where insurers seek to exit or reduce coverage, as well as an increase in competitive pressures in non-coastal markets such as the Midwest. As previously noted, we have significant concentration of exposures in certain areas, including

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portions of the Northeast and Southeast and derive a material amount of revenues from operations in the Midwest and California.

Catastrophe losses could materially reduce our profitability or cash flow.

Our property and casualty insurance subsidiaries are subject to claims arising out of catastrophes that may have a significant impact on their results of operations and financial condition. We may experience catastrophe losses, which could have a material adverse impact on our business. Catastrophes can be caused by various events including hurricanes, earthquakes, tornadoes, wind, hail, fires, severe winter weather, sabotage, terrorist actions and explosion. The frequency and severity of catastrophes are inherently unpredictable.

The extent of gross losses from a catastrophe is a function of the total amount of insured exposure in the area affected by the event and the severity of the event. The extent of net losses depends on the amount and collectability of reinsurance.

Although catastrophes can cause losses in a variety of property and casualty lines, homeowners and commercial multiple peril property insurance have, in the past, generated the vast majority of our catastrophe-related claims. Our catastrophe losses have historically been principally weather-related, particularly hurricanes, as well as snow and ice damage from winter storms.

We purchase catastrophe reinsurance as protection against catastrophe losses. Based upon an ongoing review of our reinsurers’ financial statements, financial strength ratings assigned to them by rating agencies, their reputations in the reinsurance marketplace, our collections history with them, and the analysis and guidance of our reinsurance advisors, we believe that the financial condition of our reinsurers is sound. However, reinsurance is subject to credit risks, including those resulting from over-concentration of exposures within the industry. The availability, scope of coverage and cost of reinsurance could be adversely affected by past natural catastrophes or terrorist attacks and the perceived risks associated with possible future terrorist activities. The impact of these events on the industry or on us cannot currently be determined. We plan to renew the dedicated Northeast property catastrophe occurrence treaty described above, but there is no assurance that such coverages will be available or at what price. Although we believe that our current retention levels are appropriate given our level of surplus and exposures, as well as the current reinsurance pricing environment, there can be no assurance that this reinsurance program will provide coverage levels that will prove adequate should we experience losses from one significant or several large catastrophes. We also cannot provide assurance that reinsurance will continue to be available to us at commercially reasonable rates or with coverage provisions reflective of the risks underwritten in our primary policies.

Climate change may adversely impact our results of operations.

There are concerns that the higher level of weather-related catastrophes and other losses incurred by the industry in recent years is indicative of changing weather patterns, whether as a result of changing climate (“global warming”) or otherwise, which could cause such events to persist. This would lead to higher overall losses which we may not be able to recoup, particularly in the current economic and competitive environment, and higher reinsurance costs. It would also likely increase the risks of writing property insurance in coastal areas, particularly in jurisdictions which restrict pricing and underwriting flexibility.

Although we cannot predict the certainty of such events, climate change could have an impact on issuers in which we invest, resulting in realized and unrealized losses in future periods which could have a material adverse impact on our results of operations and/or financial position. It is not possible to foresee which, if any, issuers, industries or markets will be materially and adversely affected, nor is it possible to foresee the magnitude of such effect.

We may incur financial losses resulting from our participation in shared market mechanisms, mandatory reinsurance programs and mandatory and voluntary pooling arrangements.

As a condition to conducting business in several states, our property and casualty insurance subsidiaries are required to participate in mandatory property and casualty shared market mechanisms, state-sponsored reinsurance programs or pooling arrangements. These arrangements are designed to provide various insurance coverages to individuals or other entities that otherwise are unable to purchase such coverage. We cannot predict whether our participation in these shared market mechanisms or pooling arrangements will provide underwriting profits or losses to us. For the year ended December 31, 2010, we experienced an underwriting loss of $12.9 million from participation in these mechanisms and pooling arrangements, compared to an underwriting gain of $2.3 million in 2009 and an underwriting loss of $11.5 million in 2008. We may face similar or even more dramatic earnings fluctuations in the future.

Additionally, recent significant increases and expected further increases in the number of participants or insureds in state-sponsored reinsurance pools, FAIR Plans or other residual market mechanisms, particularly in the states of Louisiana, Massachusetts and Florida, combined with regulatory restrictions on the ability to adequately price, underwrite, or non-renew business, could expose us to significant exposures and assessment risks.

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We also have credit risk associated with certain mandatory reinsurance programs such as the Michigan Catastrophic Claims Association. The MCCA was created to fund Michigan’s unique unlimited personal injury protection benefit. As of December 31, 2010, our estimated recoverable from the MCCA was $730.0 million. The MCCA operates with an increasingly large deficit.

In addition, we may be adversely affected by liabilities resulting from our previous participation in certain voluntary property and casualty assumed reinsurance pools. We have terminated participation in virtually all property and casualty voluntary pools, but remain subject to claims related to periods in which we participated. The property and casualty assumed reinsurance businesses have suffered substantial losses during the past several years, particularly related to environmental and asbestos exposure for property and casualty coverages. Due to the inherent volatility in these businesses, possible issues related to the enforceability of reinsurance treaties in the industry and the recent history of increased losses, we cannot provide assurance that our current reserves are adequate or that we will not incur losses in the future. Although we have discontinued participation in these reinsurance pools as described above, we are subject to claims related to prior years or from pools we could not exit in full. Our operating results and financial position may be adversely affected by liabilities resulting from any such claims in excess of our loss estimates. As of December 31, 2010, our reserves for these pools totaled $41.1 million.

We cannot guarantee our ability to maintain our current level of reinsurance coverage.

Similar to insurance companies, reinsurance companies can also be adversely impacted when catastrophes occur. There can be no assurance that we will be able to maintain our current levels of reinsurance coverage. Future catastrophic events and other changes in the reinsurance marketplace, including as a result of investment losses or disruptions due to challenges in the financial markets that have occurred or could occur in the future, may adversely affect our ability to obtain such coverages, as well as adversely affect the cost of obtaining that coverage.

Additionally, the availability, scope of coverage, cost, and creditworthiness of reinsurance could continue to be adversely affected as a result of not only new catastrophes, but also terrorist attacks, global conflicts, the changing legal and regulatory environment (including changes which could create new insured risks) and the perceived risks associated with future terrorist activities.

From time to time there have been proposals to scale back federal terrorism coverage under TRIPRA. At this time, we are unable to predict the likelihood of adoption of any such proposals, what will ultimately be included in such proposals if passed, or the predictability and severity of acts of terrorism; however, any such change in TRIPRA coverage could have an adverse effect on our results of operations and financial position.

Our businesses are heavily regulated and changes in regulation may reduce our profitability.

Our insurance businesses are subject to supervision and regulation by the state insurance authority in each state in which we transact business. This system of supervision and regulation relates to numerous aspects of an insurance company’s business and financial condition, including limitations on the authorization of lines of business, underwriting limitations, the ability to utilize credit-based insurance scores in underwriting, the ability to terminate agents, supervisory and liability responsibilities for agents, the setting of premium rates, the requirement to write certain classes of business which we might otherwise avoid or charge different premium rates, restrictions on the ability to withdraw from certain lines of business, the establishment of standards of solvency, the licensing of insurers and agents, compensation of agents, concentration of investments, levels of reserves, the payment of dividends, transactions with affiliates, changes of control, protection of private information of our agents, policyholders, claimants and others, and the approval of policy forms. Several states and Congress have proposed to prohibit or otherwise restrict the use of credit-based insurance scores in underwriting or rating our Personal Lines business. The elimination of the use of credit-based insurance scores could cause significant disruption to our business and our confidence in our pricing and underwriting. Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors.

In addition, in July 2010, in response to the recent global financial crisis, The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This legislation provides for enhanced regulation for the financial services industry through initiatives including, but not limited to, the creation of a Federal Insurance Office and several federal oversight agencies, the requiring of more transparency, accountability and focus in protecting investors and businesses, input of shareholders regarding executive compensation, and enhanced empowerment of regulators to pursue those who engage in financial fraud and unethical business practices. We do not yet know what the impact of this legislation and related regulations will be on our business operations or the insurance industry in general.

Additionally, from time to time, we are involved in litigation that challenges specific terms and language incorporated into property and casualty contracts, such as claims reimbursements, covered perils and exclusion clauses, among others, or the interpretation or administration of such contracts. From time to time, we are also involved in investigations and proceedings by governmental

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and self-regulatory agencies. We cannot provide assurance that these investigations, proceedings and inquiries will not result in actions that would adversely affect our results of operations or financial condition.

State regulatory oversight and various proposals at the federal level may in the future adversely affect our ability to sustain adequate returns in certain lines of business or in some cases, operate the line profitably. In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, increase state authority to regulate insurance companies and insurance holding company systems. Our business could be negatively impacted by adverse state and federal legislation or regulation, including those resulting in:

• decreases in rates;

• limitations on premium levels;

• coverage and benefit mandates;

• limitations on the ability to manage care and utilization or other claim costs;

• requirements to write certain classes of business or in certain geographies;

• restrictions on underwriting or on methods of compensating independent producers;

• higher liability exposures for our insureds;

• increased assessments or higher premium or other taxes; and

• enhanced ability to pierce “no fault” thresholds or recover non-economic damages (such as “pain and suffering”).

These regulations serve to protect the customers and other third parties who deal with us. If we are found to have violated an applicable regulation, administrative or judicial proceedings may be initiated against us which could result in censures, fines, civil penalties (including punitive damages), the issuance of cease-and-desist orders, premium refunds or the reopening of closed claim files, among other consequences. These actions could have a material adverse effect on our financial position and results of operations.

Additionally, in 2010, the Patient Protection and Affordable Care Act (“Federal Healthcare Act”) and the Financial Reform Act were adopted. It is not clear what impact the Federal Healthcare Act will have on prices for medical care or on the demand for our products such as automobile personal injury protection insurance. Similarly, the creation of a Federal Insurance Office as a result of the Financial Reform Act may ultimately impact the overall regulation of insurance in ways that cannot now be predicted. Furthermore, Congress, as well as state and local governments, also consider from time to time legislation that could increase our tax costs. If such legislation is adopted, our consolidated net income could decline. We cannot predict whether such legislation will be enacted, what the specific terms of any such legislation will be or how, if at all, it might affect our products. Also, recently enacted federal legislation mandates new and significant reporting requirements for property and casualty insurance companies which make payments to or on behalf of claimants who are eligible for various Medicare or other benefits. These requirements impose significant fines for non-compliance and reporting errors. It is possible that the federal government may seek to recover from insurers amounts paid to claimants in circumstances where the government had previously paid benefits.

We may be adversely affected by new and existing legislation in the states of Louisiana and Florida as a result of the losses incurred in those states from recent hurricanes. We also may incur a greater share of losses related to Louisiana’s and Florida’s shared market mechanisms due to these increased losses, as well as the declining number of carriers providing coverage in this region.

Louisiana’s residual market mechanism for property experienced substantial losses related to Hurricane Katrina. Under the state’s program, we are allowed to recover such losses from policyholders, subject to annual limitations. Although we have recognized an expense currently for our estimated losses from the Louisiana program, given the uncertainty in the marketplace in Louisiana, there can be no assurance that our estimate of this liability will be sufficient to cover our share of such losses or whether we will be able to recover such costs from policyholders. The Louisiana program is also subject to the litigation risks discussed above relating to the scope of insurance coverage and other questions arising out of Hurricane Katrina. Adverse decisions in these cases could materially and adversely affect such liabilities, which in turn could have a material, adverse effect on us. The homeowners market appears to be stabilizing with the residual market shrinking to a level that now predates Katrina levels. However, given Louisiana’s unique homeowners insurance system and risks, there can be no assurance that carriers will not seek to exit or significantly reduce their exposures in the state. Any such actions may increase the number of insureds seeking coverage from the residual market mechanism and could result in increased losses to us.

Florida’s residual market mechanism for property has increased in size in recent years and may grow further as insurers reduce homeowners insurance exposures in the state and the insolvencies of several smaller insurance carriers continue. Insurance companies which write business in Florida, including Commercial Lines and automobile coverage, are subject to assessment for losses from Florida’s programs, which assessment could be substantial in the event of hurricanes or other catastrophic events. It is also possible that the reinsurance from the Florida Hurricane Catastrophe Fund will be uncollectible or we would be unable to recover such assessments from the Florida Insurance Guaranty Association in the event that

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other insurers doing business in the state become insolvent. We are unable to predict the likelihood or impact of such potential assessments or other actions.

We are subject to mandatory assessments by state guaranty funds; an increase in these assessments could adversely affect our results of operations and financial condition.

All fifty states of the United States and the District of Columbia have insurance guaranty fund laws requiring property and casualty insurance companies doing business within the state to participate in guaranty associations. These associations are organized to pay contractual obligations under insurance policies issued by impaired or insolvent insurance companies. The associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired or insolvent insurer is engaged. Mandatory assessments by state guaranty funds are used to cover losses to policyholders of insolvent or rehabilitated companies and can be partially recovered through a reduction in future premium taxes in many states (provided the collecting insurer continues to write business in such state). During 2010, we had a total assessment of $3.6 million levied against us, with refunds of $2.4 million received in 2010 for a total net assessment of $1.2 million. As of December 31, 2010, we have $0.8 million of reserves related to guaranty fund assessments. In the future, these assessments may increase above levels experienced in the current and prior years. Future increases in these assessments depend upon the rate of insolvencies of insurance companies. An increase in assessments could adversely affect our results of operations and financial condition.

If we are unable to attract and retain qualified personnel, or if we experience the loss or retirement of key executives or other key employees, we may not be able to compete effectively and our operations could be impacted significantly.

Our future success will be affected by our continued ability to attract and retain qualified executives and other key employees, particularly those experienced in the property and casualty industry.

Our profitability could be adversely affected by periodic changes to our relationships with our agencies.

We periodically review agencies with which we do business to identify those that do not meet our profitability standards or are not strategically aligned with our business. Following these periodic reviews, we may restrict such agencies’ access to certain types of policies or terminate our relationship with them, subject to applicable contractual and regulatory requirements to renew certain policies for a limited time. We may not achieve the desired results from these measures, and our failure to do so could negatively affect our operating results and financial position.

We may be affected by disruptions caused by the introduction of new Commercial and Personal Lines products and related technology changes, new Commercial and Personal Lines operating models and recent or future acquisitions, including the renewal rights agreement we entered into with OneBeacon Insurance Company in December 2009, and expansion into new geographic areas. We could also be affected by an inability to retain profitable policies in force and attract profitable policies in our Commercial and Personal Lines segments, particularly in light of an increasingly competitive product pricing environment and the adoption by competitors of strategies to increase agency appointments and commissions and increased advertising.

There are increased underwriting risks associated with premium growth and the introduction of new products or programs in both our Commercial and Personal Lines businesses, as well as the appointment of new agencies and the expansion into new geographical areas.

The introduction of new Commercial Lines products, including through our acquired subsidiaries and the development of new niche and specialty lines, presents new risks. Certain new specialty products may present longer “tail” risks and increased volatility in profitability. Our expansion into new western states, including California, presents additional underwriting risks since the regulatory, geographic, natural risk, legal environment, demographic, business, economic and other characteristics of these states present challenges different from those in the states in which we currently do business.

There can also be no assurances that we will be able to successfully integrate recent and any future acquisitions or that we will not assume unknown liabilities and reserve deficiencies in connection with such acquisitions. We wrote approximately $300 million of business pursuant to the renewal rights transaction with OneBeacon. However, the vast majority of this business was written on OneBeacon’s policy forms and renewed by us. In 2011, we will be converting these reinsured policies to our policy forms and systems. There are no assurances that the insurance agencies who control such business will renew such policies directly with us, that we will be able to appropriately rate and price such policies or that such business will prove to be profitable.

Our Personal Lines production and earnings may be unfavorably affected by the continued introduction of new products, including our multivariate automobile product, as a proportion of our total personal automobile premium as compared to the historically more profitable legacy products, and our focus on account business (i.e., policyholders who have both automobile and homeowner insurance with us) which we believe, despite pricing discounts, will ultimately be more profitable business. We may also experience adverse selection, which occurs when insureds with larger risks purchase our products because of favorable pricing, under-pricing, operational difficulties or

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implementation impediments with independent agents or the inability to grow new markets after the introduction of new products or the appointment of new agents.

We have experienced increased loss ratios with respect to our personal automobile business, which is written through our Connections Auto product, particularly in certain states where we have less experience and data and less established agency relationships. There can be no assurance that as we enter new states or grow business in our identified growth states, we won’t experience higher loss trends than anticipated.

Intense competition could negatively affect our ability to maintain or increase our profitability.

We compete with a large number of companies in our property and casualty segment. We compete, and will continue to compete, with national and regional insurers, mutual companies, specialty insurance companies, so called “off-shore” companies which enjoy certain tax advantages, underwriting agencies and financial services institutions. In recent years, there has been substantial consolidation and convergence among companies in the financial services industry, resulting in increased competition from large, well-capitalized financial services firms. Many of our competitors have greater financial, technical and operating resources than we do. In addition, competition in the property and casualty insurance markets has intensified over the past several years. This competition has had and may continue to have an adverse impact on our revenues and profitability.

A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include:

• the implementation of commercial lines deregulation in several states;

• programs in which state-sponsored entities provide property insurance in catastrophe-prone areas or other alternative markets types of coverage;

• changes in, or restrictions on, the way independent agents may be compensated by insurance companies;

• increased competition from off-shore tax advantaged insurance companies;

• changing practices caused by the internet and the increased usage of real time comparative rating tools, which have led to greater competition in the insurance business in general, particularly on the basis of price; and

• proposals, from time to time, to provide for federal chartering of insurance companies.

In addition, we could face heightened competition resulting from the entry of new competitors and the introduction of new products by new and existing competitors. Increased competition could make it difficult for us to obtain new customers, retain existing customers or maintain policies in force by existing customers. It could also result in increasing our service, administrative, policy acquisition or general expense due to the need for additional advertising and marketing of our products. In addition, our administrative, technology and management information systems expenditures could also increase substantially as we try to maintain our competitive position. We cannot provide assurance that we will be able to maintain a competitive position in the markets in which we operate, or that we will be able to expand our operations into new markets. If we fail to do so, our business could be materially adversely affected.

We are rated by several rating agencies, and changes to our ratings could adversely affect our operations.

Our ratings are important in establishing our competitive position and marketing the products of our insurance companies to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry.

Our insurance company subsidiaries are rated by A.M. Best, Moody’s, Fitch, and Standard & Poor’s. These ratings reflect a rating agency’s opinion of our insurance subsidiaries’ financial strength, operating performance, strategic position and ability to meet their obligations to policyholders. These ratings are not evaluations directed to investors, and are not recommendations to buy, sell or hold our securities. Our ratings are subject to periodic review by the rating agencies and we cannot guarantee the continued retention or improvement of our current ratings. This is particularly true in the current economic environment where rating agencies may increase their capital requirements or other criteria for various rating levels.

A downgrade in one or more of the Company’s claims-paying ratings could negatively impact the Company’s business volumes and competitive position because demand for certain of its products may be reduced, particularly in lines where customers require the Company to maintain minimum ratings. Additionally, a downgrade in one or more of the Company’s debt ratings could adversely impact the Company’s ability to access the capital markets and other sources of funds, and/or adversely affect pricing of new debt sought in the capital markets in the future.

Negative changes in our level of statutory surplus could adversely affect our ratings and profitability.

The capacity for an insurance company’s growth in premiums is in part a function of its statutory surplus. Maintaining appropriate levels of statutory surplus, as measured by state insurance regulators, is considered important by state insurance regulatory authorities and the private agencies that rate insurers’ claims-paying abilities and financial strength. Regulators may require that additional capital be contributed to increase the level of statutory surplus. Failure to maintain certain levels of statutory surplus could result in increased regulatory scrutiny, action by state regulatory authorities or a downgrade by private

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rating agencies. Our surplus is affected by, among other things, results of operations and investment gains, losses and impairments.

The National Association of Insurance Commissioners, or NAIC, uses a system for assessing the adequacy of statutory capital for property and casualty insurers. The system, known as risk-based capital, is in addition to the states’ fixed dollar minimum capital and other requirements. The system is based on risk-based formulas that apply prescribed factors to the various risk elements in an insurer’s business and investments to report a minimum capital requirement proportional to the amount of risk assumed by the insurer. We believe that any failure to maintain appropriate levels of statutory surplus would have an adverse impact on our ability to grow our property and casualty business profitably.

We may not be able to grow as quickly as we intend, which is important to our current strategy.

Over the past several years, we have made and our current plans are to continue to make, significant investments in our Commercial and Personal Lines of business, and we have increased expenses and made acquisitions in order to, among other things, strengthen our product offerings and service capabilities, expand into new geographic areas, improve technology and our operating models, build expertise in our personnel, and expand our distribution capabilities, with the ultimate goal of achieving significant, sustained growth. The ability to achieve significant profitable premium growth in order to earn adequate returns on such investments and expenses, and to grow further without proportionate increases in expenses, is critical to our current strategy. There can be no assurance that we will be successful at profitably growing our business, or that we will not alter our current strategy due to changes in our markets or an inability to successfully maintain acceptable margins on new business or for other reasons, in which case written and earned premium, property and casualty segment income and net book value could be adversely affected.

We could be subject to additional losses related to the sale of our Discontinued FAFLIC and variable life insurance and annuity businesses.

On January 2, 2009, we sold our remaining life insurance subsidiary, FAFLIC, to Commonwealth Annuity, a subsidiary of Goldman Sachs. Coincident with the sale transaction, The Hanover Insurance and FAFLIC entered into a reinsurance contract whereby Hanover Insurance assumed FAFLIC’s discontinued accident and health insurance business. Goldman Sachs previously purchased, in 2005, our variable life insurance and annuity business.

In connection with these transactions, we have agreed to indemnify Commonwealth Annuity and Goldman Sachs for certain contingent liabilities, including litigation and other regulatory matters (including with respect to existing and potential litigation), as well as other contractual obligations. We have established a reserve related to these contractual indemnifications. Although we believe that this liability is appropriate, we cannot provide assurance that costs related to these indemnifications when they ultimately settle, will not exceed our current liability.

We may incur financial losses related to our discontinued assumed accident and health reinsurance pools and arrangements.

We previously participated, through FAFLIC, in approximately 40 assumed accident and health reinsurance pools and arrangements. The business was assumed by Hanover Insurance through a reinsurance agreement with FAFLIC. During 1999, we ceased writing new premiums in this business, subject to certain contractual obligations. The reinsurance pool business consisted primarily of direct and assumed medical stop loss, the medical and disability portions of workers’ compensation risks, small group managed care, long-term disability and long-term care pools, student accident and special risk business. We are currently monitoring and managing the run-off of our related participation in the 26 pools with remaining liabilities.

Under these arrangements, we variously acted as a reinsurer, a reinsured or both. In some instances, we ceded significant exposures to other reinsurers in the marketplace. There are disputes ongoing within the industry, which relate to the placement of this type of business with various reinsurers and ultimately may result in an impact to the recovery of the placed reinsurance. The potential risk to us as a participant in these pools is primarily that other companies that reinsured this business from us may seek to avoid or fail to timely pay their reinsurance obligations (especially in light of the fact that historically these pools sometimes involved multiple layers of overlapping reinsurers, or so-called “spirals”) or may become insolvent. Thus, we are exposed to both assumed losses and to credit risk related to these pools. We are not currently engaged in any significant disputes in respect to this business. At this time, we do not anticipate that any significant portion of recorded reinsurance recoverables will be uncollectible. However, we cannot provide assurance that all recoverables are collectible and should these recoverables prove to be uncollectible, our results of operations and financial position may be negatively affected.

We believe our reserves for the accident and health assumed and ceded reinsurance business appropriately reflect current claims, unreported losses and likely investment returns on related assets supporting these reserves. However, due to the inherent volatility in this business and the reporting lag of losses that tend to develop over time and which ultimately affect excess covers, there can be no assurance that current reserves are adequate or that we

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will not have additional losses in the future. Although we have discontinued participation in these reinsurance arrangements, unreported claims related to the years in which we were a participant may be reported and previously reported claims may develop unfavorably. If any such unreported claims or unfavorable development is reported to us, our results of operations and financial position may be negatively impacted.

Other market fluctuations and general economic, market and political conditions may also negatively affect our business, profitability and investment portfolio.

It is difficult to predict the impact of the challenging economic environment on both our Commercial and Personal Lines segment. In Commercial Lines, the difficult economy has resulted in reductions in demand for insurance products and services as more companies cease to do business and there are fewer business start-ups, particularly as small businesses are affected by a decline in overall consumer and business spending. Additionally, claims frequency could increase as policyholders submit and pursue claims more aggressively than in the past, fraud incidences may increase, or we may experience higher incidents of abandoned properties or poorer maintenance, which may also result in more claims activity. We have experienced higher workers’ compensation claims as injured employees take longer to return to work, increased surety losses as construction companies experience financial pressures and higher retroactive premium returns as audit results reflect lower payrolls. Our business could also be affected by an ensuing consolidation of independent insurance agencies. Our ability to increase pricing has been impacted as agents and policyholders have been more price sensitive, customers shop for policies more frequently or aggressively, utilize comparative rating models or, in Personal Lines in particular, turn to direct sales channels rather than independent agents. We have also experienced decreased new business premium levels, retention and renewal rates, and renewal premiums. Specifically in Personal Lines, policyholders may reduce coverages or change deductibles to reduce premiums, experience declining home values, or be subject to increased foreclosures, and policyholders may retain older or less expensive automobiles and purchase or insure fewer ancillary items such as boats, trailers and motor homes for which we provide coverages. Additionally if, as a result of the difficult economic environment, drivers continue to eliminate

automobile insurance coverage or to reduce their bodily injury limit, we may be exposed to more uninsured and underinsured motorist coverage losses.

At December 31, 2010, we held approximately $5.4 billion of investment assets in categories such as fixed maturities, cash and short-term investments, equity securities and other long-term investments. Our investment returns, and thus our profitability and shareholders’ equity, may be adversely affected from time to time by conditions affecting our specific investments and, more generally, by bond, stock, real estate and other market fluctuations and general economic, market and political conditions, including concerns regarding sub-prime and prime mortgages, as well as residential and commercial mortgage-backed or other debt securities, increasing concerns relating to the municipal bond markets, and developments that negatively impact our investment in real estate such as increased development costs, construction delays and tenant defaults. Our ability to make a profit on insurance products depends in part on the returns on investments supporting our obligations under these products, and the value of specific investments may fluctuate substantially depending on the foregoing conditions. We may use a variety of strategies to hedge our exposure to interest rate and other market risk. However, hedging strategies are not always available and carry certain credit risks, and our hedging could be ineffective.

Debt securities comprise a material portion of our investment portfolio. The issuers of those securities, as well as borrowers under the loans we make, customers, trading counterparties, counterparties under swaps and other derivative contracts and reinsurers, may be affected by declining market conditions. These parties may default on their obligations to us due to lack of liquidity, downturns in the economy or real estate values, operational failure, bankruptcy or other reasons. We cannot assure you that impairment charges will not be necessary in the future. Our ability to fulfill our debt and other obligations could be adversely affected by the default of third parties on their obligations owed to us.

Deterioration in the global financial markets may adversely affect our investment portfolio and have a related impact on our other comprehensive income, shareholders’ equity and overall investment performance. In recent years, global financial markets experienced unprecedented and challenging conditions, including a tightening in the availability of credit, the failure of several large financial institutions and concerns about the creditworthiness of the sovereign debt of several European and other countries. As a result, certain government bodies and central banks worldwide, including the U.S. Treasury Department and the U.S. Federal Reserve, provided for unprecedented intervention programs, the effects of which remain uncertain. In addition, in 2010, the Financial Reform Act provided for the creation of the Federal Insurance Office. The effect of such oversight office and any additional federal oversight that may ensue is unknown.

The U.S. economy has experienced significant declines in employment, household wealth, and lending. If conditions further deteriorate, our business could be further

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affected in different ways. Continued turbulence in the U.S. economy and contraction in the credit markets could further adversely affect our profitability, demand for our products or our ability to raise rates, and could also result in further declines in market value and future impairments of our investment assets. There can be no assurances that conditions in the global and domestic financial markets will not worsen and adversely affect our investment portfolio and overall performance.

In addition, our current borrowings from the FHLBB, as well as committed future borrowings to partially finance construction of a building to be leased to a third-party, are secured by collateral. If the fair value of pledged collateral falls below specific levels, we would be required to pledge additional collateral or repay any outstanding FHLBB borrowings.

Market conditions also affect the value of assets under our employee pension plans, including our Cash Balance Plan. The expense or benefit related to our employee pension plans results from several factors, including changes in the market value of plan assets, interest rates, regulatory requirements or judicial interpretation of benefits. For the year ended December 31, 2010, we recognized net expenses of $12.9 million related to our employee pension plans. Additionally, in 2010, we contributed $100 million to our qualified plan and do not expect to make any significant additional contributions in order to meet our minimum funding requirements. At December 31, 2010, our plan assets included approximately 26% of equity securities and other assets and 74% of fixed maturities. Declines in the market value of plan assets and interest rates from levels at December 31, 2010 could negatively affect our results of operations. At December 31, 2010, our qualified plan assets equaled its liabilities and for our non-qualified pension plans, our net liabilities exceeded assets by approximately $39 million. Deterioration in market conditions and differences between our assumptions and actual occurrences, and behaviors, including judicial determinations of ultimate benefit obligations pursuant to the Durand case discussed elsewhere, or otherwise, could result in a need to fund more into the qualified plan to maintain this funding level.

We may experience unrealized losses on our investments, especially during a period of heightened volatility, which could have a material adverse effect on our results of operations or financial condition.

Our investment portfolio and shareholders’ equity can be and in the past have been significantly impacted by the changes in the market values of our securities. U.S. and global financial markets and economies remain uncertain. This could result in unrealized and realized losses in future periods, and adversely affect the liquidity of our investments, which could have a material adverse impact on our results of operations and our financial position.

If, following such declines, we are unable to hold our investment assets until they recover in value, we would incur other-than-temporary impairments which would be recognized as realized losses in our results of operations, reduce net income and earnings per share and adversely affect our liquidity. Temporary declines in market value are recorded as unrealized losses, which do not affect net income and earnings per share, but reduce other comprehensive income, which is reflected on our Consolidated Balance Sheets. We cannot provide assurance that we will not have additional other-than-temporary impairments and/or unrealized investment losses in the future. Likewise, there can be no assurance that our investment portfolio will retain the net unrealized gains reflected on the balance sheet as of December 31, 2010, since such gains are dependent on prevailing interest rates, credit ratings and creditworthiness and general economic and other factors.

We are a holding company and rely on our insurance company subsidiaries for cash flow; we may not be able to receive dividends from our subsidiaries in needed amounts.

We are a holding company for a diversified group of insurance and financial services companies and our principal assets are the shares of capital stock of our subsidiaries. Our ability to make required debt service payments, as well as our ability to pay operating expenses and pay dividends to shareholders, depends upon the receipt of sufficient funds from our subsidiaries. The payment of dividends by our insurance company subsidiaries is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries, as well as these regulatory restrictions. We are required to notify insurance regulators prior to paying any dividends from our insurance subsidiaries and pre-approval is required with respect to “extraordinary dividends”.

Because of the regulatory limitations on the payment of dividends from our insurance company subsidiaries, we may not always be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our debt and other obligations. The inability of our subsidiaries to pay dividends to us in an amount sufficient to meet our debt service and funding obligations would have a material adverse effect on us. These regulatory dividend restrictions also impede our ability to transfer cash and other capital resources among our subsidiaries.

Our dependence on our insurance subsidiaries for cash flow exposes us to the risk of changes in their ability to generate sufficient cash inflows from new or existing customers or from increased cash outflows. Cash outflows may result from claims activity, expense payments or investment losses. Reductions in cash flow from our subsidiaries would have a material adverse effect on our business and results of operations.

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Although we monitor their financial soundness, we cannot be sure that our reinsurers will pay in a timely fashion, if at all.

We purchase reinsurance by transferring part of the risk that we have assumed (known as ceding) to reinsurance companies in exchange for part of the premium we receive in connection with the risk. As of December 31, 2010, our reinsurance receivable (including from MCCA) amounted to approximately $1.3 billion. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the reinsured) of our liability to our policyholders or, in cases where we are a reinsurer, to our reinsureds. Accordingly, we bear credit risk with respect to our reinsurers. Although we monitor the credit quality of our reinsurers, we cannot be sure that they will pay the reinsurance recoverables owed to us currently or in the future or that they will pay such recoverables on a timely basis.

Errors or omissions in connection with the administration of any of our products may cause our business and profitability to be negatively impacted.

We are responsible to our policyholders for administering their policies, premiums and claims and ensuring that appropriate records are maintained which reflect their transactions. We are subject to risks that errors or omissions of information occurred with respect to the administration of our products. As a result, we are subject to risks of liabilities associated with “bad faith”, unfair claims practices, unfair trade practices or similar allegations. Such risks may stem from allegations of agents, vendors, policyholders, claimants, regulators, states’ attorneys general or others. We may incur charges associated with any errors and omissions previously made or which are made in future periods. These charges may result from our obligation to policyholders to correct any errors or omissions, non-compliance with regulatory requirements, from fines imposed by regulatory authorities, or from other items, which may affect our financial position or results of operations.

We may experience difficulties with technology, data security and/or outsourcing relationships, which could have a negative impact on our ability to conduct our business. 

We use computer systems to store, retrieve, evaluate and utilize customer and company data and information. Our computer, information technology and telecommunications systems, in turn, interface with and rely upon third-party systems. Our business is highly dependent on our ability, and the ability of certain third parties, to access these systems to perform necessary business functions, including, without limitation, providing insurance quotes, processing premium payments, making changes to existing policies, filing and paying claims, providing customer support and managing our investment portfolios. Systems failures or outages could compromise our ability to perform these functions in a timely manner, which could harm our ability to conduct business and hurt our relationships with our business partners and customers. In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a computer virus, a terrorist attack or war, our systems may be inaccessible to our employees, customers or business partners for an extended period of time. Even if our employees are able to report to work, they may be unable to perform their duties for an extended period of time if our data or systems are disabled or destroyed. This could result in a materially adverse effect on our business results and liquidity.

Additionally, we could be subject to liability if confidential customer information is misappropriated from our computer systems or otherwise. Despite the implementation of security measures, these systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any well-publicized compromise of security could deter people from entering into transactions that involve transmitting confidential information to our systems, which could have a material adverse effect on our business.

We outsource certain technology and business process functions to third parties and may do so increasingly in the future. If we do not effectively develop, implement and monitor our outsourcing strategy, third party providers do not perform as anticipated or we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business. Our outsourcing of certain technology and business process functions to third parties may expose us to enhanced risk related to data security, which could result in monetary and reputational damages. In addition, our ability to receive services from third party providers outside of the United States might be impacted by cultural differences, political instability, unanticipated regulatory requirements or policies inside or outside of the United States. As a result, our ability to conduct our business might be adversely affected.

U.S. inflation may negatively impact reserves and the value of investments.

U.S. inflationary pressures, particularly with respect to medical and health care, automobile repair and construction costs, all of which are significant components of our indemnity liabilities under policies we issue to our customers, and which could also impact the adequacy of reserves we have set aside for prior accident years may have a negative affect on our results of operations. Inflationary pressures which cause or contribute to, or are the result of, increases in interest rates, may reduce the fair value of our investment portfolio.

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ITEM 1B–UNRESOLVED STAFF COMMENTS

None.

ITEM 2–PROPERTIES

We own our headquarters, located at 440 Lincoln Street, Worcester, Massachusetts, with approximately 940,000 square feet.

We also own office space located at 645 W. Grand River, Howell, Michigan, which is approximately 111,000 square feet, and a three-building complex located at 808 North Highlander Way, Howell, Michigan, with approximately 176,000 square feet, where various business operations are conducted.

We lease offices throughout the country for branch sales, underwriting and claims processing functions, and the operations of acquired subsidiaries.

We believe that our facilities are adequate for our present needs in all material respects. Certain of our properties may be made available for lease.

ITEM 3–LEGAL PROCEEDINGS

DURAND LITIGATION

On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named plaintiff, a former employee who received a lump sum distribution from our Cash Balance Plan (the “Plan”) at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, we understated the accrued benefit in the calculation. We filed a motion to dismiss on the basis that the plaintiff failed to exhaust administrative remedies, which motion was granted without prejudice in a decision dated November 7, 2007. This decision was reversed by an order dated March 24, 2009 issued by the United States Court of Appeals for the Sixth Circuit, and the case was remanded to the district court.

The plaintiff filed an Amended Complaint on December 11, 2009. In response, we filed a Motion to Dismiss on January 30, 2010. In addition to the pending calculation of the lump sum distribution claim, the Amended Complaint includes: (a) a claim that the Plan failed to calculate participants’ account balances properly because interest credits were based solely upon the performance of each participant’s selection from among various hypothetical investment options (as the Plan provided) rather than crediting the greater of that performance or the 30 year Treasury rate; (b) a claim that the 2004 Plan amendment, which changed interest crediting for all participants from the performance of participant’s investment selections to the 30 year Treasury rate, reduced benefits in violation of the Employee Retirement Income Security Act of 1974 (“ERISA”) for participants who had account balances as of the amendment date by not continuing to provide them performance-based interest crediting on those balances; and (c) claims for breach of fiduciary duty and ERISA notice requirements for not properly informing participants of the various interest crediting and lump sum distribution matters of which plaintiffs complain. In our judgment, the outcome is not expected to be material to our financial position, although it could have a material effect on the results of operations for a particular quarter or annual period and on the funding of the Plan.

Hurricane Katrina Litigation

In August 2007, the State of Louisiana filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including us, and asserts a right to benefit payments from insurers on behalf of current and former Louisiana citizens who have applied for and received or will receive funds through Louisiana’s “Road Home” program. The case was thereafter removed to the Federal District Court for the Eastern District of Louisiana.

On March 5, 2009, the court issued an Order granting in part and denying in part a Motion to Dismiss filed by Defendants. The court dismissed all claims for bad faith and breach of fiduciary duty and all claims for flood damages under policies with flood exclusions or asserted under Louisiana’s Valued Policy Law, but rejected the insurers’ arguments that the purported assignments from individual claimants to the state were barred by anti-assignment provisions in the insurers’ policies. On April 30, 2009, Defendants filed a Petition for Permission to Appeal to the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”), which was granted. On July 28, 2010, the Fifth Circuit certified the anti-assignment issue to the Louisiana Supreme Court. Oral arguments are scheduled to be heard by the Louisiana Supreme Court on March 14, 2011.

We have established our total loss and LAE reserves on the assumption that we will not have any liability under the “Road Home” or similar litigation.

ITEM 4–Reserved

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PART II

ITEM 5–MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK AND STOCKHOLDER OWNERSHIP

Our common stock is traded on the New York Stock Exchange under the symbol “THG”. On February 18, 2011, we had approximately 25,743 shareholders of record and 45,247,059 shares outstanding. On the same date, the trading price of our common stock was $47.18 per share.

COMMON STOCK PRICES AND DIVIDENDS

	High (1)		Low (1)		Dividends
2010
First Quarter	$	44.63	$	40.51	$	0.25
Second Quarter	$	45.72	$	42.33	$	0.25
Third Quarter	$	47.00	$	43.16	$	0.25
Fourth Quarter	$	47.73	$	45.25	$	0.25
2009
First Quarter	$	43.37	$	28.49		—
Second Quarter	$	38.11	$	29.19		—
Third Quarter	$	42.82	$	37.23		—
Fourth Quarter	$	45.23	$	40.67	$	0.75

(1) Common stock prices were obtained from a third party broker.

DIVIDENDS

The Board of Directors declared dividends in 2010 as follows:

	Declaration Date	Record Date	Payment Date	Dollar Amount
First Quarter	February 26, 2010	March 8, 2010	March 22, 2010	$	0.25
Second Quarter	May 11, 2010	May 24, 2010	June 7, 2010	$	0.25
Third Quarter	August 31, 2010	September 10, 2010	September 23, 2010	$	0.25
Fourth Quarter	November 22, 2010	December 7, 2010	December 21, 2010	$	0.25

The payment of future dividends on our common stock will be determined by the Board of Directors from time to time based upon cash available at our holding company, our results of operations and financial condition and such other factors as the Board of Directors considers relevant.

Dividends to shareholders may be funded from dividends paid to us from our subsidiaries. Dividends from insurance subsidiaries are subject to restrictions imposed by state insurance laws and regulations. See “Liquidity and Capital Resources” on pages 68 to 71 of Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 13 – “Dividend Restrictions” on page 118 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.

ISSUER PURCHASES OF EQUITY SECURITIES

The Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of up to $500 million. Under the repurchase authorizations, we may repurchase our common stock from time to time, in amounts and prices and at such times as deemed appropriate, subject to market conditions and other considerations. Our repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. Total repurchases under this program as of December 31, 2010 were 7.9 million shares at a cost of $342.9 million.

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These repurchases include two accelerated share repurchase agreements with Barclays Bank PLC, acting through its agent, Barclays Capital, Inc., for repurchases of 2.3 million shares of our common stock at a cost of $105.0 million on March 30, 2010 and repurchases of 2.4 million shares at a cost of $105.2 million on December 8, 2009.

Shares purchased in the fourth quarter are as follows:

Period	Total Number of Shares Purchased		Average Price Paid  per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (2)
October 1 – 31, 2010 (1)		397	$	46.01		—	$	161,100,000
November 1 – 30, 2010 (3)		—		—		—		157,000,000
December 1 – 31, 2010 (1)		2,020		47.09		—		157,000,000
Total		2,417	$	46.91		—	$	157,000,000

⁽¹⁾  Shares that were withheld to satisfy tax withholding amount due from employees upon the receipt of previously restricted share units or upon receipt of previously deferred shares.

⁽²⁾  In October 2010, the Board of Directors authorized a $100 million increase to this program, which is included in the table above.

⁽³⁾  Change in approximate dollar value of shares that may yet be purchased under the plans or programs decreased by $4.1 million due to the final settlement on November 26, 2010 associated with the March 30, 2010 accelerated share repurchase program.

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ITEM 6–SELECTED FINANCIAL DATA

Five Year Summary Of Selected Financial Highlights

For The Years Ended December 31	2010			2009			2008			2007			2006
(In millions, except per share data)
Statements of Income
Revenues
Premiums	$	2,841.0		$	2,546.4		$	2,484.9		$	2,372.0		$	2,219.2
Net investment income		247.2			252.1			258.7			247.0			228.5
Net realized investment gains (losses)		29.7			1.4			(97.8	)		(0.9	)		(0.2	)
Fees and other income		34.3			34.2			34.6			56.0			57.9
Total revenues		3,152.2			2,834.1			2,680.4			2,674.1			2,505.4
Losses and Expenses
Losses and loss adjustment expenses		1,856.3			1,639.2			1,626.2			1,457.4			1,387.1
Policy acquisition expenses		669.0			581.3			556.2			523.6			476.4
Loss (gain) from retirement of debt		2.0			(34.5	)		—			—			—
Other operating expenses		413.8			377.2			333.6			351.6			370.9
Total losses and expenses		2,941.1			2,563.2			2,516.0			2,332.6			2,234.4
Income from continuing operations before federal income taxes		211.1			270.9			164.4			341.5			271.0
Federal income tax expense		57.9			83.1			79.9			113.2			87.2
Income from continuing operations		153.2			187.8			84.5			228.3			183.8
Discontinued operations (net of taxes):
Gain (loss) from discontinued FAFLIC business, (including gain (loss) on disposal of $0.5, $7.1 and $(77.3) in 2010, 2009 and 2008)		0.5			7.1			(84.8	)		10.9			7.9
Income (loss) from operations of discontinued variable life insurance and annuity business, (including gain (loss) on disposal of $1.3, $4.9, $8.7, $7.9 and $(29.8) in 2010, 2009, 2008, 2007 and 2006)		1.3			4.9			11.3			13.1			(29.8	)
Loss from discontinued accident and health business		(0.3	)		(2.6	)		—			—			—
Income from operations of AMGRO (including gain on disposal of $11.1 in 2008)		—			—			10.1			—			—
Other discontinued operations		0.1			—			(0.5	)		0.8			7.8
Income (loss) from discontinued operations		1.6			9.4			(63.9	)		24.8			(14.1	)
Income before cumulative effect of change in accounting principle		154.8			197.2			20.6			253.1			169.7
Cumulative effect of change in accounting principle		—			—			—			—			0.6
Net income	$	154.8		$	197.2		$	20.6		$	253.1		$	170.3
Earnings per common share (diluted)	$	3.34		$	3.86		$	0.40		$	4.83		$	3.27
Dividends declared per common share	$	1.00		$	0.75		$	0.45		$	0.40		$	0.30
Balance Sheets (at December 31)
Total assets	$	8,569.9		$	8,042.7		$	9,230.2		$	9,815.6		$	9,856.6
Debt		605.9			433.9			531.4			511.9			508.8
Total liabilities		6,109.4			5,684.1			7,343.0			7,516.6			7,857.4
Shareholders’ equity		2,460.5			2,358.6			1,887.2			2,299.0			1,999.2

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ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

Introduction	33
Executive Overview	33-35
Description of Operating Segments	35
Results of Operations	35-36
Segment Results	37-54
Property and Casualty	37-52
Discontinued Operations	52-53
Other Items	53-54
Investment Portfolio	55-60
Market Risk and Risk Management Policies	60-62
Income Taxes	62-64
Critical Accounting Estimates	64-66
Other Significant Transactions	66-68
Statutory Surplus of Insurance Subsidiaries	68
Liquidity and Capital Resources	68-71
Other Matters	72
Off–Balance Sheet Arrangements	72
Contingencies and Regulatory Matters	72-74
Rating Agencies	74
Recent Developments	74
Risks and Forward-Looking Statements	74
Glossary of Selected Insurance Terms	75-77

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INTRODUCTION

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist readers in understanding the consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and subsidiaries (“THG”) and should be read in conjunction with the Consolidated Financial Statements and related footnotes included elsewhere herein.

Our results of operations include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), our principal property and casualty companies; and certain other insurance and non-insurance subsidiaries. Our results of operations also included the results of First Allmerica Financial Life Insurance Company (“FAFLIC”), our former run-off life insurance and annuity subsidiary through December 31, 2008. On January 2, 2009, we sold FAFLIC to Commonwealth Annuity and Life Insurance Company (“Commonwealth Annuity”), a subsidiary of The Goldman Sachs Group, Inc. (“Goldman Sachs”). For all prior periods presented, operations from FAFLIC are reflected as discontinued operations.

EXECUTIVE OVERVIEW

Our business primarily consists of our Commercial Lines segment, our Personal Lines segment, and our Other Property and Casualty segment.

Our pre-tax segment earnings declined in 2010, principally due to increased catastrophe losses, particularly in the first half of the year. Pre-tax catastrophe losses increased $61.4 million, to $160.3 million for 2010, compared to $98.9 million for 2009. In general, the industry experienced a high level of catastrophe losses in the first half of 2010. Excluding the effect of catastrophe losses, segment results would have increased primarily from more favorable current accident year loss results, partially offset by decreased favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves.

Total net written premiums grew significantly in 2010, particularly in Commercial Lines. Total net written premiums increased approximately $439 million or $16.8%, and net written premiums in Commercial Lines grew 39.5% in 2010 compared to 2009. For the first time in our recent history, Commercial Lines net written premiums exceeded those of Personal Lines, and total net written premiums crossed the $3 billion mark. Growth, particularly in Commercial Lines, is an important part of our strategy as we seek to build scale and diversify our risks geographically and by product line. Since 2004, net written premiums have grown a total of more than 35%, and over this same period, Commercial Lines net written premiums have increased as a percentage of the total from 33% to 52%.

We, and the industry in general, continue to experience pricing pressures, predominantly in Commercial Lines. We believe that our ongoing agency relationships, position in the marketplace and strong product set, position us well relative to many of our competitors in our principal markets.

Our expense ratio is higher than that of some of our peer companies and other competitors, which we attribute to our explicit decision to invest further in our business in support of our partner agent strategy. In Commercial Lines, most of our investments are directed toward expanding our product capabilities and offerings in various niches and differentiated products, investments in systems improvements, and continued geographic diversification. For example, we recently expanded our Commercial Lines offerings into selected states in the western part of the country. Our renewal rights transaction with OneBeacon Insurance Group (“OneBeacon”) supported both our Commercial Lines product expansion, as well as our western geographic expansion. In Personal Lines, we are investing to improve the competitiveness of our products and in technology and systems enhancements intended to make our interactions with agents more efficient.

Commercial Lines

In the Commercial Lines market, aggressive price competition requires us to be highly disciplined in our underwriting process to ensure that we write business only at acceptable margins. In certain lines of business where the weak economy may be a particularly important factor, such as surety and workers’ compensation, we have endeavored to adjust pricing and/or take a more conservative approach to risk selection in order to more appropriately reflect the higher risk of loss.

We continue to develop our segmentation of Commercial Lines, including our specialty lines, which on average are expected to generate higher margins over time and enable us to deliver a more complete product portfolio to our agents and policyholders. Our specialty lines, including our program business, inland marine and bond lines, now account for approximately one-third of our Commercial Lines net premiums written. Growth in our specialty lines continues to be a significant part of our strategy. Our ongoing focus to expand our product offerings in our specialized businesses is evidenced by our acquisitions.

In December 2009, we entered into a renewal rights agreement with OneBeacon, further strengthening our competitive position and advancing our expansion efforts in the western states. Through the agreement, we acquired access to a portion of OneBeacon’s small and middle market commercial business at renewal, a significant portion of which is consistent with our current industry specific

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programs and middle market niches. Additionally, the transaction allowed for the development of new segment, niche and industry-specific program business. On January 1, 2010, we began renewing these policies through a reinsurance arrangement with OneBeacon. These policies were underwritten on OneBeacon policy forms and using OneBeacon systems, but were based upon our underwriting and pricing guidelines. During the second quarter of 2010, we began converting a portion of renewals to our policy forms. We expect this conversion process to continue until late 2011.

Over the past four years, we have acquired several specialized businesses, including Professionals Direct, Inc. (“PDI”), which we market as Hanover Professionals, a professional liability insurance carrier for principally small to medium-sized legal practices; Verlan Holdings, Inc. (“Verlan”), which we market as Hanover Specialty Industrial, a property insurer of small and medium-sized chemical, paint, solvent and other manufacturing and distribution companies; and AIX Holdings, Inc. (“AIX”), a specialty property and casualty insurance carrier that focuses on underwriting and managing program business. In January 2010, we acquired Benchmark Professional Insurance Services, Inc., a provider of insurance solutions to the design professionals industry, including architects and engineers. In March 2010, we acquired Campania Holding Company, Inc. (“Campania”), which we market as Hanover Healthcare, a provider of insurance solutions for selected portions of the healthcare industry, including durable medical equipment suppliers, behavioral health specialists, eldercare providers, and podiatrists. Most recently, in July 2010, we entered into a renewal rights agreement with the Insurance Company of the West (“ICW”) that is expected to build our surety capabilities in our western expansion states.

In addition to these businesses, we have developed several niche insurance programs, such as for schools, religious institutions, moving and storage companies and human services organizations, such as non-profit youth and community service organizations, and we have added additional segmentation to our core middle market commercial products, including real estate, hospitality and wholesale distributors. As a complementary initiative, we have introduced products focused on management liability, specifically non-profit directors and officers liability and employment practices liability, and coverage for private company directors and officers liability.

In addition, we have made a number of enhancements to our core products and technology platforms that are intended to drive more total account placements in our small commercial business, which we believe will enhance margins. Our focus continues to be on improving and expanding our partnerships with a limited number of agents.

We believe our small commercial capabilities, distinctiveness in the middle market, and continued development of specialty business provides us with a more diversified portfolio of products and enables us to deliver significant value to our agents and policyholders. We believe these efforts will enable us to improve the overall mix of our business and ultimately our underwriting profitability.

Personal Lines

In our Personal Lines business, the market continues to be very competitive, with continued pressure on agents from direct writers, as well as from the increased usage of real time comparative rating tools. We maintain our focus on partnering with high quality, value added agencies that stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and/or additional coverages), and consultative selling. We are focused on making investments that are intended to help us maintain profitability, build a distinctive position in the market, and provide us with profitable growth opportunities.

The focus we place on our value proposition for agents, including by introducing broad and innovative product offerings is intended to help us acquire and retain quality accounts. In 2009, we introduced a substantially improved product suite (The Hanover Household) to make it easier for agents to write more lines of business per household. We also modified our operating model and improved our agency automation, which is intended to deliver a more competitive sales and services experience for agents (Front Line Excellence).

Current market conditions continue to be challenging as pricing pressures and economic conditions remain difficult and we face uncertain legal and regulatory environments, especially in Michigan and Massachusetts. These competitive and economic pressures and legal and regulatory concerns have limited our growth in Michigan and Massachusetts, our largest states, and elsewhere. We are working closely with our partner agents in these and our other core states to remain a significant writer with strong margins.

During 2010, we continued our mix management initiatives relating to our Connections^® Auto product to improve the overall profitability of the business. We remain focused on reducing our growth in less profitable automobile segments and increasing our multi-car and total account business consistent with our account rounding strategy. We experienced slightly negative growth levels in our personal automobile business in 2010.

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We believe that our Connections Auto product will help us profitably grow our market share over time. The Connections Auto product is designed to be competitively priced for a wide spectrum of drivers through its multivariate rating application, which calculates rates based upon the magnitude and correlation of multiple risk factors. At the same time, a core strategy is to broaden our portfolio offerings and write “total accounts”, which are accounts that include multiple personal line coverages for the same customer. Account business has historically provided us with stronger margins and superior retention. Total account business represents approximately two-thirds of our Personal Lines business.

Our homeowners product, Connections^® Home, is intended to improve our competitiveness for total account business by making it easier and more efficient for our agents to write business with us and by providing more comprehensive coverage options for policyholders. In addition, in fifteen states, we have introduced a more sophisticated, multivariate pricing approach to our homeowners product which is intended to better align rates with the underlying risk of each customer. We plan to continue to implement this price segmentation in our remaining states. We also continue to refine our products and work closely with high potential agents to increase the percentage of their business they place with us and to ensure that it is consistent with our preferred mix of business. Additionally, we remain focused on diversifying our state mix beyond our four core states of Michigan, Massachusetts, New York and New Jersey. Our business in core states has decreased from 77.5% of Personal Lines business five years ago to 65.4% at the end of 2010. We expect that, over time, these diversification efforts will contribute to improved profitability and retention in our Personal Lines segment and reduce earnings volatility.

Investment Portfolio

Our investment holdings totaled approximately $5.4 billion at December 31, 2010 and consist primarily of investment grade fixed maturities with net unrealized gains of $200.6 million, and cash and cash equivalents.

The U.S. and global financial markets and economies, while continuing to recover, remain in a state of uncertainty and instability. Several issuers of securities continue to be challenged by adverse business and liquidity circumstances and therefore unanticipated bond defaults could increase, particularly with respect to non-investment grade securities. Lower interest rates along with the tightening of credit spreads in 2010, primarily for commercial mortgage-backed securities, taxable municipal bonds, and corporate bonds resulted in increased unrealized gains.

Description of Operating Segments

Our primary business operations include insurance products and services in three property and casualty operating segments. These segments are Commercial Lines, Personal Lines and Other Property and Casualty. Commercial Lines includes commercial multiple peril, commercial automobile, workers’ compensation and other commercial coverages, such as specialty program business, inland marine, bonds, professional liability and management liability, while Personal Lines includes personal automobile, homeowners and other personal coverages. The Other Property and Casualty segment consists of Opus Investment Management, Inc. (“Opus”), which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets and; a voluntary pools business which is in run-off. Additionally, prior to the sale of FAFLIC on January 2, 2009, our operations included the results of this run-off life insurance and annuity business as a separate segment. We present the separate financial information of each segment consistent with the manner in which our chief operating decision maker evaluates results in deciding how to allocate resources and in assessing performance.

We report interest expense related to our debt separately from the earnings of our operating segments. Our debt consists of senior debentures, junior subordinated debentures, advances under our collateralized borrowing program with the Federal Home Loan Bank of Boston (“FHLBB”), capital securities and surplus notes.

Results of Operations

Our consolidated net income includes the results of our three operating segments (segment income), which we evaluate on a pre-tax basis, and our interest expense on debt. Segment income excludes certain items which we believe are not indicative of our core operations. The income of our segments excludes items such as federal income taxes and net realized investment gains and losses, because fluctuations in these gains and losses are determined by interest rates, financial markets and the timing of sales. Also, segment income excludes net gains and losses on disposals of businesses, discontinued operations, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from segment income may be significant components in understanding and assessing our financial performance, we believe segment income enhances an investor’s understanding of our results of operations by highlighting net income attributable to the

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core operations of the business. However, segment income should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles (“GAAP”).

Catastrophe losses are a significant component in understanding and assessing the financial performance of our business. However, catastrophic events make it difficult to assess the underlying trends in this business. Management believes that providing certain financial metrics and trends excluding the effects of catastrophes helps investors to understand the variability in periodic earnings and to evaluate the underlying performance of our operations.

2010 Compared to 2009

Our consolidated net income was $154.8 million in 2010, compared to $197.2 million in 2009. The $42.4 million decrease is primarily due to a $35.3 million decline in after-tax segment income, principally driven by higher catastrophe losses, which increased $39.9 million, net of taxes. Results in 2009 included a $34.5 million pre-tax gain ($22.3 million, net of taxes) associated with a tender offer whereby we repurchased at a discount a portion of our mandatorily redeemable preferred securities and our senior debentures. In 2010, we repurchased junior debentures which resulted in a $2.0 million loss (see also “Significant Transactions”). In addition, earnings from our discontinued operations decreased by $7.8 million. Partially offsetting these decreases was a $28.3 million increase in net realized investment gains, from a gain of $1.4 million in 2009, to a gain of $29.7 million in 2010.

2009 Compared to 2008

Our consolidated net income was $197.2 million in 2009, compared to $20.6 million in 2008. The $176.6 million improvement is primarily due to a $99.2 million improvement in our net realized investment position, from a loss in 2008 of $97.8 million to a gain in 2009 of $1.4 million. Additionally, results associated with the discontinued FAFLIC business improved by $91.9 million. We recognized an $84.8 million loss in 2008 due to its then pending sale, whereas in 2009, we recognized a gain of $7.1 million. In 2009, we also recognized a pre-tax gain of $34.5 million ($22.3 million net of taxes) related to the aforementioned corporate debt repurchases (see also “Significant Transactions”). These increases in earnings for the period compared to the same period in 2008 were partially offset by lower after-tax segment results of $18.5 million, and the recognition, in 2008, of a $10.1 million gain on the sale of AMGRO, Inc. (“AMGRO”).

The following table reflects segment income as determined in accordance with generally accepted accounting principles and a reconciliation of total segment income to consolidated net income.

For The Years Ended December 31	2010			2009			2008
(In millions)
Segment income before federal income taxes:
Property and Casualty
Commercial Lines	$	111.2		$	189.7		$	169.7
Personal Lines		113.0			76.4			123.5
Other Property and Casualty		3.5			4.0			9.0
Total Property and Casualty		227.7			270.1			302.2
Interest expense on debt		(44.3	)		(35.1	)		(39.9	)
Total segment income before federal income taxes		183.4			235.0			262.3
Federal income tax expense on segment income		(61.2	)		(77.5	)		(86.3	)
Federal income tax settlement		—			—			6.4
Net realized investment gains (losses)		29.7			1.4			(97.8	)
(Loss) gain from retirement of debt		(2.0	)		34.5			—
Other non-segment items		—			—			(0.1	)
Federal income tax benefit (expense) on non-segment items		3.3			(5.6	)		—
Income from continuing operations, net of taxes		153.2			187.8			84.5
Discontinued operations, net of taxes:
Gain (loss) from discontinued FAFLIC business (including gain (loss) on disposal of $0.5, $7.1 and $(77.3) in 2010, 2009 and 2008)		0.5			7.1			(84.8	)
Loss from discontinued accident and health business		(0.3	)		(2.6	)		—
Income from discontinued variable life insurance and annuity business (including gain on disposal of $1.3, $4.9 and $8.7 in 2010, 2009 and 2008)		1.3			4.9			11.3
Income from operations of AMGRO (including gain on disposal of $11.1 in 2008)		—			—			10.1
Other discontinued operations		0.1			—			(0.5	)
Net income	$	154.8		$	197.2		$	20.6

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SEGMENT RESULTS

The following is our discussion and analysis of the results of operations by business segment. The segment results are presented before taxes and other items which management believes are not indicative of our core operations, including realized gains and losses.

PROPERTY AND CASUALTY

The following table summarizes the results of operations for the Property and Casualty group for the periods indicated:

FOR THE YEARS ENDED DECEMBER 31	2010		2009		2008
(In millions)
Net premiums written	$	3,048.0	$	2,608.7	$	2,518.0
Net premiums earned		2,841.0		2,546.4		2,484.9
Net investment income		247.2		251.7		258.0
Other income		38.9		38.6		40.9
Total segment revenues		3,127.1		2,836.7		2,783.8
Losses and LAE		1,856.3		1,639.2		1,626.2
Policy acquisition expenses		669.0		581.3		556.2
Other operating expenses		374.1		346.1		299.2
Total losses and operating expenses		2,899.4		2,566.6		2,481.6
Segment income	$	227.7	$	270.1	$	302.2

2010 Compared to 2009

The Property and Casualty group’s segment income decreased $42.4 million, or 15.7%, to $227.7 million, for the year ended December 31, 2010, compared to $270.1 million for the year ended December 31, 2009. Catastrophe related activity increased by $61.4 million in 2010, to $160.3 million, from $98.9 million in 2009. This increase was primarily related to several severe hail, wind and thunderstorm events that resulted in unusually high catastrophes, particularly in the first half of 2010. Excluding the impact of catastrophe related activity, segment income would have increased by $19.0 million. This increase was primarily due to more favorable current accident year loss results with improvements in both Commercial and Personal Lines, partially offset by lower favorable development on prior years’ loss and LAE reserves, higher expenses and slightly lower net investment income. Favorable development on prior years’ loss and LAE reserves decreased $44.2 million in 2010, from $155.3 million in 2009 to $111.1 million in 2010.

2009 Compared to 2008

The Property and Casualty group’s segment income decreased $32.1 million, or 10.6%, to $270.1 million, for the year ended December 31, 2009, compared to $302.2 million for the year ended December 31, 2008. Catastrophe related activity decreased by $70.8 million in 2009, to $98.9 million, from $169.7 million in 2008. This decrease was primarily related to Hurricanes Ike and Gustav that resulted in unusually high catastrophes in 2008. Excluding the impact of catastrophe related activity, segment income would have decreased $102.9 million. This decrease is primarily due to higher expenses, lower current accident year loss results, lower net investment income and lower favorable development on prior years’ loss and LAE reserves. Other operating expenses increased by $46.9 million, of which approximately $30 million related to higher pension costs. Favorable development on prior years’ loss and LAE reserves decreased $3.7 million in 2009, from $159.0 million in 2008 to $155.3 million in 2009.

PRODUCTION AND UNDERWRITING RESULTS

The following table summarizes GAAP net premiums written and GAAP loss, LAE, expense and combined ratios for the Commercial Lines and Personal Lines segments. GAAP loss, LAE, catastrophe loss and combined ratios shown in the following table include prior year reserve development. These items are not meaningful for our Other Property and Casualty segment.

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FOR THE YEARS ENDED DECEMBER 31	2010						2009						2008
(In millions, except ratios)	GAAP Net Premiums Written		GAAP Loss Ratios (1)(2)		Catast- rophe Loss Ratios (3)		GAAP Net Premiums Written		GAAP Loss Ratios (1)(2)		Catast- rophe Loss Ratios (3)		GAAP Net Premiums Written		GAAP Loss Ratios (1)(2)		Catast- rophe Loss Ratios (3)
Commercial Lines:
Workers’ compensation	$	161.3		52.7		—	$	109.7		43.9		—	$	127.2		44.0		—
Commercial automobile		246.1		51.5		0.3		187.3		50.6		0.6		192.8		49.0		0.3
Commercial multiple peril		559.8		51.5		9.7		366.7		46.8		6.5		368.5		54.1		16.2
Other commercial		617.6		44.4		2.9		472.6		39.2		1.0		345.2		39.2		7.6
Total Commercial Lines		1,584.8		48.8		4.5		1,136.3		44.2		2.6		1,033.7		47.1		8.3
Personal Lines:
Personal automobile		935.1		60.6		1.0		967.9		61.6		0.4		1,011.3		59.5		0.3
Homeowners		485.5		63.3		18.4		464.3		67.6		14.7		432.5		64.4		18.4
Other personal		42.3		37.8		3.3		40.0		34.7		2.3		40.2		37.0		7.4
Total Personal Lines		1,462.9		60.8		6.7		1,472.2		62.8		4.8		1,484.0		60.4		5.8
Total	$	3,047.7		55.0		5.6	$	2,608.5		54.3		3.9	$	2,517.7		54.9		6.8
FOR THE YEARS ENDED DECEMBER 31	2010						2009						2008
(In millions, except ratios)	GAAP LAE Ratio		GAAP Expense Ratio		GAAP Combined Ratio (4)(5)		GAAP LAE Ratio		GAAP Expense Ratio		GAAP Combined Ratio (4)(5)		GAAP LAE Ratio		GAAP Expense Ratio		GAAP Combined Ratio (4)(5)
Commercial Lines		10.2		42.2		101.3		8.6		41.3		94.1		9.6		39.1		95.8
Personal Lines		10.5		27.8		99.1		11.0		28.3		102.1		11.1		28.1		99.6
Total		10.4		34.8		100.1		10.0		33.8		98.2		10.5		32.5		98.0

(1) GAAP loss ratio is a common industry measurement of the results of property and casualty insurance underwriting. This ratio reflects incurred claims compared to premiums earned. GAAP loss ratios include catastrophe losses.

(2) Includes policyholders’ dividends.

(3) Catastrophe loss ratio reflects incurred catastrophe claims compared to premiums earned.

(4) GAAP combined ratio is a common industry measurement of the results of property and casualty insurance underwriting. This ratio is the sum of incurred claims, claim expenses and underwriting expenses incurred to premiums earned. GAAP combined ratios include the impact of catastrophes. Federal income taxes, net investment income and other non-underwriting expenses are not reflected in the GAAP combined ratio.

(5) Total includes favorable development of $0.8 million, $11.8 million and $1.9 million for the years ended December 31, 2010, 2009 and 2008, respectively, which is reflected in our Other Property and Casualty segment.

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The following table summarizes GAAP underwriting results for the Commercial Lines, Personal Lines and Other Property and Casualty segments and reconciles it to GAAP segment income.

FOR THE YEAR ENDED DECEMBER 31, 2010
(In millions)	Commercial Lines			Personal Lines			Other Property and Casualty			Total
GAAP underwriting (loss) profit, excluding prior year reserve development and catastrophes	$	(20.5	)	$	51.5		$	—		$	31.0
Prior year loss and LAE reserve development - favorable		61.5			48.8			0.8			111.1
Pre-tax catastrophe effect		(61.6	)		(98.7	)		—			(160.3	)
GAAP underwriting (loss) profit		(20.6	)		1.6			0.8			(18.2	)
Net investment income (1)		129.9			102.9			14.4			247.2
Fees and other income		19.0			13.6			6.3			38.9
Other operating expenses		(17.1	)		(5.1	)		(18.0	)		(40.2	)
Segment income	$	111.2		$	113.0		$	3.5		$	227.7
FOR THE YEAR ENDED DECEMBER 31, 2009
(In millions)	Commercial Lines			Personal Lines			Other Property and Casualty			Total
GAAP underwriting loss, excluding prior year reserve development and catastrophes	$	(14.6	)	$	(12.7	)	$	(0.1	)	$	(27.4	)
Prior year loss and LAE reserve development - favorable		104.1			39.4			11.8			155.3
Pre-tax catastrophe effect		(28.6	)		(70.3	)		—			(98.9	)
GAAP underwriting profit (loss)		60.9			(43.6	)		11.7			29.0
Net investment income (1)		125.6			109.6			16.5			251.7
Fees and other income		18.4			14.4			5.8			38.6
Other operating expenses		(15.2	)		(4.0	)		(30.0	)		(49.2	)
Segment income	$	189.7		$	76.4		$	4.0		$	270.1
FOR THE YEAR ENDED DECEMBER 31, 2008
(In millions)	Commercial Lines			Personal Lines			Other Property and Casualty			Total
GAAP underwriting profit (loss), excluding prior year reserve development and catastrophes	$	25.9		$	18.8		$	(0.7	)	$	44.0
Prior year loss and LAE reserve development - favorable		98.2			58.9			1.9			159.0
Pre-tax catastrophe effect		(84.3	)		(85.4	)		—			(169.7	)
GAAP underwriting profit (loss)		39.8			(7.7	)		1.2			33.3
Net investment income (1)		124.4			118.9			14.7			258.0
Fees and other income		18.3			16.0			6.6			40.9
Other operating expenses		(12.8	)		(3.7	)		(13.5	)		(30.0	)
Segment income	$	169.7		$	123.5		$	9.0		$	302.2

(1) We manage investment assets for our property and casualty business based on the requirements of the entire Property and Casualty group. We allocate net investment income to each of our Property and Casualty segments based on actuarial information related to the underlying business.

2010 Compared to 2009

Commercial Lines

Commercial Lines net premiums written increased $448.5 million, or 39.5%, to $1,584.8 million for the year ended December 31, 2010. This increase was primarily driven by increased premiums associated with the OneBeacon renewal rights transaction of $289.1 million, and growth in our managed program business through AIX, which accounted for $63.9 million, as well as growth in various niche and segmented businesses. Also benefiting the overall growth comparison in net premiums written was a slight improvement in rate.

Commercial Lines underwriting profit decreased $81.5 million, to a loss of $20.6 million, in 2010, compared to profit of $60.9 million in 2009. This decrease was primarily due to a reduction in favorable prior year loss and LAE reserve development, increased catastrophe losses resulting from several severe hail, wind and thunderstorm events, and to higher expenses, partially offset by more favorable current accident year loss results. Catastrophe related activity increased $33.0 million in 2010, from $28.6 million in 2009 to $61.6 million in 2010, primarily in our commercial multiple peril line.

Favorable development on prior years’ loss and LAE reserves decreased $42.6 million, to $61.5 million in 2010, from $104.1 million for 2009. This change was primarily related to our surety bonds, workers’ compensation, and commercial multiple peril lines. Included in the current year results was $7.5 million of favorable LAE development, principally related to a change in the cost factors

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used for establishing unallocated LAE reserves. LAE in 2009 includes a benefit of $18.0 million, including $14.4 million associated with prior accident years, related to a change in our unallocated loss adjustment expense reserving methodology.

Commercial Lines underwriting loss, excluding prior year loss and LAE reserve development and catastrophes, increased $5.9 million, to a loss of $20.5 million, in 2010, compared to a loss of $14.6 million in 2009. This was primarily due to increased operating expenses, principally attributable to costs associated with our westward expansion initiative, increased variable compensation, and increased costs in our specialty business. These factors were partially offset by more favorable current accident year loss results, primarily in our surety bond and commercial multiple peril businesses.

We continue to experience significant price competition in certain lines of business in our Commercial Lines segment, particularly in our middle market accounts. The industry is also experiencing overall rate decreases. In addition, certain lines of business are more susceptible to losses during economically challenging periods. Our ability to increase Commercial Lines net premiums written while maintaining or improving underwriting results may be affected by continuing price competition and the current challenging economic environment.

Personal Lines

Personal Lines net premiums written decreased $9.3 million, or 0.6%, to $1,462.9 million for the year ended December 31, 2010. The most significant factor contributing to lower net premiums written is our continued focus on driving profit improvement in our core states, resulting in lower new business activity. Policies in force in our core states decreased 7% in 2010. This was largely offset by our efforts to diversify our Personal Lines business into targeted growth states. Policies in force in our target growth states increased 4% in 2010.

Net premiums written in the personal automobile line of business declined 3.4%, primarily as a result of lower policies in force in Michigan, Massachusetts, Florida and New York, which we attribute to our efforts to improve or maintain margins in those states and the competitive pricing environment. Net premiums written in the homeowners line of business increased 4.6%, resulting primarily from rate actions in 2010. Policies in force in the homeowners line increased in our targeted growth states, primarily from our account rounding initiatives.

Personal Lines underwriting profit increased $45.2 million, to a profit of $1.6 million, in 2010, compared to a loss of $43.6 million in 2009. This increase was primarily due to more favorable current accident year loss results, principally resulting from benign loss trends, which we attribute to improved non-catastrophe weather, and improvement in our mix of business, shifting to a greater proportion of whole account business, continued rate increases in both personal automobile and homeowners lines, and to lower expenses. These were partially offset by increased catastrophe losses due to several severe hail, wind, and thunderstorm events. Catastrophe related activity increased $28.4 million in 2010, from $70.3 million in 2009 to $98.7 million in 2010.

Favorable development on prior years’ loss and LAE reserves increased $9.4 million, to $48.8 million in 2010, from $39.4 million in 2009. Included in the current year results was $2.3 million of favorable LAE development, principally related to a change in the cost factors used for establishing unallocated loss adjustment expense reserves. LAE in 2009 included a benefit of $2.0 million, including $1.6 million associated with prior accident years, related to a change in our unallocated loss adjustment expense reserving methodology.

Personal Lines underwriting profit, excluding prior year loss and LAE reserve development and catastrophes, increased $64.2 million, to a profit of $51.5 million, in 2010, from a loss of $12.7 million in 2009. This increase was primarily due to more favorable current accident year loss results, principally resulting from lower frequency of losses, which we attribute to improved non-catastrophe weather and benign loss trends. Additionally, we experienced an improvement in our mix of business, shifting to a greater proportion of whole account business, as well as continued rate increases in both the personal automobile and homeowners lines. Also, underwriting and other operating expenses decreased, primarily due to lower pension costs, the favorable resolution of a loss contingency and to lower technology costs.

Although we have been able to obtain rate increases in our Personal Lines markets, our ability to maintain and increase Personal Lines net written premium and to maintain and improve underwriting results could be affected by increasing price competition, regulatory and legal developments and the current challenging economic conditions, particularly in Michigan and Massachusetts, which are our largest states. Our rate actions have adversely affected our ability to increase our policies in force and new business, particularly in our core states and in Florida. There is no assurance that we will be able to maintain our current level of production or maintain or increase rates in light of the highly competitive environment.

New business generally experiences higher loss ratios than our renewal business, and is more difficult to predict, particularly in states, such as some of our growth states, in which we have less experience and data. However, we believe that whole accounts offer better profitability and

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retention over time. Our ability to grow and be profitable will depend, in part, on our ability to continue to improve margins in the Connections Auto product and through our agency-centric, account rounding strategy. Our ability to grow could also be adversely affected by various underwriting, pricing and agency management actions.

Other Property and Casualty

Segment income of the Other Property and Casualty segment decreased $0.5 million, to $3.5 million for the year ended December 31, 2010, from $4.0 million in 2009. The decrease is primarily due to lower favorable development in our run-off voluntary pools, partially offset by lower pension costs in 2010.

2009 Compared to 2008

Commercial Lines

Commercial Lines net premiums written increased $102.6 million, or 9.9%, to $1,136.3 million for the year ended 2009. This increase was driven by growth in our specialty businesses, including the addition of AIX, which accounted for $110.2 million, and growth in our Hanover Professionals and marine businesses, which accounted for $13.0 million and $11.4 million, respectively, as well as growth in various niche and segmented businesses. Also affecting the overall growth comparison in net premiums written was improved rate, partially offset by increased reinsurance costs. Renewal retention in our core commercial lines decreased compared to the prior year, particularly in our workers’ compensation line, as we sought to improve our mix of business through a variety of pricing and underwriting actions in a very competitive environment. Additionally, our core lines premium was affected by a decrease in exposures in workers’ compensation and commercial multiple peril as a result of the difficult economic conditions.

Commercial Lines underwriting income increased $21.1 million, to $60.9 million, in 2009, compared to $39.8 million in 2008. Catastrophe losses decreased $55.7 million in 2009, to $28.6 million, from $84.3 million in the prior year. Excluding the impact of catastrophes, our underwriting income would have decreased by $34.6 million. This decrease was primarily due to higher operating expenses, primarily attributable to increased costs in our specialty businesses, higher employee and employee benefit costs, higher pension costs and higher technology costs, partially offset by lower variable compensation. Current accident year results decreased, primarily due to economic factors impacting our surety bond business. These decreases were partially offset by increased favorable development on prior years’ loss and LAE reserves of $5.9 million.

Personal Lines

Personal Lines net premiums written decreased $11.8 million, or 0.8%, to $1,472.2 million for the year ended December 31, 2009. The most significant factor contributing to lower net premiums written was a decrease in average premium size driven by changes in our premium mix toward what we expect to be more desirable account business that tends to have lower premium per policy commensurate with its better risk profile. Additionally, a decrease in premium from the Massachusetts Commonwealth Automobile Reinsurers (“CAR”) pool and increased reinsurance costs contributed to the decrease in net premiums written. The decrease in CAR related premium followed the introduction, in April 2008, of “managed competition” in Massachusetts, which restructured the private passenger automobile insurance market in the state and resulted in reduced premiums from the involuntary market. These decreases were partially offset by increases in net premiums written in our targeted growth states.

Net premiums written in the personal automobile line of business declined 4.3%, primarily as a result of declines in our core states of Massachusetts, New York and New Jersey of 11.4%, 8.5% and 10.5%, respectively. This decrease resulted primarily from lower policies in force in these core states. Policies in force in the personal automobile line of business decreased 2.0% during 2009 compared to 2008, primarily driven by our efforts to improve or maintain margins in our core states. Decreased policies in force in these states were partially offset by an increase in policies in force in our identified growth states as we continue to manage these states with a focus on profitable growth.

Net premium written in the homeowners line of business increased 7.4%, driven by an increase in policies in force of 5.3% compared to 2008, and by rate increases. This increase in policies in force was primarily driven by increases across the majority of our states due to our account rounding initiatives, partially offset by a decrease in policies in force in Florida, where throughout 2008 we non-renewed all homeowners polices.

Personal Lines underwriting loss increased $35.9 million, to a loss of $43.6 million in 2009, compared to a loss of $7.7 million in 2008. Catastrophe losses decreased $15.1 million in 2009, to $70.3 million, from $85.4 million in the prior year. Excluding the impact of catastrophes, our underwriting income would have decreased by $51.0 million. This decrease was primarily due to less favorable current accident year results, primarily due to higher non-catastrophe weather-related losses in the homeowners line caused by severe storms, to higher claims severity across all personal lines, and to less favorable development on prior years’ loss and LAE reserves of $19.5

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million. Also contributing to the decrease was higher operating expenses, primarily attributable to higher pension costs and higher technology costs.

Other Property and Casualty

Segment income of the Other Property and Casualty segment decreased $5.0 million, to $4.0 million for the year ended December 31, 2009, from $9.0 million in 2008. The decrease is primarily due to $15.8 million of higher pension costs related to our discontinued life business, partially offset by $9.9 million of higher favorable development in our run-off voluntary pools.

INVESTMENT RESULTS

Net investment income before taxes was $247.2 million for the year ended December 31, 2010, $251.7 million for the year ended December 31, 2009 and $258.0 million for the year ended December 31, 2008. The decrease in net investment income in 2010 compared to 2009 was primarily due to the utilization of fixed maturities to fund certain corporate actions, such as stock and debt repurchases and a $100 million contribution to our pension plan on January 4, 2010. The impact of lower new money yields in recent periods also contributed to the decline. These decreases were partially offset by higher income from the continued investment of cash, principally into the bond market, and the investment of proceeds from our senior debt issuance. The decrease in net investment income in 2009 compared to 2008 was primarily due to a decline in new money yields, the utilization of fixed maturities to fund the repurchase of our corporate debt and lower partnership income. These decreases were partially offset by the addition of investment income from investments held by subsidiaries acquired during 2008, and also by higher prepayment fees. Average pre-tax earned yields on fixed maturities were 5.46%, 5.53% and 5.65% for the years ended December 31, 2010, 2009, and 2008, respectively. If new money rates remain at their current lower levels, they will result in further declines in average pre-tax investment yields in future periods.

RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Overview of Loss Reserve Estimation Process

We maintain reserves for our property and casualty products to provide for our ultimate liability for losses and loss adjustment expenses (our “loss reserves”) with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves are estimates, taking into account past loss experience, modified for current trends, as well as prevailing economic, legal and social conditions. Loss reserves represent our largest liability.

Our loss reserves include case estimates for claims that have been reported and estimates for claims that have been incurred but not reported (“IBNR”) at the balance sheet date. They also include estimates of the expenses associated with processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Our property and casualty loss reserves are not discounted to present value.

Case reserves are established by our claim personnel individually on a claim by claim basis and based on information specific to the occurrence and terms of the underlying policy. For some classes of business, average case reserves are used initially. Case reserves are periodically reviewed and modified based on new or additional information pertaining to the claim.

IBNR reserves are estimated by management and our reserving actuaries on an aggregate basis for each line of business, coverage and accident year for all loss and loss expense liabilities not reflected within the case reserves. The sum of the case reserves and the IBNR reserves represents our estimate of total unpaid loss and loss adjustment expense.

We regularly review our loss reserves using a variety of actuarial techniques. We update the reserve estimates as historical loss experience develops, additional claims are reported and resolved and new information becomes available. Any changes in estimates are reflected in operating results in the period in which the estimates are changed.

IBNR reserve estimates are generally calculated by first projecting the ultimate cost of all claims that have occurred or are expected to occur in the future in aggregate and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported to us, some of which may not yet be known to the insured, as well as a provision for future development on reported claims. IBNR represents a significant proportion of our total net loss reserves, particularly for long tail liability classes. In fact, approximately 48% of our aggregate net loss reserves at December 31, 2010 were for IBNR losses and loss expenses.

Management’s process for establishing loss reserves is primarily based on the results of our reserving actuaries’ quarterly reserving process; however, there are a number of other factors in addition to the actuarial point estimates as further described under the section below entitled “Loss and LAE Reserves by Line of Business.” In establishing our loss reserves, we consider facts currently known and the present state of the law and coverage litigation. Based on all information currently available, we believe that the aggregate loss reserves at December 31, 2010 were adequate to cover claims for losses that had occurred as of that date, including both those known to us and those yet to be reported. However, as described below, there are significant

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uncertainties inherent in the loss reserving process. Management’s estimate of the ultimate liability for losses that had occurred as of December 31, 2010 is expected to change in future periods as we obtain further information, and such changes could have a material effect on our results of operations and financial condition.

Management’s Review of Judgments and Key Assumptions

We determine the amount of our loss reserves based on an estimation process that is very complex and uses information from both company specific and industry data, as well as general economic information. The estimation process is a combination of objective and subjective information, the blending of which requires significant actuarial and business judgment. There are various assumptions required including future trends in frequency and severity of claims, trends in total loss costs, operational changes in claim handling processes, and trends related to general economic and social conditions. As a result, informed subjective estimates and judgments as to our ultimate exposure to losses are an integral component of our loss reserving process.

Given the inherent complexity of our loss reserving process and the potential variability of the assumptions used, the actual emergence of losses will vary, perhaps substantially, from the estimate of losses included in our financial statements, particularly in those instances where settlements do not occur until well into the future. Our net loss reserves at December 31, 2010 were $2.2 billion. Therefore, a relatively small percentage change in the estimate of net loss reserves would have a material effect on our results of operations.

There is greater inherent uncertainty in estimating insurance reserves for certain types of property and casualty insurance lines, particularly workers’ compensation, personal and bodily injury in our automobile lines, and other liability lines, where a longer period of time may elapse before a definitive determination of ultimate liability and losses may be made. In addition, the technological, judicial, regulatory and political climates involving these types of claims change regularly. There is also greater uncertainty in establishing reserves with respect to new business, particularly new business which is generated with respect to newly introduced product lines, by newly appointed agents or in geographies in which we have less experience in conducting business, such as the program business written by our AIX subsidiary, our new professional liability specialty lines or business written in the western part of the country. In such cases, there is less historical experience or knowledge and less data upon which the actuaries can rely. Historically, we have limited the issuance of long tailed other liability policies, including directors and officers (“D&O”) liability, errors and omissions (“E&O”) liability and medical professional liability. With the acquisition of Hanover Professionals in 2007, which writes lawyers professional E&O coverage, the acquisition of Campania in 2010, which writes medical professional liability and product liability coverages, and the introduction of new specialty coverages, such as the company’s management liability products, we are increasing and expect to continue to increase our exposure to longer tailed liability lines, including D&O coverages.

We regularly update our reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in the results of operations as adjustments to losses and LAE. Often, these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and the loss event occurred. When these types of subsequent adjustments affect prior years, they are described separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results and may vary by line of business.

Inflation generally increases the cost of losses covered by insurance contracts. The effect of inflation varies by product. Our property and casualty insurance premiums are established before the amount of losses and LAE and the extent to which inflation may affect such expenses are known. Consequently, we attempt, in establishing rates and reserves, to anticipate the potential impact of inflation and increasing medical costs in the projection of ultimate costs. We have experienced increasing medical and attendant care costs, including those associated with personal automobile personal injury protection claims, particularly in Michigan, as well as in our workers’ compensation line in most states. This increase is reflected in our reserve estimates, but continued increases could contribute to increased losses and LAE in the future.

We regularly review our reserving techniques, our overall reserving position and our reinsurance. Based on (i) our review of historical data, legislative enactments, judicial decisions, legal developments in impositions of damages and policy coverage, political attitudes and trends in general economic conditions, (ii) our review of per claim information, (iii) our historical loss experience and that of the industry, (iv) the relatively short-term nature of most policies written by us, and (v) our internal estimates of required reserves, we believe that adequate provision has been made for loss reserves. However, establishment of appropriate reserves is an inherently uncertain process and there can be no certainty that current established reserves will prove adequate in light of subsequent actual experience. A significant change to the estimated reserves could have a material impact on our results of operations and financial position. An increase or decrease in reserve estimates would result in a corresponding decrease or increase

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in financial results. For example, each one percentage point change in the aggregate loss and LAE ratio resulting from a change in reserve estimation is currently projected to have an approximate $28 million impact on property and casualty segment income, based on 2010 full year premiums.

As discussed below, estimated loss and LAE reserves for claims occurring in prior years developed favorably by $111.1 million, $155.3 million, and $159.0 million for the years ended December 31, 2010, 2009, and 2008 respectively, which represented 5.1%, 7.4% and 7.2% of net loss reserves held at the end of each such period.

The major causes of material uncertainty relating to ultimate losses and loss adjustment expenses (“risk factors”) generally vary for each line of business, as well as for each separately analyzed component of the line of business. In some cases, such risk factors are explicit assumptions of the estimation method and in others, they are implicit. For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal interpretation of existing contract language will remain unchanged. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently.

Some risk factors will affect more than one line of business. Examples include changes in claim department practices, changes in settlement patterns, regulatory and legislative actions, court actions, timeliness of claim reporting, state mix of claimants, and degree of claimant fraud. Additionally, there is also a higher degree of uncertainty due to growth in our newly acquired businesses, for which we have limited historical claims experience. The extent of the impact of a risk factor will also vary by components within a line of business. Individual risk factors are also subject to interactions with other risk factors within line of business components. Thus, risk factors can have offsetting or compounding effects on required reserves.

We are also defendants in various litigation, including putative class actions, which claim punitive damages, bad faith or extracontractual damages, or claim a broader scope of policy coverage than our interpretation.

Loss and LAE Reserves by Line of Business

Reserves Other than those Relating to Asbestos and Environmental Claims

Our loss reserves include amounts related to short tail and long tail classes of business. “Tail” refers to the time period between the occurrence of a loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount is likely to vary from our original estimate.

Short tail classes consist principally of automobile physical damage, homeowners, commercial property and marine business. For these coverages, claims are generally reported and settled shortly after the loss occurs because the claims relate to tangible property and are more likely to be discovered shortly after the loss occurs. Consequently, the estimation of loss reserves for these classes is less complex.

While 57% of our written premium is in short tailed classes of business, most of our loss reserves relate to longer tail liability classes of business. Long tail classes include commercial liability, automobile liability, workers’ compensation and other types of third party coverage. For many liability claims, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the discovery and reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long tail liability coverage has limited statistical credibility because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. An accident year is the calendar year in which a loss is incurred. Liability claims are also more susceptible to litigation and can be significantly affected by changing contract interpretations, the legal environment and the expense of protracted litigation. Consequently, the estimation of loss reserves for these coverages is more complex and typically subject to a higher degree of variability compared to short tail coverages.

Most of our indirect business from voluntary and involuntary pools is long tail casualty reinsurance. Reserve estimates for this business are therefore subject to the variability caused by extended loss emergence periods. The estimation of loss reserves for this business is further complicated by delays between the time the claim is reported to the ceding insurer and when it is reported by the ceding insurer to us and by our dependence on the quality and consistency of the loss reporting by the ceding company.

Our reserving actuaries, who are independent of the business units, perform a comprehensive review of loss reserves for each of the numerous classes of business we write at the end of each quarter. This review process takes into consideration a variety of trends that impact the ultimate settlement of claims, including the emergence of paid and reported losses relative to expectations.

The loss reserve estimation process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes. As part of this process, our actuaries use a variety of actuarial methods that analyze experience, trends and other relevant factors. The principal standard actuarial methods used by our actuaries in the loss reserve reviews include loss development

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factor methods, expected loss methods (Bornheutter-Ferguson), and adjusted loss methods (Berquist-Sherman).

Loss development factor methods generally assume that the losses yet to emerge for an accident year are proportional to the paid or reported loss amount observed so far. Historical patterns of the development of paid and reported losses by accident year can be predictive of the expected future patterns that are applied to current paid and reported losses to generate estimated ultimate losses by accident year.

Bornheutter-Ferguson methods calculate IBNR directly for each accident year as the product of expected ultimate losses times the proportion of ultimate losses estimated to be unreported or unpaid (obtained from the loss development factor methods). Expected ultimate losses are determined by multiplying the expected loss ratio times earned premium. The expected loss ratio uses loss ratios from prior accident years adjusted to reflect current revenue and cost levels. The expected loss ratio is a critical component of Bornheutter-Ferguson and provides a general reasonability guide for all reserving methods.

Berquist-Sherman methods are used in cases where historical development patterns may be deemed less optimal for use in estimating ultimate losses of recent accident years. Under these methods, patterns of historical paid or reported losses are first adjusted to reflect current payment settlement patterns and case reserve adequacy and then evaluated in the same manner as the paid or reported loss development factor methods described above. The reported loss development factor method can be less appropriate when the adequacy of case reserves suddenly changes, while the paid loss development factor method can likewise be less appropriate when settlement patterns suddenly change.

For some low volume and high volatility classes of business, special reserving techniques are utilized that estimate IBNR by selecting the loss ratio that balances actual reported losses to expected reported losses as defined by the estimated underlying reporting pattern.

In completing their loss reserve analysis, our actuaries are required to determine the most appropriate actuarial methods to employ for each line of business, coverage and accident year. Each estimation method has its own pattern, parameter and/or judgmental dependencies, with no estimation method being better than the others in all situations. The relative strengths and weaknesses of the various estimation methods when applied to a particular class of business can also change over time, depending on the underlying circumstances. In many cases, multiple estimation methods will be valid for the particular facts and circumstances of the relevant class of business. The manner of application and the degree of reliance on a given method will vary by line of business and coverage, and by accident year based on our actuaries’ evaluation of the above dependencies and the potential volatility of the loss frequency and severity patterns. The estimation methods selected or given weight by our actuaries at a particular valuation date are those that are believed to produce the most reliable indication for the loss reserves being evaluated. Selections incorporate input from claims personnel, pricing actuaries, and underwriting management on loss cost trends and other factors that could affect ultimate losses.

For short tail classes, the emergence of paid and incurred losses generally exhibits a reasonably stable pattern of loss development from one accident year to the next. Thus, for these classes in the vast majority of cases, the loss development factor method is generally appropriate. In certain cases where there is a relatively low level of reliability placed on the available paid and incurred loss data, expected loss methods or adjusted loss methods are considered appropriate for the most recent accident year.

For long tail lines of business, applying the loss development factor method often requires more judgment in selecting development factors as well as more significant extrapolation. For those long tail lines of business with high frequency and relatively low per-loss severity (e.g., personal automobile liability), volatility will often be sufficiently modest for the loss development factor method to be given significant weight, even in the most recent accident years, but expected loss methods and adjusted loss methods are always considered and frequently utilized in the selection process. For those long tail lines of business with low frequency and high loss potential (e.g., commercial liability), anticipated loss experience is less predictable because of the small number of claims and erratic claim severity patterns. In these situations, the loss development factor methods may not produce a reliable estimate of ultimate losses in the most recent accident years since many claims either have not yet been reported or are only in the early stages of the settlement process. Therefore, the actuarial estimates for these accident years are based on methods less reliant on extrapolation, such as Bornheutter-Ferguson. Over time, as a greater number of claims are reported and the statistical credibility of loss experience increases, loss development factor methods or adjusted loss methods are given increasingly more weight.

Using all the available data, our actuaries select an indicated loss reserve amount for each line of business, coverage and accident year based on the various assumptions, projections and methods. The total indicated reserve amount determined by our actuaries is an aggregate of the indicated reserve amounts for the individual classes of

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business. The ultimate outcome is likely to fall within a range of potential outcomes around this indicated amount, but the indicated amount is not expected to be precisely the ultimate liability.

As stated above, numerous factors (both internal and external) contribute to the inherent uncertainty in the process of establishing loss reserves, including changes in the rate of inflation for goods and services related to insured damages (e.g., medical care, home repairs, etc.), changes in the judicial interpretation of policy provisions, changes in the general attitude of juries in determination of damages, legislative actions, changes in the extent of insured injuries, changes in the trend of expected frequency and/or severity of claims, changes in our book of business (e.g., change in mix due to new product offerings, new geographic areas, etc.), changes in our underwriting norms, and changes in claim handling procedures and/or systems. Regarding our indirect business from voluntary and involuntary pools, we are provided loss estimates by managers of each pool. We adopt reserve estimates for the pools that consider this information and other facts.

In addition, we must consider the uncertain effects of emerging or potential claims and coverage issues that arise as legal, judicial and social conditions change. These issues could have a negative effect on our loss reserves by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. As a result of these potential issues, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have further complicated the already complex loss reserving process.

As part of our loss reserving analysis, we take into consideration the various factors that contribute to the uncertainty in the loss reserving process. Those factors that could materially affect our loss reserve estimates include loss development patterns and loss cost trends, rate and exposure level changes, the effects of changes in coverage and policy limits, business mix shifts, the effects of regulatory and legislative developments, the effects of changes in judicial interpretations, the effects of emerging claims and coverage issues and the effects of changes in claim handling practices. In making estimates of reserves, however, we do not necessarily make an explicit assumption for each of these factors. Moreover, all estimation methods do not utilize the same assumptions and typically no single method is determinative in the reserve analysis for a line of business and coverage. Consequently, changes in our loss reserve estimates generally are not the result of changes in any one assumption. Instead, the variability will be affected by the interplay of changes in numerous assumptions, many of which are implicit to the approaches used.

For each line of business and coverage, we regularly adjust the assumptions and actuarial methods used in the estimation of loss reserves in response to our actual loss experience, as well as our judgments regarding changes in trends and/or emerging patterns. In those instances where we primarily utilize analyses of historical patterns of the development of paid and reported losses, this may be reflected, for example, in the selection of revised loss development factors. In those long tail classes of business that comprise a majority of our loss reserves and for which loss experience is less predictable due to potential changes in judicial interpretations, potential legislative actions, the cost of litigation or determining liability and the ultimate loss, inflation and potential claims issues, this may be reflected in a judgmental change in our estimate of ultimate losses for particular accident years.

The future impact of the various factors that contribute to the uncertainty in the loss reserving process is extremely difficult to predict. There is potential for significant variation in the development of loss reserves, particularly for long tail classes of business. We do not derive statistical loss distributions or confidence levels around our loss reserve estimate, and as a result, do not have reserve range estimates to disclose. Actuarial ranges of reasonable estimates are not a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date. This is due, among other reasons, to the fact that actuarial ranges are developed based on known events as of the valuation date whereas the ultimate disposition of losses is subject to the outcome of events and circumstances that were unknown as of the valuation date.

The following tables and related discussion includes disclosure of possible variation from current actuarial estimates of loss reserves due to a change in certain key assumptions for the primary long tail coverages within certain lines of business, which typically represent the areas of greatest uncertainty in our reserving process. These tables are included simply to illustrate how certain changes in data or in our assumptions can affect reserves for particular lines. We believe that the estimated variation in reserves detailed in the following tables is a reasonable estimate of the possible variation that may occur in the future, and are provided to illustrate the relationship between claim reporting patterns and expected loss ratios, respectively, on actuarial loss reserve estimates for the lines identified. However, if such variation did occur, it would likely occur over a period of several years and

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therefore its impact on our results of operations would be spread over the same period. It is important to note, however, that there is the potential for future variation greater than the following amounts and for any such variations to be recognized in a single quarterly or annual period.

As noted, the following tables illustrate the relationship between the impact on our actuarial loss reserve estimates of reasonably likely variations to claim reporting patterns and expected actuarial estimates of ultimate loss costs, two key actuarial assumptions used to estimate our net reserves at December 31, 2010, from the assumptions utilized by our actuaries. The five point change to our expected loss ratio selections, which incorporate variability in both ultimate frequency and severity, are within the historical variation present in our prior accident year development. The three month change to reporting patterns represent claims reporting that is both faster and slower than our current reporting assumption for reported loss patterns and this degree of change is within the historical variation present in actual reporting patterns. A faster reporting pattern results in lower indicated net loss reserves due to the presumption that a higher proportion of ultimate claims have been reported thus far; therefore, a lower proportion of ultimate claims needs to be carried as IBNR. A slower reporting pattern results in higher indicated net loss reserves due to the presumption that a lower proportion of ultimate claims have been reported thus far; and therefore, a higher proportion of ultimate claims need to be carried as IBNR.

The results show the cumulative dollar difference between our current actuarial estimate and the estimate that we would develop if our understanding with respect to loss reporting patterns and ultimate loss costs were different by three months or five points, respectively. No consideration has been given to potential correlation or lack of correlation among key assumptions or among lines of business and coverage. As a result, it would be inappropriate to take the amounts described in the following table and add them together in an attempt to estimate volatility in total. While we believe these are reasonably likely scenarios, we do not believe the reader should consider the following sensitivity analysis as an actual reserve range.

EXPECTED DOLLAR EFFECT ON ACTUARIAL LOSS RESERVE ESTIMATES
(In millions)
	Change in Expected Loss Ratio
Reporting Pattern	5 points lower			Unchanged			5 points higher
Personal Automobile Bodily Injury (1)
3 months faster	$	(20	)	$	(15	)	$	(9	)
Unchanged		(7	)		—			7
3 months slower		10			18			27
Workers’ Compensation Indemnity
3 months faster	$	(8	)	$	(5	)	$	(1	)
Unchanged		(4	)		—			4
3 months slower		(2	)		3			7
Workers’ Compensation Medical
3 months faster	$	(5	)	$	(3	)	$	(1	)
Unchanged		(2	)		—			2
3 months slower		(1	)		2			4
Commercial Multiple Peril Liability
3 months faster	$	(11	)	$	(6	)	$	(2	)
Unchanged		(5	)		—			5
3 months slower		1			6			12

(1) Example: Personal Automobile Bodily Injury, if losses are actually developing and emerging three months slower than we anticipate in our models, our actuarial estimate for this coverage would be understated by $18 million. If our assumed payment patterns are consistent with our expectations, but the expected loss ratio in our model is 5% too low, then our actuarial estimate for this coverage would be understated by $7 million.

Senior management meets with our reserving actuaries at the end of each quarter to review the results of the latest actuarial loss reserve analysis. Based on this quarterly process, management determines the carried reserve for each line of business and coverage and assesses the reasonableness of the difference between recorded and actuarially indicated reserves. In making the determination, management considers numerous factors, such as changes in actuarial indications in the period, the maturity of the accident year, trends observed over the recent past, the level of volatility within a particular class of business, general economic trends, and other factors not fully captured in the actuarial reserve analysis. In doing so, management must evaluate whether a change in the data represents credible actionable information or an anomaly. Such an assessment requires considerable judgment. Even if a change is determined to be apparent, it is not always possible to determine the extent of the change. As a result, there can be a time lag between the emergence of a change and a determination that the change should be reflected in the carried loss reserves. In general, changes are made more quickly to more mature accident years and less volatile classes of business.

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On August 1, 2010, the Michigan Supreme Court issued a decision in a case captioned McCormick v. Carrier, et al, overturning the so-called Kreiner decision, and in doing so, we believe the Court significantly expanded the circumstances under which claimants can sue for non-economic losses (for example, pain and suffering) resulting from automobile accidents in Michigan. We believe the revised standard will significantly increase certain unresolved past claims and future claims for non-economic damages in our personal automobile line. Accordingly, we established our actuarial point estimates based upon our understanding of the law as of December 31, 2010. As of December 31, 2009, our actuarial point estimates were established based upon the prior law, but management considered the likelihood of an adverse decision in this matter in establishing additional recorded net reserves greater than actuarially indicated reserves. As a result, the actuarial point estimate for the personal automobile line was increased by approximately $15 million during the third quarter of 2010 to take into account the estimated effects of the McCormick decision. A corresponding and offsetting decrease was made to the reserve established in excess of the actuarial point estimate for this line of business.

The table below shows our recorded reserves, net of reinsurance, and the related actuarial reserve point estimates by line of business at December 31, 2010 and 2009.

DECEMBER 31	2010				2009
(In millions)	Recorded Net Reserves		Actuarial Point Estimate		Recorded Net Reserves		Actuarial Point Estimate
Workers’ Compensation	$	329.9	$	318.5	$	334.5	$	324.6
Commercial Automobile		172.0		168.8		157.4		152.2
Commercial Multiple Peril		426.2		408.4		395.3		372.7
Other Commercial Lines		344.0		330.6		287.5		274.8
Personal Automobile		634.4		618.7		663.6		632.9
Homeowners		109.3		104.0		88.6		83.9
Other Personal Lines		18.1		19.2		20.2		19.2
Asbestos and Environmental		10.1		10.4		11.3		11.4
Pools and Other		116.3		116.3		133.5		133.5
Total	$	2,160.3	$	2,094.9	$	2,091.9	$	2,005.2

At December 31, 2010 and December 31, 2009, total recorded net reserves were 3.1% and 4.3% greater than actuarially indicated reserves, respectively. The principal factors considered by management, in addition to the actuarial point estimates, in determining the reserves at December 31, 2010 and 2009 vary by line of business.

In our Commercial Lines segment, management considered the growth in our specialty lines, including our acquisitions over the past few years, inland marine and surety bond businesses, product mix changes and recent adverse frequency and severity trends in certain coverages. Management considered the recent trends in our contract surety bond business where higher loss trends have emerged in recent quarters related to declining general economic conditions. Additionally, management considered the potential for adverse development in workers’ compensation where losses tend to emerge over long periods of time, trends are cyclical related to general economic conditions, and rising medical costs, while moderating, have continued to be a concern. With the growth of our specialty lines, we are modestly increasing our exposure to longer tailed liability lines and there is less historical experience and less actuarial data available, all of which results in less certainty when estimating ultimate reserves. In our commercial multiple peril line, management considered the potential for adverse development due to increasing legal defense costs related to exposures, such as personal injury, advertising injury, Chinese drywall, and other complex cases that may continue to trend higher than expected.

In our Personal Lines segment, management considered the Michigan Supreme Court’s recent decision to overturn the so-called Kreiner decision and the resulting increase in our actuarial indications during the year as described above, the potential impact of the adverse frequency and development trends in personal and bodily injury claims in our automobile line related to the 2008 through 2010 accident years and the related potential for continued adverse trends due to costs shifting from health insurers to property and casualty insurers resulting from continued economic concerns and health insurance coverage trends, all of which have added additional uncertainty to future development in our personal automobile line. Additionally, management considered the growth in our new business in a number of states where there is additional uncertainty in the ultimate profitability and development of reserves due to the unseasoned nature of our new business and new agency relationships in these markets. Although our experience and data in these areas is growing with the passage of time, a sufficient number of years of actuarial data is not yet available to base loss estimates solely on this data in new geographical areas and agency relationships and with new products. As a result, there is less certainty when estimating ultimate reserves and more judgment by management is required. In our homeowners line, management also considered the potential for adverse development related to catastrophe losses.

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The table below provides a reconciliation of the beginning and ending gross reserve for unpaid losses and LAE as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Reserve for losses and LAE, beginning of year	$	3,152.1		$	3,201.3		$	3,165.8
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of current year (1)		1,966.4			1,793.5			1,784.6
Decrease in provision for insured events of prior years; favorable development		(111.1	)		(155.3	)		(159.0	)
Total incurred losses and LAE		1,855.3			1,638.2			1,625.6
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year		1,077.8			970.9			999.9
Losses and LAE attributable to insured events of prior years		738.6			788.5			712.4
Total payments		1,816.4			1,759.4			1,712.3
Change in reinsurance recoverable on unpaid losses		48.3			72.0			(11.9	)
Purchase of Verlan Fire Insurance Company		—			—			4.2
Purchase of AIX Holdings, Inc.		—			—			129.9
Purchase of Campania Holdings, Inc.		36.5			—			—
Reserve for losses and LAE, end of year	$	3,275.8		$	3,152.1		$	3,201.3

(1) Includes unfavorable reserve development related to catastrophe losses of $4.1 million, $7.0 million, and $0.7 million in 2010, 2009, and 2008, respectively.

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

DECEMBER 31	2010		2009		2008
(In millions)
Workers’ Compensation	$	527.1	$	524.1	$	547.0
Commercial Automobile		224.5		217.4		226.4
Commercial Multiple Peril		470.4		449.7		499.5
Other Commercial		559.1		517.4		483.8
Total Commercial		1,781.1		1,708.6		1,756.7
Personal Automobile		1,358.4		1,303.4		1,292.5
Homeowners and Other		136.3		140.1		152.1
Total Personal		1,494.7		1,443.5		1,444.6
Total reserve for losses and LAE	$	3,275.8	$	3,152.1	$	3,201.3

The total reserve for losses and LAE as disclosed in the above tables increased by $123.7 million in 2010 and decreased by $49.2 million in 2009.

Prior Year Development by Line of Business

When trends emerge that we believe affect the future settlement of claims, we adjust our reserves accordingly. Reserve adjustments are reflected in the Consolidated Statements of Income as adjustments to losses and LAE. Often, we recognize these adjustments in periods subsequent to the period in which the underlying loss event occurred. These types of subsequent adjustments are disclosed and discussed separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results.

The following table summarizes the change in provision for insured events of prior years, excluding catastrophe losses, by line of business.

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
(Decrease) increase in loss provision for insured events of prior years:
Workers’ Compensation	$	(21.2	)	$	(28.2	)	$	(27.6	)
Commercial Automobile		(4.0	)		(7.1	)		(9.3	)
Commercial Multiple Peril		(20.6	)		(28.8	)		(36.1	)
Other Commercial		(0.5	)		(17.1	)		(18.0	)
Total Commercial		(46.3	)		(81.2	)		(91.0	)
Personal Automobile		(37.8	)		(44.9	)		(54.6	)
Homeowners and Other		(3.6	)		4.8			(6.9	)
Total Personal		(41.4	)		(40.1	)		(61.5	)
Voluntary Pools		(0.8	)		(11.8	)		(1.9	)
Decrease in loss provision for insured events of prior years		(88.5	)		(133.1	)		(154.4	)
Decrease in LAE provision for insured events of prior years		(22.6	)		(22.2	)		(4.6	)
Decrease in total loss and LAE provision for insured events of prior years	$	(111.1	)	$	(155.3	)	$	(159.0	)

Estimated loss reserves for claims occurring in prior years developed favorably by $88.5 million, $133.1 million and $154.4 million during 2010, 2009 and 2008, respectively. The favorable loss reserve development during the year ended December 31, 2010 is primarily the result of lower than expected severity in the personal automobile line across all coverages and lower frequency in the personal automobile line in property coverages, primarily related to the 2009 accident year, and lower than expected frequency in the workers’ compensation line, primarily related to the 2008 and 2009 accident years. In addition, lower than expected severity in the commercial multiple peril line in liability coverages, primarily related to the 2007 through 2009 accident years and in the commercial umbrella line related to the 2007 through 2009 accident

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years contributed to the favorable development, partially offset by unfavorable development in our bond line, primarily related to the 2009 accident year.

The favorable loss reserve development during the year ended December 31, 2009 is primarily the result of lower than expected severity of bodily injury in the personal automobile line, primarily in the 2005 through 2008 accident years, lower than expected severity in the workers’ compensation line, primarily in the 2000 through 2008 accident years and lower than expected severity in the commercial multiple peril line, primarily in the 2005 through 2007 accident years. In addition, lower than expected severity in the bond line, lower projected losses in our run-off voluntary pools and lower projected exposures to asbestos and environmental liability for our direct written business contributed to the favorable development. Partially offsetting the favorable development was unfavorable non-catastrophe weather-related property loss development, primarily related to our homeowners, commercial property and personal automobile physical damage lines, which developed unfavorably by $6.8 million, $6.7 million, and $1.6 million, respectively.

The favorable loss reserve development during the year ended December 31, 2008 is primarily the result of lower than expected severity of bodily injury in the personal automobile line, primarily in the 2003 through 2007 accident years, and lower than expected severity of liability claims in the commercial multiple line for the 2002 through 2007 accident years. In addition, lower than expected severity in the workers’ compensation line, primarily in the 2003 through 2007 accident years, contributed to the favorable development.

During the years ended December 31, 2010, 2009 and 2008, estimated LAE reserves for claims occurring in prior years developed favorably by $22.6 million, $22.2 and $4.6 million, respectively. The 2010 amount includes $9.8 million of favorable development resulting from a change in the cost factors used for establishing unallocated loss adjustment expense reserves. The favorable LAE development in 2010 is also attributable to improvements in ultimate loss activity on prior accident years, primarily in the commercial multiple peril, personal automobile, and workers’ compensation lines. In 2009, we changed our unallocated loss adjustment expense reserving methodology from that based on cash payments to that based on unit costs, which resulted in a $20.0 million benefit, of which $16.0 million related to prior years. We believe that the methodology based on unit costs is more representative of our future costs of settling our existing claims. The favorable development in 2008 was primarily attributable to the aforementioned improvement in ultimate loss activity on prior accident years, primarily in the commercial multiple peril line.

Although we have experienced significant favorable development in both losses and LAE in recent years, there can be no assurance that this level of favorable development will occur in the future. We believe that we will experience less favorable prior year development in future years than we experienced recently. The factors that resulted in the favorable development of prior year reserves, including the aforementioned changes in LAE reserves, are considered in our ongoing process for establishing current accident year reserves. In light of our recent years of favorable development, the factors driving this development were considered to varying degrees in setting the more recent years’ accident year reserves. As a result, we expect the current and most recent accident year reserves not to develop as favorably as they have in the past. In light of the significance, in recent periods, of favorable development to our Property and Casualty group’s segment income, declines in favorable development could be material to our results of operations.

Asbestos and Environmental Reserves

Although we attempt to limit our exposures to asbestos and environmental damage liability through specific policy exclusions, we have been and may continue to be subject to claims related to these exposures.

The following table summarizes our asbestos and environmental reserves (net of reinsurance and excluding pools).

FOR THE YEARS ENDED DECEMBER 31	2010									2009									2008
(In millions)	Asbestos			Environmental			Total			Asbestos			Environmental			Total			Asbestos			Environmental			Total
Beginning reserves	$	6.5		$	4.8		$	11.3		$	10.3		$	8.2		$	18.5		$	11.3		$	8.1		$	19.4
Incurred (reduction in) losses and LAE		1.1			(1.5	)		(0.4	)		(3.7	)		(3.4	)		(7.1	)		(0.3	)		(2.0	)		(2.3	)
(Paid) reimbursed losses and LAE		(0.8	)		—			(0.8	)		(0.1	)		—			(0.1	)		(0.7	)		2.1			1.4
Ending reserves	$	6.8		$	3.3		$	10.1		$	6.5		$	4.8		$	11.3		$	10.3		$	8.2		$	18.5

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Ending loss and LAE reserves for all direct business written by our property and casualty companies related to asbestos and environmental damage liability, included in the reserve for losses and LAE, were $10.1 million, $11.3 million and $18.5 million, net of reinsurance of $19.9 million for both 2010 and 2009, and $13.9 million in 2008. During 2010, we reduced our asbestos and environmental reserves by $1.2 million due to several small settlements. In recent years, average asbestos and environmental payments have declined modestly. As a result of the declining payments, our actuarial indicated point estimate of asbestos and environmental liability reserves was lowered resulting in favorable reserve development of $7.1 million during the year ended December 31, 2009. During 2008, our asbestos and environmental reserves decreased by $0.9 million, primarily due to a favorable cash recovery from a reinsurer on a prior year environmental claim. As a result of our historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos and environmental damage liability loss experience has remained minimal in relation to our total loss and LAE incurred experience.

In addition, and not included in the numbers above, we have established loss and LAE reserves for assumed reinsurance pool business with asbestos and environmental damage liability of $33.9 million, $45.6 million and $58.4 million at December 31, 2010, 2009 and 2008, respectively. These reserves relate to pools in which we have terminated our participation; however, we continue to be subject to claims related to years in which we were a participant. Results of operations from these pools are included in our Other Property and Casualty segment. The $11.7 million decrease in these reserves during 2010 was primarily due to a large claim settlement within these pools. A significant part of our pool reserves relates to our participation in the Excess and Casualty Reinsurance Association (“ECRA”) voluntary pool from 1950 to 1982. In 1982, the pool was dissolved and since that time, the business has been in run-off. Our percentage of the total pool liabilities varied from 1% to 6% during these years. Our participation in this pool has resulted in average paid losses of approximately $2 million annually over the past ten years.

During the year ended December 31, 2009, our ECRA pool reserves were lowered by $6.3 million as the result of an actuarial study completed by the ECRA pool manager. Management reviewed the ECRA actuarial study, concurred that the study was reasonable, and adopted its actuarial point estimate. In addition, management recorded favorable development of $4.3 million on a separate large claim settlement within these pools. Because of the inherent uncertainty regarding the types of claims in these pools, we cannot provide assurance that our reserves will be sufficient.

We estimate our ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, assumed reinsurance or pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. We believe that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. Nevertheless, the asbestos, environmental and toxic tort liability reserves could be revised, and any such revisions could have a material adverse effect on our results of operations for a particular quarterly or annual period or on our financial position.

REINSURANCE

Our Property and Casualty group maintains a reinsurance program designed to protect against large or unusual losses and LAE activity. We utilize a variety of reinsurance agreements that are intended to control our exposure to large property and casualty losses, stabilize earnings and protect capital resources, including facultative reinsurance, excess of loss reinsurance and catastrophe reinsurance. We determine the appropriate amount of reinsurance based upon our evaluation of the risks insured, exposure analyses prepared by consultants, our capital allocation models and on market conditions, including the availability and pricing of reinsurance. Reinsurance contracts do not relieve us from our primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to us. We believe that the terms of our reinsurance contracts are consistent with industry practice in that they contain standard terms and conditions with respect to lines of business covered, limit and retention, arbitration and occurrence. Based on an ongoing review of our reinsurers’ financial statements, reported financial strength ratings from rating agencies, and the analysis and guidance of our reinsurance advisors, we believe that our reinsurers are financially sound.

Catastrophe reinsurance serves to protect us, as the ceding insurer, from significant losses arising from a single event such as snow, ice storm, windstorm, hail, hurricane, tornado, riot or other extraordinary events. There were no ceded losses under our catastrophe reinsurance agreements in 2010 or 2009, and $0.3 million in 2008. In 2009, we purchased catastrophe reinsurance coverage, which provided for maximum loss coverage limits of $700 million and a combined co-participation and retention level of $197 million of losses for a single event. Effective July 1, 2009, for a twelve month term, we purchased an additional $200 million excess of $700 million layer and a

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co-participation of $100 million of losses for a single event. In July 2010, we renewed this coverage, however, we modified our co-participation levels. We previously retained 50% of the losses associated with this layer. Beginning on July 1, 2010, 100% of losses in this layer are covered by reinsurance. Also, effective July 1, 2010, for a twelve month term, we purchased an additional $100 million excess of $900 million property catastrophe coverage layer. Both of these layers only provide coverage for perils in the Northeast.

Although we believe our retention and co-participation amounts for 2010 and 2011 are appropriate given our surplus level and the current reinsurance pricing environment, there can be no assurance that our reinsurance program will provide coverage levels that will prove adequate should we experience losses from one significant or several large catastrophes during 2011. Additionally, as a result of the current economic environment as well as losses incurred by reinsurers in recent years, the availability and pricing of appropriate reinsurance programs may be adversely affected in future renewal periods. We may not be able to pass these costs on to policyholders in the form of higher premiums or assessments.

We also are subject to concentration of risk with respect to reinsurance ceded to various residual market mechanisms. As a condition to conduct certain businesses in various states, we are required to participate in residual market mechanisms and pooling arrangements which provide insurance coverage to individuals or other entities that are otherwise unable to purchase such coverage. These market mechanisms and pooling arrangements include, among others, the Michigan Assigned Claims facility and the Michigan Catastrophic Claims Association.

See “Reinsurance” in Item 1 – Business on pages 13 to 15 of this Form 10-K for further information on our reinsurance programs.

Discontinued Operations

Discontinued operations consist of: (i) Discontinued FAFLIC Business, including both the loss associated with the sale of FAFLIC on January 2, 2009 and the loss or income resulting from its prior business operations; (ii) Discontinued Operations of our Variable Life Insurance and Annuity Business in 2005; and (iii) Discontinued Accident and Health Business.

Discontinued FAFLIC Business

On January 2, 2009, we sold our remaining life insurance subsidiary, FAFLIC, to Commonwealth Annuity, a subsidiary of Goldman Sachs. In connection with the sale, FAFLIC paid a dividend consisting of designated assets with a statutory book value of approximately $130 million. Total net proceeds from the sale, including the dividend, were approximately $230 million, net of transaction costs. Additionally, coincident with the sale transaction, Hanover Insurance and FAFLIC entered into a reinsurance contract whereby Hanover Insurance assumed FAFLIC’s discontinued accident and health insurance business. We also agreed to indemnify Commonwealth Annuity for certain litigation, regulatory matters and other liabilities related to the pre-closing activities of the business transferred.

The following table summarizes the results for this discontinued business for the periods indicated:

For the Years Ended December 31	2010		2009		2008
(In millions)
Gain (loss) on sale of FAFLIC, net of taxes	$	0.5	$	7.1	$	(77.3	)
Loss from operations of FAFLIC business, including net realized losses of $14.4 for the year ended December 31, 2008		—		—		(7.5	)
Gain (loss) from discontinued FAFLIC business, net of taxes	$	0.5	$	7.1	$	(84.8	)

Gain (Loss) on sale of FAFLIC

The following table summarizes the components of the loss recognized in 2008 related to the sale of FAFLIC.

For the Year Ended December 31	2008
(In millions)
Carrying value of FAFLIC before pre-close dividend	$	267.7	(1)
Pre-close net dividend		(129.8	)(2)
		137.9
Proceeds from sale		105.8	(3)
Loss on sale before impact of transaction and other costs		(32.1	)
Transaction costs		(3.9	)(4)
Liability for certain legal indemnities and employee-related costs		(8.2	)(5)
Other miscellaneous adjustments		(33.1	)(6)
Net loss	$	(77.3	)

⁽¹⁾ Shareholder’s equity in the FAFLIC business, prior to the impact of the sale transaction.

⁽²⁾  Net pre-close dividends.

⁽³⁾  Proceeds to THG from Commonwealth Annuity.

⁽⁴⁾  Transaction costs include legal, actuarial and other professional fees.

⁽⁵⁾  Liability for expected contractual indemnities of FAFLIC recorded at December 31, 2008. These costs also include severance and retention payments anticipated to result from this transaction.

⁽⁶⁾  Included in other miscellaneous adjustments are investment losses of $48.5 million, as well as favorable reserve adjustments related to the accident and health business of $15.6 million.

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In 2010 and 2009, we recognized gains of $0.5 million and $7.1 million, net of tax, respectively, related to the sale of FAFLIC. These gains were primarily due to our change in our estimate of indemnification liabilities related to the sale. The gain in 2009 also reflects the release of sale-related accruals and a tax adjustment relating to FAFLIC’s operations in prior tax years.

In connection with the sales transaction, we agreed to indemnify Commonwealth Annuity for certain legal, regulatory and other matters that existed as of the sale. Accordingly, we established a pre-tax gross liability for guarantees and indemnifications of $9.9 million. As of December 31, 2010, our total pre-tax gross liability related to these guarantees was $1.2 million. Although we believe our current estimate for this liability is appropriate, there can be no assurance that this estimate will be sufficient to pay future expenses associated with these guarantees.

Loss from Operations of FAFLIC Business

The following table summarizes the results of FAFLIC’s operations in 2008:

For the Year Ended December 31	2008
(In millions)
Premiums	$	25.6
Fees and other loss		(0.7	)
Net investment income		66.2
Net realized investment losses		(14.4	)
Total revenue		76.7
Policy benefits, claims and losses		69.7
Policy acquisition and other operating expenses		9.9
Loss included in discontinued operations before federal income taxes		(2.9	)
Federal income tax expense		4.6
Loss from discontinued operations of FAFLIC	$	(7.5	)

The loss from FAFLIC’s discontinued operations was $7.5 million for the year ended December 31, 2008, which reflects other-than-temporary impairments in 2008 and losses associated with the sale of fixed maturities, partially offset by favorable run-off of the business.

Discontinued Operation of our Variable Life Insurance and Annuity Business

On December 30, 2005, we sold our run-off variable life insurance and annuity business to Goldman Sachs and indemnified Goldman Sachs for certain litigation, regulatory matters and other liabilities relating to the pre-closing activities. Results currently consist primarily of expense and recoveries relating to indemnification obligations incurred in connection with this sale. The following table summarizes the results for this discontinued business for the periods indicated.

For the Years Ended December 31	2010		2009		2008
(In millions)
Gain on disposal of variable life insurance and annuity business, net of taxes	$	1.3	$	4.9	$	11.3

For the years ended December 31, 2010, and December 31, 2009, we recorded gains of $1.3 million and $4.9 million, net of tax, respectively, primarily related to changes in our estimate of liabilities related to certain indemnities to Goldman Sachs relating to pre-sale activities of the business sold. For the year ended December 31, 2008, we recorded a gain of $11.3 million, net of tax, primarily from an $8.6 million release of liabilities related to certain contractual indemnities to Goldman Sachs, and a $2.7 million tax benefit from a settlement with the Internal Revenue Service (“IRS”) related to tax years 1995 through 2001.

As of December 31, 2010, our total gross liability for guarantees and indemnifications provided in connection with the disposal of our former variable life insurance and annuity business was $4.2 million on a pre-tax basis. Although we believe our current estimate for this liability is appropriate, there can be no assurance that this estimate will be sufficient to pay future expenses associated with these guarantees.

Discontinued Accident and Health Business

In 2010, we recognized a loss from the discontinued accident and health insurance business of $0.3 million, driven by increased reserves resulting from our current interpretation of the provisions of the Patient Protection and Affordable Care Act (“PPACA”), as well as realized investment losses due to impairments, which were partially offset by net investment income. In 2009, we recognized a loss of $2.6 million related to this business, primarily from net realized investment losses resulting from other-than-temporary impairments. The accident and health business had no financial results that impacted 2008. For a description of the business, see “Discontinued Operations” in the Business Section on page 15 of this Form 10-K.

OTHER ITEMS

Net realized gains on investments were $29.7 million for 2010 compared to gains of $1.4 million for 2009 and losses of $97.8 million for 2008. Net realized gains in 2010 are due to $43.6 million of gains recognized, primarily from the sale of fixed maturities and equity securities, partially offset by a $13.9 million of other-than-temporary impairments from fixed maturities, low-income housing tax partnerships and equity securities. Net realized investment gains in 2009 resulted from $34.3 million of gains recognized principally from the sale of fixed maturities, partially offset by $32.9 million of other-than-temporary impairments

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from both fixed maturities and equity securities. In 2008, losses resulted primarily from $113.1 million of other-than-temporary impairments, primarily from fixed maturities, partially offset by $15.3 million of gains recognized principally from the sale of fixed maturities.

During 2009, we completed a cash tender offer to repurchase a portion of our 8.207% Series B Capital Securities due in 2027 that were issued by AFC Capital Trust I (subsequently redeemed and exchanged for Junior Subordinated Debentures) and a portion of our 7.625% Senior Debentures due in 2025 that were issued by THG. AFC Capital Trust I was subsequently liquidated as of July 30, 2009. As a result of these actions and including securities repurchased prior and subsequent to the tender offer, we recorded a pre-tax gain of $34.5 million in 2009. In 2010, we repurchased an additional $36.5 million of our Junior Subordinated Debentures at a cost of $38.5 million, resulting in a $2.0 million loss on the repurchases (see “Other Significant Transactions” on pages 66 to 68 for further discussion regarding these items).

During 2008, we recognized income of $10.1 million, which reflects an $11.1 million gain on the sale of AMGRO, partially offset by losses from the operations of AMGRO during that period. Additionally, in 2008, we recognized a $6.4 million tax benefit resulting from a settlement with the IRS for tax years 1995 through 2001.

Net income includes the following items:

(In millions)
	Property and Casualty
2010	Commercial Lines			Personal Lines			Other Property and Casualty (2)			Discontinued Operations			Total
Net realized investment gains (losses) (1)	$	13.3		$	17.8		$	(1.4	)	$	—		$	29.7
Loss from retirement of debt		—			—			(2.0	)		—			(2.0	)
Gain from discontinued FAFLIC business, net of taxes		—			—			—			0.5			0.5
Loss from discontinued accident and health business, net of taxes		—			—			—			(0.3	)		(0.3	)
Gain on disposal of variable life insurance and annuity business, net of taxes		—			—			—			1.3			1.3
Other discontinued operations, net of taxes		—			—			—			0.1			0.1
2009
Net realized investment gains (losses) (1)	$	0.3		$	(0.8	)	$	1.9		$	—		$	1.4
Gain from retirement of debt		—			—			34.5			—			34.5
Gain from discontinued FAFLIC business, net of taxes		—			—			—			7.1			7.1
Loss from discontinued accident and health business, net of taxes		—			—			—			(2.6	)		(2.6	)
Gain on disposal of variable life insurance and annuity business, net of taxes		—			—			—			4.9			4.9
2008
Net realized investment (losses) gains (1)	$	(53.4	)	$	(53.6	)	$	9.2		$	—		$	(97.8	)
Federal income tax settlement		2.1			5.6			(1.3	)		—			6.4
Other non-segment items		(0.1	)		—			—			—			(0.1	)
Loss from discontinued FAFLIC business (including loss on disposal of $77.3), net of taxes		—			—			—			(84.8	)		(84.8	)
Gain on disposal of variable life insurance and annuity business, net of taxes		—			—			—			11.3			11.3
Income from operations of AMGRO (including gain on disposal of $11.1), net of taxes		—			—			—			10.1			10.1
Other discontinued operations		—			—			—			(0.5	)		(0.5	)

(1) We manage investment assets for our property and casualty business based on the requirements of the entire property and casualty group. We allocate the investment income, expenses and realized gains (losses) to our Commercial Lines, Personal Lines and Other Property and Casualty segments based on actuarial information related to the underlying business.

(2) Includes corporate eliminations.

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INVESTMENT PORTFOLIO

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

DECEMBER 31	2010						2009
(In millions, except percentage data)	Carrying Value			% of Total Carrying Value			Carrying Value			% of Total Carrying Value
Fixed maturities (1)	$	4,915.2			91.4	%	$	4,732.4			91.9	%
Equity securities (1)		128.6			2.4			69.3			1.3
Cash and cash equivalents (1)		292.9			5.5			316.7			6.1
Other long-term investments		39.4			0.7			32.3			0.7
Total, including assets of discontinued operations		5,376.1			100.0	%		5,150.7			100.0	%
Investment assets of discontinued operations		(119.8	)					(117.1	)
Total investment assets of continuing operations	$	5,256.3					$	5,033.6

(1) We carry these investments at fair value.

Investment Assets

The following discussion includes the investment assets of our continuing operations, as well as the investment assets of our discontinued accident and health business.

Total investment assets increased $225.4 million, or 4.4%, to $5.4 billion for the year ended December 31, 2010, of which fixed maturities increased $182.8 million, equities increased $59.3 million, and cash and cash equivalents decreased $23.8 million. The increase in fixed maturities is primarily due to market value appreciation and investment assets acquired with our new subsidiary, Campania. The increase in equity securities is primarily due to additional net investments in 2010.

Our fixed maturity portfolio is comprised primarily of investment grade corporate securities, taxable and tax-exempt issues of state and local governments, residential mortgage-backed securities, commercial mortgage-backed securities, U.S. government securities and asset-backed securities.

The following table provides information about the investment type and credit quality of our fixed maturities portfolio:

DECEMBER 31	2010
(In millions, except percentage data) Investment Type	Rating Agency Equivalent  Designation	Amortized Cost		Fair Value		Net Unrealized Gain (Loss) (1)			Change in Net Unrealized for the Year
Corporates:
NAIC 1	Aaa/Aa/A	$	1,002.2	$	1,058.6	$	56.4		$	24.1
NAIC 2	Baa		1,012.6		1,082.5		69.9			21.4
NAIC 3 and below	Ba, B, Caa and lower		341.4		360.8		19.4			15.5
Total corporates			2,356.2		2,501.9		145.7			61.0
Asset-backed:
Residential mortgage-backed securities			725.4		755.3		29.9			14.3
Commercial mortgage-backed securities			350.7		368.1		17.4			14.7
Asset-backed securities			57.5		61.2		3.7			1.2
Municipals:
Taxable			813.7		812.8		(0.9	)		15.7
Tax-exempt			149.7		152.7		3.0			(1.1	)
U.S. government			261.4		263.2		1.8			2.3
Total fixed maturities (2)		$	4,714.6	$	4,915.2	$	200.6		$	108.1

(1) Includes $33.7 million unrealized loss related to other-than-temporary impairment losses recognized in other comprehensive income.

(2) Includes discontinued accident and health business of $115.8 million in amortized cost and $117.3 million in fair value at December 31, 2010.

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During 2010, our net unrealized gains on fixed maturities increased $108.1 million, or 117%, to a net unrealized gain of $200.6 million at December 31, 2010 from $92.5 million at December 31, 2009, largely due to lower prevailing interest rates combined with the tightening of credit spreads in the fixed income markets.

Amortized cost and carrying value by rating category for the years ended December 31, 2010 and 2009 were as follows:

DECEMBER 31			2010							2009
(In millions, except percentage data)
NAIC Designation	Rating  Agency Equivalent Designation		Amortized Cost		Carrying Value		% of Total Carrying Value			Amortized Cost		Carrying Value		% of Total Carrying Value
1		Aaa/Aa/A	$	3,178.8	$	3,292.9		67.0	%	$	3,120.8	$	3,168.0		66.9	%
2		Baa		1,168.1		1,234.6		25.1			1,198.0		1,240.3		26.2
3		Ba		173.8		182.6		3.7			138.2		130.5		2.8
4		B		139.5		144.2		3.0			93.1		98.0		2.1
5		Caa and lower		42.0		45.2		0.9			84.0		88.0		1.9
6		In or near default		12.4		15.7		0.3			5.8		7.6		0.1
Total fixed maturities (1)			$	4,714.6	$	4,915.2		100.0	%	$	4,639.9	$	4,732.4		100.0	%

(1) Includes discontinued accident and health business of $115.8 million in amortized cost and $117.3 million in fair value at December 31, 2010, and $119.6 million in amortized cost and $116.8 million in fair value at December 31, 2009.

Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 92% of our fixed maturity portfolio consisted of investment grade securities at December 31, 2010, compared to 93% at December 31, 2009.

The quality of our fixed maturity portfolio remains strong based on ratings, capital structure position, support through guarantees, underlying security and parent ownership and yield curve position. We do not hold any securities in the following sectors: subprime mortgages, either directly or through our mortgage-backed securities; collateralized debt obligations; collateralized loan obligations; or credit derivatives.

Commercial mortgage-backed securities (“CMBS”) constitute $368.1 million of our invested assets, of which approximately 19% is fully defeased with U.S. government securities. The portfolio is seasoned, with approximately 72% of our CMBS holdings from pre-2005 vintages, 13% from the 2005 vintage, 10% from the 2007 vintage and 5% from the 2006 vintage. The CMBS portfolio is of high quality with approximately 69% being AAA rated and 31% rated AA or A. The CMBS portfolio has a weighted average loan-to-value ratio of 74% and credit enhancement of approximately 23% as of December 31, 2010.

Our municipal bond portfolio constitutes approximately 18% of invested assets at December 31, 2010 and is 99% investment grade, without regard to any insurance enhancement.

At December 31, 2010, $64.0 million of our fixed maturities were invested in traditional private placement investments compared to $77.9 million at December 31, 2009. Fair values of these investments are primarily determined either by a third party broker or by pricing models that use discounted cash flow analyses.

Our fixed maturity and equity securities are classified as available-for-sale and are carried at fair value. Financial instruments whose value is determined using significant management judgment or estimation constitute less than 2% of the total assets we measured at fair value. (See also Note 6 – “Fair Value” on pages 102 to 107 of the Notes to Consolidated Financial Statements and Supplementary Data of the Form 10-K).

Although we expect to invest new funds primarily in investment grade fixed maturities, we have invested, and expect to continue to invest a portion of funds in common equity securities and below investment grade fixed maturities and other assets. The average earned yield on fixed maturities was 5.46% and 5.53% for the years ended December 31, 2010 and 2009, respectively. If new money rates remain at their current lower levels, they will result in declines in average pre-tax investment yields in future periods.

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Other-than-Temporary Impairments

For the year ended December 31, 2010, we recognized $13.9 million of other-than-temporary impairments (“OTTI”) on fixed maturities, certain low-income housing tax credit limited partnerships (“LIHTC”) and equity securities in earnings, of which $4.4 million related to LIHTC partnerships, $4.3 million was estimated credit losses on debt securities, $3.3 million related to debt securities that we intend to sell and $1.9 million related to common stocks. Other-than-temporary impairments recognized on debt securities during 2010 primarily included $2.9 million on below investment grade corporate bonds principally in the industrial and utilities sectors, $2.7 million on investment grade residential mortgage-backed securities and $1.2 million on investment grade corporate bonds in the industrial sector. For the year ended December 31, 2009, we recognized other-than-temporary impairments of $32.9 million in earnings, which principally included losses on below investment grade corporate bonds in the industrial sector of $21.2 million and $9.5 million from perpetual preferred securities primarily in the financial sector.

In our determination of other-than-temporary impairments of fixed maturity and equity securities, we consider several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends, dividend payments, and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the length of time and the degree to which the fair value of an issuer’s securities remains below our cost. With respect to fixed maturity investments, we consider all factors that might raise doubt about the issuer’s ability to pay all amounts due according to the contractual terms and whether we expect to recover the entire amortized cost basis of the security. With respect to equity securities, we consider our ability and intent to hold the investment for a period of time to allow for a recovery in value. We apply these factors to all securities.

We monitor corporate fixed maturity securities with unrealized losses on a quarterly basis and more frequently when necessary to identify potential credit deterioration as evidenced by ratings downgrades, unexpected price variances, and/or company or industry specific concerns. We apply consistent standards of credit analysis which includes determining whether the issuer is current on its contractual payments and we consider past events, current conditions and reasonable forecasts to evaluate whether we expect to recover the entire amortized cost basis of the security. We utilize valuation declines as a potential indicator of credit deterioration and apply additional levels of scrutiny in our analysis as the severity of the decline increases or duration persists.

For our impairment review of asset-backed fixed maturity securities, we forecast our best estimate of the prospective future cash flows of the security to determine if we expect to recover the entire amortized cost basis of the security. Our analysis includes estimates of underlying collateral default rates based on historical and projected delinquency rates and estimates of the amount and timing of potential recovery. We consider all available information relevant to the collectability of cash flows, including information about the payment terms of the security, prepayment speeds, the financial condition of the underlying borrowers, collateral trustee reports, credit ratings analysis and other market data when developing our estimate of the expected cash flows.

When an other-than-temporary impairment of a debt security occurs, and we intend to sell or more likely than not will be required to sell the investment before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings, which reduces net income and earnings per share. If we do not intend to sell the fixed maturity investment and more likely than not will not be required to sell it, we separate the other-than-temporary impairment into the amount we estimate represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings, which reduces net income and earnings per share. The amount of the estimated other-than-temporary impairment that is non-credit related is recognized in other comprehensive income, net of applicable taxes.

We estimate the amount of the other-than-temporary impairment that relates to credit by comparing the amortized cost of the debt security with the net present value of the debt security’s projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment. The non-credit portion of the impairment is equal to the difference between the fair value and the net present value of the fixed maturity security at the impairment measurement date.

Other-than-temporary impairments of equity securities are recorded as realized losses, which reduce net income and earnings per share. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value.

For equity method investments, we recognize impairment when evidence demonstrates that a loss in value that is other-than-temporary has occurred. Evidence of a loss in value that is other-than-temporary may include the

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absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment. During each period, we evaluate whether an impairment indicator has occurred that may have a significant adverse affect on the carrying value of the investment. Impairment indicators may include: lower expectations of residual value from a limited partnership, reduced valuations of the investments held by limited partnerships, actual recent cash flows that are significantly less than expected cash flows or any other adverse events since the last financial statements were received that might affect the value of the investee’s capital. Other-than-temporary impairments of limited partnerships are recorded as realized losses, which reduce net income and earnings per share.

Temporary declines in market value are recorded as unrealized losses, which do not affect net income and earnings per share, but reduce other comprehensive income, which is reflected in our Consolidated Balance Sheets. We cannot provide assurance that the other-than-temporary impairments will be adequate to cover future losses or that we will not have substantial additional impairments in the future.

Unrealized Losses

The following table provides information about our fixed maturities and equity securities that are in an unrealized loss position.

DECEMBER 31, 2010
(In millions)	12 months or less				Greater than 12 Months				Total
	Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI (1)		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S. government and agency securities	$	2.7	$	85.1	$	0.5	$	16.4	$	3.2	$	101.5
States and political subdivisions		10.4		292.3		9.0		86.7		19.4		379.0
Corporate fixed maturities		6.7		256.9		14.0		78.3		20.7		335.2
Residential mortgage-backed securities		3.2		103.8		8.8		31.0		12.0		134.8
Commercial mortgage-backed securities		0.1		13.1		0.9		7.3		1.0		20.4
Total investment grade		23.1		751.2		33.2		219.7		56.3		970.9
Below investment grade (2):
Corporate fixed maturities		1.1		56.8		14.8		102.5		15.9		159.3
Total fixed maturities		24.2		808.0		48.0		322.2		72.2		1,130.2
Equity securities:
Common equity securities		1.9		45.8		—		—		1.9		45.8
Total (3)	$	26.1	$	853.8	$	48.0	$	322.2	$	74.1	$	1,176.0

(1) Includes $33.7 million of unrealized losses related to OTTI recognized in other comprehensive income, of which $14.8 million are below investment grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss had been rated by the NAIC, Standard & Poor’s or Moody’s at December 31, 2010.

(3) Includes discontinued accident and health business of $6.6 million in gross unrealized losses with $48.6 million in fair value at December 31, 2010.

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DECEMBER 31, 2009
(In millions)	12 months or less				Greater than 12 Months				Total
	Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI (1)		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S. government and agency securities	$	3.7	$	170.8	$	—	$	—	$	3.7	$	170.8
States and political subdivisions		9.0		275.2		15.6		176.5		24.6		451.7
Corporate fixed maturities		3.4		115.8		13.3		152.7		16.7		268.5
Residential mortgage-backed securities		6.6		89.1		7.5		62.6		14.1		151.7
Commercial mortgage-backed securities		0.4		13.5		7.0		30.0		7.4		43.5
Total investment grade		23.1		664.4		43.4		421.8		66.5		1,086.2
Below investment grade (2):
States and political subdivisions		0.2		8.7		0.8		8.2		1.0		16.9
Corporate fixed maturities		10.6		84.1		16.9		150.1		27.5		234.2
Total below investment grade		10.8		92.8		17.7		158.3		28.5		251.1
Total fixed maturities		33.9		757.2		61.1		580.1		95.0		1,337.3
Equity securities:
Common equity securities		—		—		0.3		1.4		0.3		1.4
Total (3)	$	33.9	$	757.2	$	61.4	$	581.5	$	95.3	$	1,338.7

(1) Includes $40.6 million of unrealized losses related to OTTI losses recognized in other comprehensive income, of which $14.8 million are below investment grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss had been rated by the NAIC, Standard & Poor’s or Moody’s at December 31, 2009.

(3) Includes discontinued accident and health business of $8.8 million in gross unrealized losses with $55.0 million in fair value at December 31, 2009.

Gross unrealized losses on fixed maturities and equity securities decreased $21.2 million, or 22%, to $74.1 million at December 31, 2010, compared to $95.3 million at December 31, 2009. The decrease in unrealized losses was primarily due to lower interest rates and tightening of credit spreads of commercial mortgage-backed securities, taxable municipal bonds and corporate bonds during 2010. At December 31, 2010, gross unrealized losses and OTTI primarily consist of $36.6 million of corporate fixed maturities, $17.3 million in taxable municipal bonds and $13.0 million of mortgage-backed securities. Gross unrealized losses and OTTI on corporate fixed maturities include $21.5 million in the financial sector, $12.4 million in the industrial sector and $2.7 million in utilities and other.

Obligations of states and political subdivisions, the U.S. Treasury and U.S. agency securities had associated gross unrealized losses of $22.6 million and $29.3 million at December 31, 2010 and 2009, respectively.

We view the gross unrealized losses on fixed maturities and equity securities as being temporary since it is our assessment that these securities will recover in the near term, as evidenced by the improvement in unrealized losses during the past year, allowing us to realize their anticipated long-term economic value. With respect to gross unrealized losses on fixed maturities, we do not intend to sell nor is it more likely than not we will be required to sell debt securities before this expected recovery of amortized cost (See also “Liquidity and Capital Resources”). With respect to equity securities, we have the intent and ability to retain such investments for the period of time anticipated to allow for this expected recovery in fair value. The risks inherent in our assessment methodology include the risk that, subsequent to the balance sheet date, market factors may differ from our expectations; the global economic recovery takes longer and is less robust than we expect; we may decide to subsequently sell a security for unforeseen business needs; or changes in the credit assessment or equity characteristics from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, an other-than-temporary impairment would be recognized. Although unrealized losses are not reflected in the results of financial operations until they are realized or deemed “other-than-temporary”, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets.

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The following table sets forth gross unrealized losses for fixed maturities by maturity period and for equity securities at December 31, 2010 and 2009. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers. Mortgage-backed securities are included in the category representing their ultimate maturity.

DECEMBER 31	2010		2009
(In millions)
Due in one year or less	$	2.6	$	0.5
Due after one year through five years		11.9		14.0
Due after five years through ten years		17.8		23.0
Due after ten years		39.9		57.5
Total fixed maturities		72.2		95.0
Equity securities		1.9		0.3
Total fixed maturities and equity securities (1)	$	74.1	$	95.3

(1) Includes discontinued accident and health business of $6.6 million and $8.8 million in gross unrealized losses at December 31, 2010 and 2009, respectively.

Our investment portfolio and shareholders’ equity can be and have been significantly impacted by changes in market values of our securities. Although we have seen improvement in unrealized losses during 2009 and 2010, economic conditions remain tenuous, market values could continue to fluctuate, and defaults on fixed income securities could increase. As a result, depending on market conditions, we could incur additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations and/or financial position.

The carrying values of defaulted fixed maturity securities on non-accrual status at December 31, 2010 and 2009 were not material. The effects of non-accruals for the years ended December 31, 2010 and 2009, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were reductions in net investment income of $2.3 million and $3.1 million, respectively. Any defaults in the fixed maturities portfolio in future periods may negatively affect investment income.

The U.S. and global financial markets and economies, while continuing to recover, remain in a state of uncertainty and instability. Several issuers continue to face adverse business and liquidity circumstances, increasing the possibility of unanticipated defaults in the future. While we may experience defaults on fixed income securities, particularly with respect to non-investment grade securities, it is difficult to foresee which issuers, industries or markets will be affected. As a result, the value of our fixed maturity portfolio could change rapidly in ways we cannot currently anticipate. Depending on market conditions, we could incur additional realized and unrealized losses in future periods.

MARKET RISK AND RISK MANAGEMENT POLICIES

INTEREST RATE SENSITIVITY

Our operations are subject to risk resulting from interest rate fluctuations which may adversely impact the valuation of the investment portfolio. In a rising interest rate environment, the value of the fixed income sector, which comprises 91% of our investment portfolio, may decline as a result of decreases in the fair value of the securities. Our intent is to hold securities to maturity and recover the decline in valuation as prices accrete to par. However, our intent may change prior to maturity due to changes in the financial markets, our analysis of an issuer’s credit metrics and prospects, or as a result of changes in cash flow needs. Interest rate fluctuations may also reduce net investment income and as a result, profitability. The portfolio may realize lower yields and therefore lower net investment income on securities because the securities with prepayment and call features may prepay at a different rate than originally projected. In a declining interest rate environment, prepayments and calls may increase as issuers exercise their option to refinance at lower rates. The resulting funds would be reinvested at lower yields. In a rising interest rate environment, the funds may not be available to invest at higher interest rates.

The following table illustrates the estimated impact on the fair value of our investment portfolio at December 31, 2010 of hypothetical changes in prevailing interest rates, defined as changes in interest rates on U.S. Treasury debt. It does not reflect changes in credit spreads, liquidity spreads and other factors that affect the value of securities. Since changes in prevailing interest rates are often accompanied by changes in these other factors, the reader should not assume that an actual change in interest rates would result in the values illustrated.

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(Dollars in millions) Investment Type	+300bp		+200bp		+100bp		0		-100bp		-200bp		-300bp
Residential mortgage-backed securities	$	660	$	695	$	730	$	755	$	765	$	770	$	765
All other fixed income securities		3,595		3,765		3,955		4,160		4,360		4,525		4,640
Total	$	4,255	$	4,460	$	4,685	$	4,915	$	5,125	$	5,295	$	5,405

For our Property and Casualty business, our investment strategy is intended to maximize investment income with consideration towards driving long-term growth of shareholders’ equity and book value. The determination of the appropriate asset allocation is a process that focuses on the types of business written and the level of surplus required to support our different businesses and the risk return profiles of the underlying asset classes. We look to balance the goals of capital preservation, stability, liquidity and after-tax return.

The majority of our assets are invested in the fixed income markets. Through fundamental research and credit analysis, our investment professionals seek to identify a portfolio of stable income producing higher quality U.S. government, municipal, corporate, residential and commercial mortgage-backed securities and asset-backed securities, as well as undervalued securities in the credit markets balanced by strong relative value characteristics. We have a general policy of diversifying investments both within and across all sectors to mitigate credit and interest rate risk. We monitor the credit quality of our investments and our exposure to individual markets, borrowers, industries, sectors and, in the case of commercial mortgage-backed securities, property types and geographic locations. In addition, we currently carry debt which is subject to interest rate risk. The majority of this debt was issued at fixed interest rates between 5.50% and 8.207%. Current market conditions do not allow for us to invest assets at similar rates of return; therefore our earnings on a similar level of assets are not sufficient to cover our current debt interest costs.

The following tables for the years ended December 31, 2010 and 2009 provide information about our financial instruments used for purposes other than trading that are sensitive to changes in interest rates. The tables present principal cash flows and related weighted-average interest rates by expected maturities, unless otherwise noted below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers. Mortgage-backed and asset-backed securities are included in the category representing their expected maturity. Available-for-sale securities include both U.S. and foreign-denominated fixed maturities. Additionally, we have assumed our available-for-sale securities are similar enough to aggregate those securities for presentation purposes. Specifically, variable rate available-for-sale securities comprise an immaterial portion of the portfolio and do not have a significant impact on weighted-average interest rates. Therefore, the variable rate investments are not presented separately; instead they are included in the tables at their current interest rate. Debt is presented at contractual maturities, except for the redemption of $48.0 million of Junior Subordinated Debentures on February 15, 2011 and the debt for previously acquired subsidiaries. We have presented this debt in the category that reflects the more likely payments, which is expected to be earlier than their contractual maturities.

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For the Year Ended December 31, 2010	2011			2012			2013			2014			2015			Thereafter			Total			Fair Value 12/31/10
(Dollars in millions)
Rate Sensitive Assets:
Available-for-sale securities	$	244.9		$	272.0		$	415.8		$	347.1		$	407.2		$	3,095.3		$	4,782.3		$	4,924.8
Average interest rate		5.12	%		5.63	%		5.04	%		5.22	%		4.83	%		5.39	%		5.30	%
Rate Sensitive Liabilities:
Debt	$	55.0		$	14.5		$	—		$	—		$	—		$	536.4		$	605.9		$	603.9
Average interest rate		7.92	%		7.15	%		—			—			—			7.10	%		7.18	%

For the Year Ended December 31, 2009	2010			2011			2012			2013			2014			Thereafter			Total			Fair Value 12/31/09
(Dollars in millions)
Rate Sensitive Assets:
Available-for-sale securities	$	365.9		$	327.7		$	294.9		$	426.2		$	402.5		$	2,934.1		$	4,751.3		$	4,783.8
Average interest rate		4.39	%		5.84	%		5.72	%		5.21	%		5.01	%		5.57	%		5.42	%
Rate Sensitive Liabilities:
Debt	$	7.1		$	—		$	14.7		$	—		$	—		$	412.1		$	433.9		$	387.9
Average interest rate		5.94	%		—			7.24	%		—			—			7.21	%		7.19	%

EQUITY PRICE RISK

Our equity securities portfolio is exposed to equity price risk arising from potential volatility in equity market prices. Portfolio characteristics are analyzed regularly and price risk is actively managed through a variety of techniques. At December 31, 2010, a hypothetical increase or decrease of 10% in the market price of our equity securities would have resulted in an increase or decrease in the fair value of the equity securities portfolio of approximately $13 million. A hypothetical 10% increase or decrease at December 31, 2009 would have resulted in an increase or decrease in the fair value of the equity securities portfolio of $7 million.

FOREIGN CURRENCY SENSITIVITY

In 2010 and 2009, we did not have material exposure to foreign currency related risk.

INCOME TAXES

We file a consolidated United States federal income tax return that includes the holding company and its domestic subsidiaries (including non-insurance operations).

The provisions for federal income taxes from continuing operations were $57.9 million, $83.1 million, and $79.9 million in 2010, 2009 and 2008, respectively. These provisions resulted in consolidated effective federal tax rates of 27.4%, 30.7%, and 48.6% on pre-tax income for 2010, 2009, and 2008, respectively. The 2009 provision reflects a $0.3 million benefit resulting from the settlement with the IRS of interest claims for tax years 1995 through 1997. The 2008 provision reflects a $6.4 million benefit resulting from the settlement with the IRS of tax years 1995 through 2001.

The decreases in the 2010 and 2009 tax rates resulted from reductions in our valuation allowance related to realized loss carryforwards. In 2008, we believed that we would not realize the tax benefit related to the realized investment losses occurring in that year. Accordingly, we increased our valuation allowance to recognize that we did not believe we would realize these tax benefits. In 2010 and 2009, we were able to realize a portion of our capital loss carryforwards from prior years. Accordingly, we reduced our valuation allowance in 2010 and 2009, resulting in tax rates that are less than the statutory rate. Absent these changes in our valuation allowance, the effective tax rates for 2010, 2009, and 2008 would have been 32.0%, 33.2%, and 27.8% respectively.

Our federal income tax expense on segment income was $61.2 million for 2010 compared to $77.5 million in 2009 and $86.3 million in 2008. The decreases in 2010 and 2009 are primarily due to lower segment income.

In addition to the aforementioned benefits from our settlement of ongoing IRS audits, we also realized similar tax benefits in our discontinued operations. In 2009, a benefit of $0.2 million resulting from the settlement with the IRS of interest claims for 1977 through 1981 was recognized in discontinued operations as income related to our discontinued FAFLIC business. During 2008, we reached an agreement with the IRS on our 1995 to 2001 audit cycle.

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A benefit of $2.6 million was recognized in discontinued operations as income related to our discontinued variable life insurance and annuity business and a tax expense of $0.7 million was recognized related to our discontinued FAFLIC business.

In January 2010, we made a $100.0 million pension contribution which resulted in both a current deduction of $35.0 million and the utilization (reduction) of a deferred tax asset of the same amount. This contribution is the most significant reason the current tax expense is $5.7 million in 2010, representing only approximately 10% of the total provision for federal income taxes from continuing operations.

In January, July, September, and December of 2010, we completed transactions which resulted in the realization, for tax purposes only, of unrealized gains in our investment portfolio of $98.4 million, $37.1 million, $31.1 million, and $120.8 million, respectively. These transactions enabled us to realize capital loss carryforwards to offset these gains, and resulted in the release of $66.2 million and $34.4 million, in 2010 and 2009 respectively, of the valuation allowance we held against the deferred tax asset related to these capital loss carryforwards. The total release of $100.6 million was accounted for as an increase in income from continuing operations of $3.2 million and $6.0 million in 2010 and 2009, respectively, with the remaining $91.4 million reflected as a benefit in accumulated and other comprehensive income at December 31, 2010. This amount will be released into income from continuing operations, related to non-segment income, in future years, as the investment securities subject to these transactions are sold or mature.

In 2010, we reduced the valuation allowance related to our deferred tax asset by a total of $104.1 million, from $195.6 million to $91.5 million. There were four principal components to this reduction. First, we reduced the valuation allowance by $66.2 million as a result of the transactions described above which utilized our capital loss carryforwards. Second, we increased the valuation allowance by $20.3 million for certain tax basis unrealized losses which we do not believe we can utilize. This increase was reflected as a decrease in accumulated other comprehensive income. Third, $135.5 million of our capital loss carryforward expired in 2010. As a result, we released the $47.4 million of the valuation allowance attributable to these expirations with an equal and offsetting reduction in the related deferred tax asset. Fourth, as a result of $29.7 million in net realized capital gains, we decreased our valuation allowance by $9.7 million as an increase to income from continuing operations since these gains utilized our capital loss carryforwards. The remaining $1.1 million decrease was attributable to other items reflected as income from discontinued operations.

During 2009, we reduced the valuation allowance related to our deferred tax asset by $152.6 million, from $348.2 million to $195.6 million. There were two principal components to this reduction. First, we reversed through other comprehensive income, the $118.4 million valuation allowance that we had recognized at December 31, 2008 associated with the tax benefit related to the net unrealized depreciation in our investment portfolio at that time. During 2009, appreciation in the portfolio changed the nature of the tax attribute from that of an asset to that of a liability, and thus, there was no longer a need for that portion of the valuation allowance. Second, as a result of the aforementioned transactions, we reversed $28.4 million of the valuation allowance as an adjustment to other comprehensive income and $6.0 million of the valuation allowance as an adjustment to income from continuing operations. The remaining $0.2 million net increase in our valuation allowance was attributable to other items, and reflected as a $0.9 million increase in income from continuing operations and a $1.1 million decrease in income from discontinued operations.

Included in our deferred tax net asset as of December 31, 2010 is an asset of $69.2 million related to capital loss carryforwards. Our pre-tax capital loss carryforwards are $197.8 million, including $176.5 million resulting from the sale of FAFLIC in 2009. At December 31, 2010, we have a full valuation allowance against this asset, since it is our opinion that it is more likely than not that the asset will not be realized. Our estimate of the gross amount and likely realization of capital loss carryforwards may change over time.

As of December 31, 2010, we have alternative minimum tax (“AMT”) credit carryforwards of $111.1 million. We expect to utilize these tax credits during the next three to four years. The result of their utilization will be a lower current tax rate offset by a higher deferred tax provision, and also lower cash expenditures for federal income taxes during the utilization period. Once the minimum tax credits have been fully utilized, we expect our current tax rate to be closer to the statutory rate of 35%. Although there is no expiration on AMT credit carryforwards, we cannot be certain that we will utilize them as quickly as our expectations.

A corporation is entitled to a tax deduction from gross income for a portion of any dividend which was received from a domestic corporation that is subject to income tax. This is referred to as a “dividends received deduction.” In prior years, we have taken this dividends received deduction

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when filing our federal income tax return. Many separate accounts held by life insurance companies receive dividends from such domestic corporations, and therefore, were regarded as entitled to this dividends received deduction. In its Revenue Ruling 2007-61, issued on September 25, 2007, the IRS announced its intention to issue regulations with respect to certain computational aspects of the dividends received deduction on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are not yet known, but they could result in the elimination of some or all of the separate account dividends received deduction tax benefit that we receive. We believe that it is more likely than not that any such regulation would apply prospectively only, and application of this regulation is not expected to be material to our results of operations in any future annual period. However, there can be no assurance that the outcome of the revenue ruling will be as anticipated. We believe that retroactive application would not materially affect our financial position or results of operations. In September 2009, as part of the audit of 2005 and 2006, the IRS disallowed our dividends received deduction relating to separate account assets for both years 2005 and 2006. We challenged the disallowance by filing a formal protest, and have requested an IRS Appeals conference. Should we ultimately be unsuccessful in our challenge, due to tax attributes and the sale of Allmerica Financial Life Insurance and Annuity Company, the effects of this proposed adjustment should not be material to our financial position or results of operations.

CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements. These statements have been prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting estimates are those which we believe affect the more significant judgments and estimates used in the preparation of our financial statements. Additional information about our other significant accounting policies and estimates may be found in Note 1 - “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data on pages 85 to 92 of this Form 10-K.

PROPERTY & CASUALTY INSURANCE LOSS RESERVES

See “Segment Results – Reserves for Losses and Loss Adjustment Expenses” on pages 42 to 51 of this Form 10-K for a discussion of our critical accounting estimates for loss reserves.

PROPERTY AND CASUALTY REINSURANCE RECOVERABLES

We share a significant amount of insurance risk of the primary underlying contracts with various insurance entities through the use of reinsurance contracts. As a result, when we experience loss events that are subject to a reinsurance contract, reinsurance recoveries are recorded. The amount of the reinsurance recoverable can vary based on the size of the individual loss or the aggregate amount of all losses in a particular line, book of business or an aggregate amount associated with a particular accident year. The valuation of losses recoverable depends on whether the underlying loss is a reported loss, or an incurred but not reported loss. For reported losses, we value reinsurance recoverables at the time the underlying loss is recognized, in accordance with contract terms. For incurred but not reported losses, we estimate the amount of reinsurance recoverable based on the terms of the reinsurance contracts and historical reinsurance recovery information and apply that information to the gross loss reserve estimates. The most significant assumption we use is the average size of the individual losses for those claims that have occurred but have not yet been recorded by us. The reinsurance recoverable is based on what we believe are reasonable estimates and is disclosed separately on the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses are settled.

PENSION BENEFIT OBLIGATIONS

Prior to 2005, we provided pension retirement benefits to substantially all of our employees based on a defined benefit cash balance formula. In addition to the cash balance allocation, certain transition group employees, who had met specified age and service requirements as of December 31, 1994, were eligible for a grandfathered benefit based primarily on the employees’ years of service and compensation during their highest five consecutive plan years of employment. As of January 1, 2005, the defined benefit pension plans were frozen.

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We account for our pension plans in accordance with ASC 715, Compensation – Retirement Benefits. In order to measure the liabilities and expense associated with these plans, we must make various estimates and key assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates. These estimates and assumptions are reviewed at least annually and are based on our historical experience, as well as current facts and circumstances. In addition, we use outside actuaries to assist in measuring the expenses and liabilities associated with this plan.

The discount rate enables us to state expected future cash flows as a present value on the measurement date. We also use this discount rate in the determination of our pre-tax pension expense or benefit. A lower discount rate increases the present value of benefit obligations and increases pension expense. As of December 31, 2010 and 2009, we determined our discount rate utilizing an independent yield curve which provides for a portfolio of high quality bonds that are expected to match the cash flows of our pension plan. Bond information used in the yield curve included only those rated Aa or better as of December 31, 2010 and 2009, respectively, and had been rated by at least two well-known rating agencies. At December 31, 2010, based upon our qualified plan assets and liabilities in relation to this discount curve, we decreased our discount rate to 5.625%, from 6.125% at December 31, 2009.

To determine the expected long-term return on plan assets, we consider the historical mean returns by asset class for passive indexed strategies, as well as current and expected asset allocations and adjust for certain factors that we believe will have an impact on future returns. For the years ended December 31, 2010 and 2009, the expected rate of return on plan assets was 7.00% and 7.50%, respectively. The decrease reflects our strategy to shift investment assets from equity securities to fixed maturity investments over several years to our current composition of 74% fixed maturities and 26% equities, as well as declines in the fixed maturities markets in general. Actual returns on plan assets in excess of these expected returns will generally reduce our net actuarial losses (or increase actuarial gains) that are reflected in our accumulated other comprehensive income balance in shareholders’ equity, whereas actual returns on plan assets which are less than expected returns will generally increase our net actuarial losses (or decrease actuarial gains) that are reflected in accumulated other comprehensive income. These gains or losses are amortized into expense in future years.

Holding all other assumptions constant, sensitivity to changes in our key assumptions related to our qualified defined benefit pension plan are as follows:

Discount Rate – A 25 basis point increase in discount rate would decrease our pension expense in 2011 by $1.9 million and decrease our projected benefit obligation by $12.3 million. A 25 basis point reduction in the discount rate would increase our pension expense by $1.7 million and increase our projected benefit obligation by $12.9 million.

Expected Return on Plan Assets – A 25 basis point increase or decrease in the expected return on plan assets would decrease or increase our pension expense in 2011 by $1.3 million.

OTHER-THAN-TEMPORARY IMPAIRMENTS

We employ a systematic methodology to evaluate declines in fair values below amortized cost for all fixed maturity and equity security investments. The methodology utilizes a quantitative and qualitative process ensuring that available evidence concerning the declines in fair value below amortized cost is evaluated in a disciplined manner. In determining whether a decline in fair value below amortized cost is other-than-temporary, we evaluate several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends, dividend payments and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the length of time and the degree to which the fair value of an issuer’s securities remains below our cost. With respect to fixed maturity investments, we consider all factors that might raise doubt about the issuer’s ability to pay all amounts due according to the contractual terms and whether we expect to recover the entire amortized cost basis of the security. With respect to equity securities, we consider our ability and intent to hold the investment for a period of time to allow for a recovery in value. We apply these factors to all securities.

We monitor corporate fixed maturity securities with unrealized losses on a quarterly basis and more frequently when necessary to identify potential credit deterioration as evidenced by ratings downgrades, unexpected price variances, and/or company or industry specific concerns. We apply consistent standards of credit analysis which includes determining whether the issuer is current on its contractual payments and we consider past events, current conditions and reasonable forecasts to evaluate whether we expect to recover the entire amortized cost basis of the security. We utilize valuation declines as a potential indicator of credit deterioration and apply additional levels of scrutiny in our analysis as the severity of the decline increases or duration persists.

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For our impairment review of asset-backed fixed maturity securities, we forecast our best estimate of the prospective future cash flows of the security to determine if we expect to recover the entire amortized cost basis of the security. Our analysis includes estimates of underlying collateral default rates based on historical and projected delinquency rates and estimates of the amount and timing of potential recovery. We consider all available information relevant to the collectibility of cash flows, including information about the payment terms of the security, prepayment speeds, the financial condition of the underlying borrowers, collateral trustee reports, credit ratings analysis and other market data when developing our estimate of the expected cash flows.

When an other-than-temporary impairment of a debt security occurs, and we intend to sell or more likely than not will be required to sell the investment before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings, which reduces net income and earnings per share. If we do not intend to sell the fixed maturity investment or more likely than not will not be required to sell it, we separate the other-than-temporary impairment into the amount we estimate represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings, which reduces net income and earnings per share. The amount of the estimated other-than-temporary impairment that is non-credit related is recognized in other comprehensive income, net of applicable taxes.

We estimate the amount of the other-than-temporary impairment that relates to credit by comparing the amortized cost of the debt maturity security with the net present value of the debt security’s projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment. The non-credit portion of the impairment is equal to the difference between the fair value and the net present value of the fixed maturity security at the impairment measurement date.

Other-than-temporary impairments of equity securities are recorded as realized losses, which reduce net income and earnings per share. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value.

For equity method investments, we recognize impairment when evidence demonstrates that a loss in value that is other-than-temporary has occurred. Evidence of a loss in value that is other-than-temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment. During each period, we evaluate whether an impairment indicator has occurred that may have a significant adverse affect on the carrying value of the investment. Impairment indicators may include: lower expectations of residual value from a limited partnership, reduced valuations of the investments held by limited partnerships, actual recent cash flows that are significantly less than expected cash flows or any other adverse events since the last financial statements received that might affect the value of the investee’s capital. Other-than-temporary impairments of limited partnerships are recorded as realized losses, which reduce net income and earnings per share.

Temporary declines in market value are recorded as unrealized losses, which do not affect net income and earnings per share, but reduce accumulated other comprehensive income, which is reflected in our Consolidated Balance Sheets. We cannot provide assurance that the other-than-temporary impairments will be adequate to cover future losses or that we will not have substantial additional impairments in the future. (See “Investment Portfolio” for further discussion regarding other-than-temporary impairments and securities in an unrealized loss position).

OTHER SIGNIFICANT TRANSACTIONS

During 2010, we paid quarterly dividends of 25 cents per share to our shareholders. Total dividends paid in the quarters ended December 31, 2010, September 30, 2010, June 30, 2010 and March 31, 2010 were $11.3 million, $11.6 million, $12.0 million and $12.3 million, respectively. Our dividend payments in 2010 represented a 33% increase over the annual dividend payment of 75 cents per share in 2009.

Since October 2007 and through December 2010, our Board of Directors has authorized aggregate repurchases of our common stock of up to $500 million, including a $100 million increase in the program in the fourth quarter of 2010. Under the repurchase authorizations, we may repurchase our common stock from time to time, in amounts and prices and at such times as we deem appropriate, subject to market conditions and other considerations. Our repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. On March 30, 2010 and December 8, 2009, we entered into accelerated share repurchase agreements with Barclays Bank PLC, acting through its agent Barclays Capital, Inc., for the immediate repurchase of 2.3 million and 2.4 million shares, respectively, of our common stock at a cost of

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$105.0 million and $105.2 million, respectively. Total repurchases under the program as of December 31, 2010 were 7.9 million shares at a cost of $342.9 million, for an average price per share of $43.27.

On June 14, 2010, we purchased approximately 11 acres of developable land in Worcester, Massachusetts for $5 million. A portion of the land will be developed with the construction of a new 200,000 square foot office building and the redevelopment of an adjacent parking garage (the “City Square Project”). In addition, we signed a 17 year lease agreement with a tenant for the new building and garage. The tenant is an unaffiliated public company with an investment grade credit rating. Through December 31, 2010, we capitalized $8.3 million in related lease acquisition, legal, architectural and associated costs. Development costs are estimated between $65 million and $70 million and the project will be financed, in part, through the issuance of collateralized debt through our membership in the FHLBB. In July 2010, Hanover Insurance committed to borrow $46.3 million from the FHLBB to finance the project. These borrowings will be drawn down in several increments from July 2010 to January 2012. During 2010, Hanover Insurance received an advance of $9.5 million from this commitment. Amounts drawn from the $46.3 million mature on July 20, 2020 and carry fixed interest rates with a weighted average of 3.88%. (See also below for further information related to participation in the FHLBB’s collateralized borrowing program).

On March 31, 2010, we acquired Campania for a cash purchase price of approximately $24 million, subject to various terms and conditions. Campania specializes in insurance solutions for portions of the healthcare industry.

On February 23, 2010, we issued $200.0 million aggregate principal amount of 7.50% senior unsecured notes due March 1, 2020. The senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of capital stock of restricted subsidiaries and limitations on liens. These debentures pay interest semi-annually on March 1 and September 1.

On December 3, 2009, we entered into a renewal rights agreement with OneBeacon. Through this agreement, we acquired access to a portion of OneBeacon’s small and middle market commercial business at renewal, including industry programs and middle market niches. This transaction included consideration of approximately $23 million, plus certain potential additional consideration estimated to total approximately $11 million, primarily representing purchased renewal rights intangible assets which are included as other assets in our Consolidated Balance Sheets. The agreement was effective for renewals beginning January 1, 2010.

On September 25, 2009, Hanover Insurance received an advance of $125 million through its membership in the FHLBB as part of a collateralized borrowing program. This advance bears interest at a fixed rate of 5.50% per annum over a twenty-year term. The proceeds from these borrowings were used by Hanover Insurance to acquire AIX and its subsidiaries from the holding company. As collateral to the FHLBB for all advances received, including those relating to the City Square Project, as of December 31, 2010, Hanover Insurance has pledged government agency securities with a fair value of $162.7 million. Collateral pledged to the FHLBB totaled $142.0 million as of December 31, 2009. The fair value of the collateral pledged must be maintained at certain specified levels of the borrowed amount, which can vary depending on the type of assets pledged. If the fair value of this collateral declines below these specified levels, Hanover Insurance would be required to pledge additional collateral or repay outstanding borrowings. Hanover Insurance is permitted to voluntarily repay the outstanding borrowings at any time, subject to a repayment fee. As a requirement of membership in the FHLBB, Hanover Insurance acquired $2.5 million of FHLBB stock, and as a condition to participating in the FHLBB’s collateralized borrowing program, it was required to purchase additional shares of FHLBB stock in an amount equal to 4.5% of its outstanding borrowings. These additional purchases totaled $6.1 million through December 31, 2010.

We liquidated AFC Capital Trust I (the “Trust”) on July 30, 2009. Each holder of 8.207% Series B Capital Securities (“Capital Securities”) as of that date received a principal amount of our Series B 8.207% Junior Subordinated Deferrable Interest Debentures (“Junior Debentures”) due February 3, 2027 equal to the liquidation amount of the Capital Securities held by such holder. The liquidation of the Trust did not have a material effect on our results of operations or financial position. On June 29, 2009, prior to liquidating the Trust, we completed a cash tender offer to repurchase a portion of our Capital Securities that were issued by the Trust and a portion of our 7.625% Senior Debentures (“Senior Debentures”) due in 2025 that were issued by THG. As of that date, $69.3 million of Capital Securities were tendered at a price equal to $800 per $1,000 of face value. In addition, we accepted for tender a principal amount of $77.3 million of Senior Debentures. Depending on the time of tender, holders of the Senior Debentures accepted for purchase received a price of either $870 or $900 per $1,000 of face value. Separately, we held $65.0 million of Capital Securities previously repurchased at a discount in the open market prior to the tender offer, and $1.1 million of Senior Debentures.

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We recognized a pre-tax gain of $34.5 million in 2009 as a result of such purchases. In December 2010, we repurchased $36.5 million of our Junior Debentures at a cost of $38.5 million, resulting in a $2.0 million loss on the repurchases. As of December 31, 2010, a net principal amount of $129.2 million of Junior Debentures and $121.4 million of Senior Debentures remained outstanding.

On November 28, 2008, we acquired AIX for approximately $100 million, subject to various terms and conditions. AIX is a specialty property and casualty insurer that underwrites and manages program business.

On June 2, 2008, we completed the sale of our premium financing subsidiary, AMGRO, to Premium Financing Specialists, Inc. We recorded a gain of $11.1 million related to this sale, which was reflected in the Consolidated Statement of Income as part of discontinued operations.

On March 14, 2008, we acquired all of the outstanding shares of Verlan for $29.0 million. Verlan, now referred to as Hanover Specialty Industrial, is a specialty company providing property insurance to chemical, paint, solvent and other manufacturing and distribution companies.

STATUTORY SURPLUS OF INSURANCE SUBSIDIARIES

The following table reflects the consolidated statutory surplus for our property and casualty businesses as of December 31, 2010 and December 31, 2009:

December 31	2010		2009
(In millions)
Total Statutory Surplus–Combined P&C Companies	$	1,747.3	$	1,741.6

The consolidated statutory surplus increased $5.7 million during 2010, primarily due to underwriting results and net realized gains, partially offset by a $75 million dividend to the holding company in December 2010.

The NAIC prescribes an annual calculation regarding risk based capital (“RBC”). RBC ratios for regulatory purposes, as described in the glossary, are expressed as a percentage of the capital required to be above the Authorized Control Level (the “Regulatory Scale”); however, in the insurance industry, RBC ratios are widely expressed as a percentage of the Company Action Level. The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance, as of December 31, 2010 and 2009, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):

(In millions, except ratios) December 31, 2010	Company Action Level		Authorized Control Level		RBC  Ratio Industry Scale			RBC Ratio Regulatory Scale
The Hanover Insurance Company	$	566.0	$	283.0		306	%		613	%
December 31, 2009
The Hanover Insurance Company	$	498.9	$	249.5		346	%		693	%

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of our ability to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, our primary ongoing source of cash is dividends from our insurance subsidiaries. However, dividend payments to us by our insurance subsidiaries are subject to limitations imposed by state regulators, such as the requirement that cash dividends be paid out of unreserved and unrestricted earned surplus. The payment of “extraordinary” dividends, as defined, from any of our insurance subsidiaries is restricted.

In the fourth quarters of 2010, 2009, and 2008, respectively, dividends of $75.0 million, $153.7 million and $166.0 million were declared and paid by our property and casualty business, providing additional cash and securities to the holding company. Additionally, in the fourth quarter of 2008, we elected to make a capital contribution of $76.3 million back to Hanover Insurance, which was paid in January 2009.

In connection with the sale of FAFLIC to Commonwealth Annuity on January 2, 2009, the Massachusetts Division of Insurance approved a net dividend from FAFLIC to THG, which totaled approximately $130 million. This dividend was paid to the holding company on January 2, 2009 and consisted primarily of property and equipment, which was subsequently purchased by Hanover Insurance from THG at fair value. Additionally, in the first quarter of 2008, a dividend of $17 million was declared and paid by FAFLIC.

Sources of cash for our insurance subsidiaries primarily include premiums collected, investment income and maturing investments. Primary cash outflows are paid claims, losses and loss adjustment expenses, policy acquisition expenses, other underwriting expenses and investment purchases. Cash outflows related to losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid

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losses and because of the potential for large losses either individually or in the aggregate. We periodically adjust our investment policy to respond to changes in short-term and long-term cash requirements.

Net cash provided by operating activities was $87.7 million during 2010, compared to net cash provided by operations of $91.6 million in 2009 and $209.5 million in 2008. The decrease in net cash provided by operating activities in 2010 compared to 2009 primarily resulted from a $100 million contribution to our qualified defined benefit pension plan in January 2010. In addition, cash was used to provide for higher operating expenses and increased loss and LAE payments in 2010. These cash uses in 2010 were almost entirely offset by cash provided by increased written premium in 2010. The $117.9 million decrease in cash provided by operating activities in 2009 compared to 2008, primarily resulted from an increase in net loss and LAE payments, and increased level of funding associated with our qualified defined benefit pension plan, and an increase in expenditures related to our business investments, primarily investments in our product development and technology.

Net cash used in investing activities was $101.8 million during 2010, compared to net cash used of $174.2 in 2009 and to net cash provided of $189.2 million in 2008. During 2010, cash used was primarily related to our net purchases of equity securities and fixed maturities. Additionally, cash was used in 2010 in connection with our acquisitions and renewal rights transactions. During 2009, cash was primarily used as we reinvested a portion of existing cash into fixed maturities and invested the proceeds from the sale of our Life Companies into fixed maturities. Additionally, in 2009, equities were sold and additional cash was used in connection with the One Beacon renewal rights agreement. This investing activity was partially offset by cash provided from sales of fixed maturities to fund our stock repurchase program. During 2008, cash was primarily provided by net sales and maturities of fixed maturity securities. Due to the uncertainty in the capital markets, we held a high level of cash and cash equivalents during the fourth quarter of 2008. Partially offsetting this increase was cash payments made in connection with the acquisitions of AIX and Verlan.

Net cash used in financing activities was $9.7 million during 2010, compared to cash used in financing activities of $130.2 million in 2009 and $144.6 million in 2008. During 2010, cash used in financing activities primarily resulted from repurchases of treasury stock and debt, as well as our quarterly dividend payments to shareholders. These were substantially offset by proceeds from the issuance, on February 23, 2010, of $200.0 million unsecured senior debentures. During 2009, cash used in financing activities primarily resulted from $148.1 million net repurchases of our stock and $37.5 million to fund annual dividends to shareholders. These uses were partially offset by $53.1 million of cash inflows from our securities lending program. Also during 2009, a $125.0 million advance received as part of the FHLBB collateralized borrowing program was offset by $125.9 million used to repurchase a portion of our corporate debt (see Significant Transactions). During 2008, cash used in financing activities primarily resulted from $58.5 million of net repurchases of our stock, $50.6 million of net repayments related to our securities lending program, $23.0 million in dividends paid to shareholders and $21.0 million related to the maturity of a trust instrument supported by a funding obligation.

At December 31, 2010, THG, as a holding company, held $447.2 million of fixed maturities and cash. We believe our holding company assets are sufficient to meet our future obligations, which currently consist primarily of interest on our senior and junior debentures, our dividends to shareholders, costs associated with retirement benefits provided to our former life employees and agents, and to the extent required, payments related to indemnification of liabilities associated with the sale of various subsidiaries. We do not expect that it will be necessary to dividend additional funds from our insurance subsidiaries in order to fund 2011 holding company obligations; however, we may decide to do so.

During 2010, we paid four quarterly dividends, as declared by the Board, of twenty-five cents per share each to our shareholders totaling $47.2 million. We believe that our holding company assets are sufficient to provide for future shareholder dividends should the Board of Directors declare them.

We expect to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements, including the funding of our qualified defined benefit pension plan. Although no contribution was required in 2010 to meet our minimum funding obligations required by the Employee Retirement Income Security Act of 1974 (“ERISA”), on January 4, 2010, we contributed $100.0 million to the qualified defined benefit pension plan. With this contribution and based upon the current estimate of liabilities and certain assumptions regarding investment returns and other factors, our qualified defined benefit pension plan is essentially fully funded as of December 31, 2010. As a result, we currently expect that significant cash contributions will not be required for this plan for several years. However, the ultimate payment amount is based on several assumptions, including but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates and the ultimate

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valuation and determination of benefit obligations. Since differences between actual plan experience and our assumptions are likely, changes to our funding obligations in future periods are possible.

Our insurance subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term investments. In the early part of 2009 and prior, the financial markets experienced unprecedented declines in value, especially in the financial and industrial sectors. Many securities currently held by THG and its subsidiaries experienced the impact of these significant changes in market value. Due to lower interest rates and the continued tightening of credit spreads in our taxable municipal bonds, corporate bonds, and commercial and residential mortgage-backed securities portfolios in 2010, we experienced an improvement in our unrealized position, resulting in net unrealized gains of $211.2 million on securities held at December 31, 2010. We believe that the quality of the assets we hold will allow us to realize the long-term economic value of our portfolio, including securities that are currently in an unrealized loss position. We do not anticipate the need to sell these securities to meet our insurance subsidiaries’ cash requirements. We expect our insurance subsidiaries to generate sufficient operating cash to meet all short-term and long-term cash requirements. However, there can be no assurance that unforeseen business needs or other items will not occur causing us to have to sell those securities in a loss position before their values fully recover; thereby causing us to recognize impairment charges in that time period.

Since October and through December 2010, our Board of Directors has authorized aggregate repurchases of our common stock of up to $500 million, including a $100 million increase in the program in the fourth quarter. Our repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. On March 30, 2010 and December 8, 2009, we entered into accelerated share repurchase agreements with Barclays Bank PLC, acting through its agent Barclays Capital, Inc., and utilized a portion of our existing share repurchase authorization for the immediate repurchase of 2.3 million and 2.4 million shares, respectively, of our common stock at a cost of $105.0 million and $105.2 million, respectively. Including the accelerated share repurchase, during 2010, we repurchased 2.9 million shares at a cost of $134.7 million. Total repurchases under this program as of December 31, 2010 were 7.9 million shares at a cost of $342.9 million.

Our Junior Debentures have a face value of $129.2 million as of December 31, 2010 and pay cumulative dividends semi-annually at 8.207% and mature February 3, 2027. In 2010, we repurchased $36.5 million of our Junior Debentures at a cost of $38.5 million, resulting in a $2.0 million loss on the repurchases. Additionally, on February 15, 2011, we repurchased an additional $48.0 million of Junior Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million on the repurchase. These repurchases are expected to reduce our pre-tax interest costs in 2011 by approximately $7 million. We may continue to repurchase additional Junior Debentures or Senior Debentures on an opportunistic basis (see also Other Significant Transactions).

On February 23, 2010, we issued $200.0 million aggregate principal amount of 7.5% senior unsecured notes due March 1, 2020. Net proceeds of the offering were approximately $197 million. We plan to use the net proceeds of the issuance for general corporate and working capital purposes, which may include repurchase of shares of our common stock, capital expenditures, possible acquisitions and any other general corporate purposes. The lenders under the syndicated credit agreement discussed below waived the covenant that limited additional borrowing in order to permit us to complete this offering.

In June 2007, we entered into a $150.0 million committed syndicated credit agreement which expired in June 2010. There were no borrowings under this agreement. The agreement provided for covenants, including, but not limited to, maintaining a certain level of equity and an RBC ratio in our primary property and casualty companies of at least 175% (based on the Industry Scale). We were in compliance with the covenants of this agreement during the duration of the contract. We did not renew or replace this syndicated credit agreement upon expiration. Additionally, we had no commercial paper borrowings as of December 31, 2010 and we do not anticipate utilizing commercial paper in the near term.

Our financing obligations generally include repayment of our Senior and Junior Debentures and borrowings from the FHLBB, and operating lease payments. The following table represents our annual payments related to the contractual principal and interest payments of these financing obligations as of December 31, 2010 and operating lease payments reflect expected cash payments based upon lease terms. In addition, we also have included our estimated payments related to our loss and LAE obligations and our current expectation of payments to be made to support the obligations of our benefit plans. The following table also includes commitments to purchase investment securities at a future date. Actual payments may differ from the contractual and/or estimated payments in the table.

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December 31, 2010	Maturity less than 1 year		Maturity 1-3 years		Maturity 4-5 years		Maturity in excess of 5 years		Total
(In millions)
Debt (1)	$	48.0	$	—	$	—	$	557.9	$	605.9
Interest associated with debt (1)		40.1		81.4		81.4		358.6		561.5
Operating lease commitments (2)		14.1		19.6		9.2		—		42.9
Qualified defined benefit pension plan funding obligations (3)		—		—		—		—		—
Non-qualified defined benefit pension and post-retirement benefit obligations (4)		8.5		15.6		14.9		31.5		70.5
Investment commitments (5)		33.9		62.4		—		—		96.3
Loss and LAE obligations (6)		962.7		917.6		411.5		984.0		3,275.8

(1) Debt includes our senior debentures due in 2025, which pay annual interest at a rate of 7 5/8%, our senior debentures due in 2020, which pay annual interest at a rate of 7.50%, and our junior subordinated debentures due in 2027, which pay cumulative dividends at an annual rate of 8.207%. We executed a repurchase of $48.0 million of our Junior Debentures in February 2011; such repurchase is reflected in the less than one year category. All other payments related to the principal amount of these agreements are expected to be made at the end of the respective debt agreements. We hold two additional junior subordinated debentures, of which one, in the principal amount of $3.0 million, pays cumulative dividends at an annual rate of LIBOR plus 3.625% through maturity in 2035. Payment related to the principal amount of this agreement represents the contractual maturity; therefore, principal and interest associated with this obligation are reflected in the above table based upon the contractual maturity date and based upon current LIBOR rates. The Company has the ability to prepay this commitment, which is not reflected in the table above. The other junior subordinated debentures, in the principal amount of $15.0 million, pay cumulative dividends at an annual rate of 8.37% on two-thirds of the securities, while dividend payments on one-third of the securities is based on the three-month LIBOR plus 3.70%. Payment related to the principal amount of this agreement represents the contractual maturity; therefore, principal and interest associated with this obligation are reflected in the above table based upon the contractual maturity date and based upon current LIBOR rates. The Company has the ability to prepay this commitment, which is not reflected in the table above. In addition, we have $125.0 million of borrowings under a collateralized borrowing program with the FHLBB which pays interest monthly at a rate of 5.50% annually. Such borrowings are available for a twenty-year term or through September 25, 2029. We also have $9.5 million of borrowings under this collateralized borrowing program which pays interest monthly. Furthermore, we have committed to borrowing an additional $36.8 million under this program, the majority of which will occur in 2011. All current and future borrowings under this program with the FHLBB pay interest at a weighted average rate of 3.88%. These borrowings have a maturity date of July 20, 2020. Additionally, our debt includes surplus notes in the principal amount of $4.0 million due in 2034, which pay quarterly interest at a rate of the three month LIBOR plus 4.25%. Payment related to the principal amount of this agreement represents the contractual maturity; therefore, principal and interest associated with this obligation are reflected in the above table based upon the contractual maturity date and based upon current LIBOR rates. The Company has the ability to prepay this commitment, which is not reflected in the table above. For purposes of this table, we used the LIBOR rate as of December 31, 2010 which was 0.30%.

(2) Our insurance subsidiaries are lessees with a number of operating leases.

(3) In 2010, we contributed $100.0 million to our qualified defined benefit pension plan and do not expect to make any significant additional contributions in order to meet our minimum funding requirements. However, additional contributions may be required in the future based on the level of pension assets and liabilities in future periods. The ultimate payment amount is based on several assumptions, including, but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates and the ultimate valuation of benefit obligations. Differences between actual plan experience and our assumptions are likely and will likely result in changes to our funding obligations in future periods.

(4) Non-qualified defined benefit pension and postretirement benefit obligations reflect estimated payments to be made through plan year 2020 for pension, postretirement and postemployment benefits. Estimates of these payments and the payment patterns are based upon historical experience.

(5) Investment commitments include $58.4 million related to the City Square Project, $18.8 million related to tax credits, $16.8 million related to partnerships, and $2.3 million in other investment commitments.

(6) Unlike many other forms of contractual obligations, loss and LAE reserves do not have definitive due dates and the ultimate payment dates are subject to a number of variables and uncertainties. As a result, the total loss and LAE reserve payments to be made by period, as shown above, are estimates based principally on historical experience.

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OTHER MATTERS

We have a qualified defined benefit pension plan and several non-qualified pension plans that were frozen as of January 1, 2005. Several factors and assumptions affect the amount of costs associated with the plans and contributions required to be provided to the trust for the qualified plan, including, among others, assumed long-term rates of return on plan assets.

To determine the expected long-term return on plan assets, we consider the historical mean returns by asset class for passive indexed strategies, as well as current and expected asset allocations and adjust for certain factors that we believe will have an impact on future returns. Actual returns on plan assets in any given year seldom result in the achievement of the expected rate of return on assets. Actual returns that are in excess of these expected returns will generally reduce the net actuarial losses (or increase actuarial gains) that are reflected in our accumulated other comprehensive income balance in shareholders’ equity, whereas actual returns on plan assets which are less than expected returns will generally increase our net actuarial losses (or decrease actuarial gains) that are reflected in accumulated other comprehensive income. These gains or losses are amortized into expense in future years.

Expenses related to these plans are generally calculated based upon information available at the beginning of the plan year. Our pre-tax expense related to our defined benefit plans was $12.9 million and $33.9 million for 2010 and 2009, respectively. The assets held by the qualified benefit plan are subject to changing economic conditions (see Investment Portfolio on pages 55 to 60 of this Form 10-K). Actual returns of the plan investments generated approximately $56 million and $70 million of income during 2010 and 2009, respectively.

The benefit from the investment gains experienced in 2010 was partially offset by a decrease in the discount rate from prior year, and a decrease in the long-term return assumption to 7.00%. This net gain resulted in adjustments to our net actuarial gains in 2010 of approximately $3.5 million. This is reflected as a decrease to our accumulated other comprehensive income. In 2009, investment gains were partially offset by a decrease in the discount rate from prior year, and a decrease in the long-term return assumption to 7.50%. This net gain resulted in adjustments to our net actuarial gains in 2009 of approximately $48.5 million, which are reflected in our accumulated other comprehensive income. The change in these actuarial gains and losses is amortized in future years. The effect of our actual investment experience in 2010, which included the effect of the $100 million contribution made January 4, 2010, and taking into consideration the decrease in discount rates in 2011, pension related expenses in 2011 are expected to be consistent with our costs in 2010. Accordingly, we expect our pre-tax pension expense to remain at approximately $13 million in 2011.

On January 4, 2010, and as discussed in “Liquidity and Capital Resources” on pages 68 to 71 of this Form 10-K, we made a discretionary contribution of $100 million to the plan. Based on current assumptions, this results in our qualified defined benefit plan being essentially fully funded as of December 31, 2010. Accordingly, we do not currently expect to make significant additional contributions to the plan in order to maintain appropriate funding levels in the near term. However, the ultimate payment amount is based on several assumptions, including, but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates and the ultimate valuation and determination of benefit obligations. Since differences between actual plan experience and our assumptions are likely, changes to our funding obligations in future periods are possible.

OFF-BALANCE SHEET ARRANGEMENTS

We currently do not have any material off-balance sheet arrangements that are reasonably likely to have an effect on our financial position, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.

CONTINGENCIES AND REGULATORY MATTERS

LITIGATION AND CERTAIN REGULATORY MATTERS

Durand Litigation

On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named Plaintiff, a former employee who received a lump sum distribution from our Cash Balance Plan (the “Plan”) at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, we understated the accrued benefit in the calculation. We filed a Motion to Dismiss on the basis that the Plaintiff failed to exhaust administrative remedies, which motion was granted without prejudice in a decision dated November 7, 2007. This decision was reversed by an order dated March 24, 2009 issued by the United States Court of Appeals for the Sixth Circuit, and the case was remanded to the district court.

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The plaintiff filed an Amended Complaint on December 11, 2009. In response, we filed a Motion to Dismiss on January 30, 2010. In addition to the pending calculation of the lump sum distribution claim, the Amended Complaint includes: (a) a claim that the Plan failed to calculate participants’ account balances properly because interest credits were based solely upon the performance of each participant’s selection from among various hypothetical investment options (as the Plan provided) rather than crediting the greater of that performance or the 30 year Treasury rate; (b) a claim that the 2004 Plan amendment, which changed interest crediting for all participants from the performance of participant’s investment selections to the 30 year Treasury rate, reduced benefits in violation of ERISA for participants who had account balances as of the amendment date by not continuing to provide them performance-based interest crediting on those balances; and (c) claims for breach of fiduciary duty and ERISA notice requirements for not properly informing participants of the various interest crediting and lump sum distribution matters of which plaintiffs complain. In our judgment, the outcome is not expected to be material to our financial position, although it could have a material effect on the results of operations for a particular quarter or annual period and on the funding of the Plan.

Hurricane Katrina Litigation

In August 2007, the State of Louisiana filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including us, and asserts a right to benefit payments from insurers on behalf of current and former Louisiana citizens who have applied for and received or will receive funds through Louisiana’s “Road Home” program. The case was thereafter removed to the Federal District Court for the Eastern District of Louisiana.

On March 5, 2009, the court issued an Order granting in part and denying in part a Motion to Dismiss filed by Defendants. The court dismissed all claims for bad faith and breach of fiduciary duty and all claims for flood damages under policies with flood exclusions or asserted under Louisiana’s Valued Policy Law, but rejected the insurers’ arguments that the purported assignments from individual claimants to the state were barred by anti-assignment provisions in the insurers’ policies. On April 30, 2009, Defendants filed a Petition for Permission to Appeal to the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”), which was granted. On July 28, 2010, the Fifth Circuit certified the anti-assignment issue to the Louisiana Supreme Court. Oral arguments are scheduled to be heard by the Louisiana Supreme Court on March 14, 2011.

We have established our total loss and LAE reserves on the assumption that we will not have any liability under the “Road Home” or similar litigation, and that we will otherwise prevail in litigation as to the cause of certain large losses and not incur extra contractual or punitive damages.

Certain Regulatory and Industry Developments

Unfavorable economic conditions may contribute to an increase in the number of insurance companies that are under regulatory supervision. This may result in an increase in mandatory assessments by state guaranty funds, or voluntary payments by solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. We are not able to reasonably estimate the potential impact of any such future assessments or voluntary payments.

Over the past several years, state-sponsored insurers, reinsurers and involuntary pools have increased significantly, particularly in those states which have Atlantic or Gulf Coast exposures. As a result, the potential assessment exposure of insurers doing business in such states and the attendant collection risks have increased, particularly, in our case, in the states of Massachusetts, Louisiana and Florida. Such actions and related regulatory restrictions on rate increases, underwriting and the ability to non-renew business may limit our ability to reduce the potential exposure to hurricane related losses. At this time, we are unable to predict the likelihood or impact of any such potential assessments or other actions.

On August 1, 2010, the Michigan Supreme Court issued a decision in a case captioned McCormick v. Carrier, et. al, overturning the so-called Kreiner decision, and in so doing, we believe that the Court significantly expanded the circumstances under which claimants can sue for non-economic losses resulting from automobile accidents in Michigan. Although the full implications and application of the McCormick decision are not yet understood and may evolve in the future, we believe that the revised standard will adversely affect both past claims which are not finally resolved, as well as future claims. Although our reserves reflect our best estimate of the impact of this decision, in light of evolving law and the

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uncertain application of this new standard, we cannot be certain as to the adequacy of these reserves or of our ability to raise rates for liability coverage of Michigan commercial and personal automobile polices to reflect the additional losses we expect to incur.

From time to time, proposals have been made to establish a federal based insurance regulatory system and to allow insurers to elect either federal or state-based regulation (“optional federal chartering”). In light of the economic environment and the focus on increased regulatory controls, particularly with regard to financial institutions, there has been renewed interest in such proposals.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Financial Reform Act”) was enacted. The Financial Reform Act includes a provision to establish a Federal Insurance Office with the purpose of collecting information to better understand insurance issues at the federal level and to monitor the extent to which traditional underserved communities and consumers, minorities, and low and moderate income persons have access to affordable insurance products. The Financial Reform Act also contains provisions affecting financial institutions, credit rating agencies and other commercial and consumer businesses.

Other Matters

We have been named a defendant in various other legal proceedings arising in the normal course of business. In addition, we are involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which we have been named a defendant or the subject of an inquiry or investigation, and our ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. In our opinion, based on the advice of legal counsel, the ultimate resolutions of such proceedings will not have a material effect on our financial position, although they could have a material effect on the results of operations for a particular quarter or annual period.

Residual Markets

We are required to participate in residual markets in various states, which generally pertain to high risk insureds, disrupted markets or lines of business or geographic areas where rates are regarded as excessive. The results of the residual markets are not subject to the predictability associated with our own managed business, and are significant to the workers’ compensation line of business, the homeowners line of business and both the commercial and personal automobile lines of business.

RATING AGENCIES

Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers information on specific insurance companies. Higher ratings generally indicate the rating agencies’ opinion regarding financial stability and a stronger ability to pay claims.

We believe that strong ratings are important factors in marketing our products to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry. Insurance company financial strength ratings are assigned to an insurer based upon factors deemed by the rating agencies to be relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security. Customers typically focus on claims-paying ratings, while creditors focus on debt ratings. Investors use both to evaluate a company’s overall financial strength.

RECENT DEVELOPMENTS

In February 2011, we repurchased $48.0 million of our Junior Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million. (See also Note 7 – “Debt” on pages 107 and 108 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K).

RISKS AND FORWARD-LOOKING STATEMENTS

Management’s Discussion and Analysis contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of indicators of forward-looking statements and specific important factors that could cause actual results to differ materially from those contained in forward-looking statements, see Part I – Item 1A on pages 16 to 27 of this Annual Report of Form 10-K for the fiscal year ended December 31, 2010. This Management’s Discussion and Analysis should be read and interpreted in light of such factors.

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GLOSSARY OF SELECTED INSURANCE TERMS

Account rounding – The conversion of single policy customers to accounts with multiple policies and/or additional coverages.

Benefit payments – Payments made to an insured or their beneficiary in accordance with the terms of an insurance policy.

Casualty insurance – Insurance that is primarily concerned with the losses caused by injuries to third persons and their property (other than the policyholder) and the related legal liability of the insured for such losses.

Catastrophe – A severe loss, resulting from natural and manmade events, including risks such as hurricane, fire, earthquake, windstorm, tornado, hailstorm, severe winter weather, explosion, terrorism and other similar events.

Catastrophe loss – Loss and directly identified loss adjustment expenses from catastrophes. The Insurance Services Office (“ISO”) Property Claim Services (“PCS”) defines a catastrophe loss as an event that causes $25 million or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers. In addition to those catastrophe events declared by ISO, claims management also generally includes within the definition of a “catastrophe loss”, an event that causes approximately $5 million or more in company insured property losses and affects in excess of one hundred policyholders.

Cede; cedent; ceding company – When a party reinsures its liability with another, it “cedes” business and is referred to as the “cedent” or “ceding company”.

Combined ratio, GAAP – This ratio is the GAAP equivalent of the statutory ratio that is widely used as a benchmark for determining an insurer’s underwriting performance. A ratio below 100% generally indicates profitable underwriting prior to the consideration of investment income. A combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income. The combined ratio is the sum of the loss ratio, the loss adjustment expense ratio and the underwriting expense ratio.

Credit spread – The difference between the yield on the debt securities of a particular corporate debt issue and the yield of a similar maturity of U.S. Treasury debt securities.

Current accident year loss results – A measure of the estimated earnings impact of current premiums offset by estimated loss experience and expenses for the current accident year. This measure includes the estimated increase in revenue associated with higher prices (premiums), including those caused by price inflation and changes in exposure, partially offset by higher volume driven expenses and inflation of loss costs. Volume driven expenses include policy acquisition costs such as commissions paid to property and casualty agents which are typically based on a percentage of premium dollars.

Dividends received deduction – A corporation is entitled to a special tax deduction from gross income for dividends received from a domestic corporation that is subject to income tax.

Earned premium – The portion of a premium that is recognized as income, or earned, based on the expired portion of the policy period, that is, the period for which loss coverage has actually been provided. For example, after six months, $50 of a $100 annual premium is considered earned premium. The remaining $50 of annual premium is unearned premium. Net earned premium is earned premium net of reinsurance.

Excess of loss reinsurance – Reinsurance that indemnifies the insured against all or a specific portion of losses under reinsured policies in excess of a specified dollar amount or “retention”.

Expense Ratio, GAAP – The ratio of underwriting expenses to premiums earned for a given period.

Exposure – A measure of the rating units or premium basis of a risk; for example, an exposure of a number of automobiles.

Frequency – The number of claims occurring during a given coverage period.

Inland Marine Insurance – In Commercial Lines, this is a type of coverage developed for shipments that do not involve ocean transport. It covers articles in transit by all forms of land and air transportation as well as bridges, tunnels and other means of transportation and communication. In the context of Personal Lines, this term relates to floater policies that cover expensive personal items such as fine art and jewelry.

Loss adjustment expenses (“LAE”) – Expenses incurred in the adjusting, recording, and settlement of claims. These expenses include both internal company expenses and outside services. Examples of LAE include claims adjustment services, adjuster salaries and fringe benefits, legal fees and court costs, investigation fees and claims processing fees.

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Loss adjustment expense (“LAE”) ratio, GAAP – The ratio of loss adjustment expenses to earned premiums for a given period.

Loss costs – An amount of money paid for a property and casualty claim.

Loss ratio, GAAP– The ratio of losses to premiums earned for a given period.

Loss reserves – Liabilities established by insurers to reflect the estimated cost of claims payments and the related expenses that the insurer will ultimately be required to pay in respect of insurance it has written. Reserves are established for losses and for LAE.

Multivariate product – An insurance product, the pricing for which is based upon the magnitude of, and correlation between, multiple rating factors. In practical application, the term refers to the foundational analytics and methods applied to the product construct. Our Connections Auto product is an example of a multivariate product.

Peril – A cause of loss.

Property insurance – Insurance that provides coverage for tangible property in the event of loss, damage or loss of use.

Rate – The pricing factor upon which the policyholder’s premium is based.

Rate increase (Commercial Lines) – Represents the average change in premium on renewal policies caused by the estimated net effect of base rate changes, discretionary pricing, inflation or changes in policy level exposure.

Rate increase (Personal Lines) – The estimated cumulative premium effect of approved rate actions during the prior policy period applied to a policy’s renewal premium.

Reinstatement premium – A pro-rata reinsurance premium that may be charged for reinstating the amount of reinsurance coverage reduced as the result of a reinsurance loss payment under a reinsurance treaty. For example, in 2005 this premium was required to ensure that our property catastrophe occurrence treaty, which was exhausted by Hurricane Katrina, was available again in the event of another large catastrophe loss in 2005.

Reinsurance – An arrangement in which an insurance company, or a reinsurance company, known as the reinsurer, agrees to indemnify another insurance or reinsurance company, known as the ceding company, against all or a portion of the insurance or reinsurance risks underwritten by the ceding company under one or more policies. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on risks and catastrophe protection from large or multiple losses. Reinsurance does not legally discharge the primary insurer from its liability with respect to its obligations to the insured.

Risk based capital (“RBC”) – A method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The RBC ratio for regulatory purposes is calculated as total adjusted capital divided by required risk based capital. Total adjusted capital for property and casualty companies is capital and surplus, adjusted for the non-tabular reserve discount applicable to our assumed discontinued accident and health insurance business. The Company Action Level is the first level at which regulatory involvement is specified based upon the level of capital. Regulators may take action for reasons other than triggering various RBC action levels. The various action levels are summarized as follows:

• The Company Action Level, which equals 200% of the Authorized Control Level, requires a company to prepare and submit a RBC plan to the commissioner of the state of domicile. A RBC plan proposes actions which a company may take in order to bring statutory capital above the Company Action Level. After review, the commissioner will notify the company if the plan is satisfactory.

• The Regulatory Action Level, which equals 150% of the Authorized Control Level, requires the insurer to submit to the commissioner of the state of domicile an RBC plan, or if applicable, a revised RBC plan. After examination or analysis, the commissioner will issue an order specifying corrective actions to be taken.

• The Authorized Control Level authorizes the commissioner of the state of domicile to take whatever regulatory actions considered necessary to protect the best interest of the policyholders and creditors of the insurer.

• The Mandatory Control Level, which equals 70% of the Authorized Control Level, authorizes the commissioner of the state of domicile to take actions necessary to place the company under regulatory control (i.e., rehabilitation or liquidation).

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Security Lending – We engage our banking provider to lend securities from our investment portfolio to third parties. These lent securities are fully collateralized by cash. We monitor the fair value of the securities on a daily basis to assure that the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. We record securities lending collateral as a cash equivalent, with an offsetting liability in expenses and taxes payable.

Severity – A monetary increase in the loss costs associated with the same or similar type of event or coverage.

Specialty Lines – A major component of our Other Commercial Lines. There is no accepted industry definition of “specialty lines”, but for our purpose specialty lines consist of products such as inland and ocean marine, bond business, specialty property, professional liability, management liability and various other program businesses. When discussing net written premiums and other financial measures of our specialty businesses, we may include non-specialty premiums that are written as part of the entire account.

Statutory accounting principles – Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by insurance regulatory authorities including the NAIC, which in general reflect a liquidating, rather than going concern, concept of accounting.

Underwriting – The process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept risks.

Underwriting expenses – Expenses incurred in connection with the acquisition, pricing and administration of a policy.

Underwriting expense ratio, GAAP – The ratio of underwriting expenses to earned premiums in a given period.

Unearned premiums – The portion of a premium representing the unexpired amount of the contract term as of a certain date.

Written premium – The premium assessed for the entire coverage period of a property and casualty policy without regard to how much of the premium has been earned. See also earned premium. Net written premium is written premium net of reinsurance.

ITEM 7A– QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to “Market Risk and Risk Management Policies” on pages 60 to 62 of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

The Hanover Insurance Group, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of The Hanover Insurance Group, Inc. and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for other-than-temporary impairments of debt securities in 2009.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Campania Holding Company, Inc. (“Campania”), which was acquired on March 31, 2010, from its assessment of the effectiveness of internal control over financial reporting as of December 31, 2010. We have also excluded Campania from our audit of internal control over financial reporting. The total assets and total revenues of Campania constitute approximately $35 million, or less than 1%, and approximately $11 million, or less than 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2010.

PricewaterhouseCoopers LLP

Boston, Massachusetts

February 23, 2011

78

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions, except per share data)
Revenues
Premiums	$	2,841.0		$	2,546.4		$	2,484.9
Net investment income		247.2			252.1			258.7
Net realized investment gains (losses):
Total other-than-temporary impairment losses on investments		(9.4	)		(42.2	)		(113.1	)
Portion of loss transferred (from) to other comprehensive income		(4.5	)		9.3			—
Net other–than–temporary impairment losses on investments recognized in earnings		(13.9	)		(32.9	)		(113.1	)
Net realized gains from sales and other		43.6			34.3			15.3
Total net realized investment gains (losses)		29.7			1.4			(97.8	)
Fees and other income		34.3			34.2			34.6
Total revenues		3,152.2			2,834.1			2,680.4
Losses and expenses
Losses and loss adjustment expenses		1,856.3			1,639.2			1,626.2
Policy acquisition expenses		669.0			581.3			556.2
Loss (gain) from retirement of debt		2.0			(34.5	)		—
Other operating expenses		413.8			377.2			333.6
Total losses and expenses		2,941.1			2,563.2			2,516.0
Income before federal income taxes		211.1			270.9			164.4
Federal income tax expense:
Current		5.7			51.2			17.5
Deferred		52.2			31.9			62.4
Total federal income tax expense		57.9			83.1			79.9
Income from continuing operations		153.2			187.8			84.5
Discontinued operations (Note 2):
Gain (loss) from discontinued FAFLIC business (net of income tax benefit (expense) of $0.3, $(0.9) and $(4.6) in 2010, 2009 and 2008), including gain (loss) on disposal of $0.5, $7.1 and $(77.3) in 2010, 2009 and 2008		0.5			7.1			(84.8	)
Income from operations of discontinued variable life insurance and annuity business (net of income tax benefit of $2.9 in 2008), including gain on disposal of $1.3, $4.9 and $8.7 in 2010, 2009 and 2008		1.3			4.9			11.3
Loss from discontinued accident and health business (net of income tax expense of $0.1 and $0.4 in 2010 and 2009)		(0.3	)		(2.6	)		—
Income from the operations of AMGRO (net of tax benefit of $1.3 in 2008), including gain on disposal of $11.1 in 2008		—			—			10.1
Other discontinued operations		0.1			—			(0.5	)
Net income	$	154.8		$	197.2		$	20.6

-79-

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Continued)

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions, except per share data)
Earnings per common share:
Basic:
Income from continuing operations	$	3.36		$	3.71		$	1.65
Discontinued operations:
Gain (loss) from operations of discontinued FAFLIC business (net of income tax benefit (expense) of $0.01, $(0.02) and $(0.09) in 2010, 2009 and 2008), including gain (loss) on disposal of $0.01, $0.14 and $(1.51) in 2010, 2009 and 2008		0.01			0.14			(1.66	)
Income from operations of discontinued variable life insurance and annuity business (net of income tax benefit of $0.06 in 2008), including gain on disposal of $0.03, $0.10, and $0.17 in 2010, 2009 and 2008		0.03			0.10			0.22
Loss from discontinued accident and health business (net of income tax expense of $0.01 in 2009)		(0.01	)		(0.05	)		—
Income from the operations of AMGRO (net of tax benefit of $0.02 in 2008), including gain on disposal of $0.22 in 2008		—			—			0.20
Other discontinued operations		—			—			(0.01	)
Net income per share	$	3.39		$	3.90		$	0.40
Weighted average shares outstanding		45.6			50.6			51.3
Diluted:
Income from continuing operations	$	3.31		$	3.68		$	1.63
Discontinued operations:
Gain (loss) from operations of discontinued FAFLIC business (net of income tax benefit (expense) of $0.01, $(0.02), and $(0.09) in 2010, 2009 and 2008), including gain (loss) on disposal of $0.01, $0.14 and $(1.49) in 2010, 2009 and 2008		0.01			0.14			(1.64	)
Income from operations of discontinued variable life insurance and annuity business (net of income tax benefit of $0.05 in 2008), including gain on disposal of $0.03, $0.09 and $0.17 in 2010, 2009 and 2008		0.03			0.09			0.22
Loss from discontinued accident and health business (net of income tax expense of $0.01 in 2009)		(0.01	)		(0.05	)		—
Income from the operations of AMGRO (net of tax benefit of $0.02 in 2008), including gain on disposal of $0.21 in 2008		—			—			0.20
Other discontinued operations		—			—			(0.01	)
Net income per share	$	3.34		$	3.86		$	0.40
Weighted average shares outstanding		46.3			51.1			51.7

The accompanying notes are an integral part of these consolidated financial statements.

-80-

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31	2010			2009
(In millions, except share data)
Assets
Investments:
Fixed maturities at fair value (amortized cost of $4,598.8 and $4,520.3)	$	4,797.9		$	4,615.6
Equity securities at fair value (cost of $120.7 and $57.3)		128.6			69.2
Other long-term investments		39.4			32.3
Total investments		4,965.9			4,717.1
Cash and cash equivalents		290.4			316.5
Accrued investment income		53.8			52.3
Premiums and accounts receivable, net		772.0			590.8
Reinsurance receivable on paid and unpaid losses, benefits and unearned premiums		1,254.2			1,197.9
Deferred policy acquisition costs		345.3			286.3
Deferred federal income taxes		177.4			228.6
Goodwill		179.2			171.4
Other assets		398.1			351.2
Assets of discontinued operations		133.6			130.6
Total assets	$	8,569.9		$	8,042.7
Liabilities
Policy liabilities and accruals:
Losses and loss adjustment expenses	$	3,277.7		$	3,153.9
Unearned premiums		1,520.3			1,300.5
Total policy liabilities and accruals		4,798.0			4,454.4
Expenses and taxes payable		541.7			603.2
Reinsurance premiums payable		34.4			58.5
Debt		605.9			433.9
Liabilities of discontinued operations		129.4			134.1
Total liabilities		6,109.4			5,684.1
Commitments and contingencies (Notes 15 and 19)
Shareholders’ Equity
Preferred stock, $.01 par value, 20.0 million shares authorized, issued none		—			—
Common stock, $.01 par value, 300.0 million shares authorized, 60.5 million shares issued		0.6			0.6
Additional paid-in capital		1,796.5			1,808.5
Accumulated other comprehensive income		136.7			28.8
Retained earnings		1,246.8			1,141.1
Treasury stock at cost (15.6 million and 13.0 million shares)		(720.1	)		(620.4	)
Total shareholders’ equity		2,460.5			2,358.6
Total liabilities and shareholders’ equity	$	8,569.9		$	8,042.7

The accompanying notes are an integral part of these consolidated financial statements.

-81-

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Preferred Stock
Balance at beginning and end of year	$	—		$	—		$	—
Common Stock
Balance at beginning and end of year		0.6			0.6			0.6
Additional Paid-in Capital
Balance at beginning of year		1,808.5			1,803.8			1,822.6
Settlement of accelerated share repurchases		(8.7	)		—			—
Employee and director stock-based awards and other		(3.3	)		4.7			(18.8	)
Balance at end of year		1,796.5			1,808.5			1,803.8
Accumulated Other Comprehensive Income (Loss)
Net Unrealized Appreciation (Depreciation) on Investments and Derivative Instruments:
Balance at beginning of year		107.7			(276.1	)		5.5
Cumulative effect of change in accounting principle		—			(33.3	)		—
Balance at beginning of year, as adjusted		107.7			(309.4	)		5.5
Net appreciation (depreciation) during the period:
Net appreciation (depreciation) on available-for-sale securities and derivative instruments		104.7			415.8			(284.3	)
Benefit for deferred federal income taxes		5.9			1.3			2.7
		110.6			417.1			(281.6	)
Balance at end of year		218.3			107.7			(276.1	)
Defined Benefit Pension and Postretirement Plans:
Balance at beginning of year		(78.9	)		(108.7	)		(25.9	)
Amounts arising in the period		(13.9	)		26.0			(123.8	)
Amortization during the period:
Amount recognized as net periodic benefit cost		9.8			19.8			(3.6	)
Benefit (provision) for deferred federal income taxes		1.4			(16.0	)		44.6
		(2.7	)		29.8			(82.8	)
Balance at end of year		(81.6	)		(78.9	)		(108.7	)
Total accumulated other comprehensive income (loss)		136.7			28.8			(384.8	)
Retained Earnings
Balance at beginning of year, before cumulative effect of accounting change, net of tax		1,141.1			949.8			946.9
Cumulative effect of accounting change, net of tax		—			33.3			—
Balance at beginning of year, as adjusted		1,141.1			983.1			946.9
Net income		154.8			197.2			20.6
Dividends to shareholders		(47.2	)		(37.5	)		(23.0	)
Treasury stock issued for less than cost and other		(9.7	)		(5.3	)		(9.7	)
Recognition of share-based compensation		7.8			3.6			15.0
Balance at end of year		1,246.8			1,141.1			949.8
Treasury Stock
Balance at beginning of year		(620.4	)		(482.2	)		(450.7	)
Shares purchased at cost		(126.0	)		(148.1	)		(58.5	)
Net shares reissued at cost under employee stock-based compensation plans		26.3			9.9			27.0
Balance at end of year		(720.1	)		(620.4	)		(482.2	)
Total shareholders’ equity	$	2,460.5		$	2,358.6		$	1,887.2

The accompanying notes are an integral part of these consolidated financial statements.

-82-

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Net income	$	154.8		$	197.2		$	20.6
Other comprehensive income (loss):
Available-for-sale securities:
Net appreciation (depreciation) during the period		97.8			423.1			(284.9	)
Portion of other-than-temporary impairment losses transferred from (to) other comprehensive income		6.9			(7.3	)		—
Benefit for deferred federal income taxes		5.9			1.3			2.9
Total available-for-sale securities		110.6			417.1			(282.0	)
Derivative instruments:
Net appreciation during the period		—			—			0.6
Provision for deferred federal income taxes		—			—			(0.2	)
Total derivative instruments		—			—			0.4
		110.6			417.1			(281.6	)
Pension and postretirement benefits:
Amounts arising in the period:
Net actuarial (loss) gain		(13.9	)		21.5			(126.9	)
Prior service cost		—			4.5			3.1
Total amounts arising in the period		(13.9	)		26.0			(123.8	)
Amortization recognized as net periodic benefit costs:
Net actuarial loss		17.2			27.2			3.0
Prior service cost		(5.8	)		(5.8	)		(4.9	)
Transition asset		(1.6	)		(1.6	)		(1.7	)
Total amortization recognized as net periodic pension and postretirement cost (benefit)		9.8			19.8			(3.6	)
(Decrease) increase in pension and postretirement benefit costs		(4.1	)		45.8			(127.4	)
Benefit (provision) for deferred federal income taxes		1.4			(16.0	)		44.6
Total pension and postretirement benefits		(2.7	)		29.8			(82.8	)
Other comprehensive income (loss)		107.9			446.9			(364.4	)
Comprehensive income (loss)	$	262.7		$	644.1		$	(343.8	)

The accompanying notes are an integral part of these consolidated financial statements.

-83-

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Cash Flows From Operating Activities
Net income	$	154.8		$	197.2		$	20.6
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposal of variable life insurance and annuity business		(1.3	)		(4.9	)		(11.3	)
(Gain) loss on sale of FAFLIC		(0.5	)		(7.1	)		77.3
Gain on sale of AMGRO, Inc.		—			—			(11.1	)
Loss (gain) from retirement of debt		2.0			(34.5	)		—
Net realized investment (gains) losses		(29.3	)		1.8			112.2
Net amortization and depreciation		16.7			11.8			15.1
Stock-based compensation expense		11.3			11.7			11.6
Amortization of defined benefit plan costs		9.8			19.8			(3.6	)
Deferred federal income taxes		52.0			31.9			53.7
Change in deferred acquisition costs		(57.7	)		(21.5	)		(10.5	)
Change in premiums and notes receivable, net of reinsurance premiums payable		(204.9	)		(14.1	)		75.0
Change in accrued investment income		(1.1	)		—			3.1
Change in policy liabilities and accruals, net		288.2			9.9			(156.8	)
Change in reinsurance receivable		(38.2	)		(58.3	)		116.7
Change in expenses and taxes payable		(85.0	)		(44.6	)		(103.2	)
Other, net		(33.2	)		(7.5	)		20.7
Net cash provided by operating activities		83.6			91.6			209.5
Cash Flows From Investing Activities
Proceeds from disposals and maturities of available-for-sale fixed maturities		1,376.2			2,162.3			1,114.1
Proceeds from disposals of equity securities and other investments		123.6			70.9			11.9
Proceeds from mortgages sold, matured or collected		9.0			17.4			10.2
Proceeds from collections of installment finance and notes receivable		—			—			192.3
Proceeds from the sale of FAFLIC		—			105.8			—
Cash transferred with sale of FAFLIC		—			(108.1	)		—
Net proceeds from sale of AMGRO, Inc.		—			—			1.0
Proceeds from sale of variable life insurance and annuity business, net		—			—			13.3
Purchase of available-for-sale fixed maturities		(1,401.5	)		(2,345.8	)		(828.2	)
Purchase of equity securities and other investments		(184.9	)		(44.5	)		(22.9	)
Net cash used for business acquisitions		(13.3	)		(21.8	)		(114.1	)
Capital expenditures		(10.9	)		(10.4	)		(9.5	)
Disbursements to fund installment finance and notes receivable		—			—			(178.6	)
Other investing items		3.0			—			(0.3	)
Net cash (used in) provided by investing activities		(98.8	)		(174.2	)		189.2
Cash Flows From Financing Activities
Withdrawals from contractholder deposit funds and trust instruments supported by funding obligations		—			—			(21.0	)
Exercise of options		12.0			3.1			8.2
Proceeds from debt borrowings		207.5			125.0			—
Change in collateral related to securities lending program		(7.7	)		53.1			(50.6	)
Dividends paid to shareholders		(47.2	)		(37.5	)		(23.0	)
Repurchases of debt		(38.5	)		(125.9	)		—
Repurchases of common stock		(134.7	)		(148.1	)		(58.5	)
Other financing activities		—			0.1			0.3
Net cash used in financing activities		(8.6	)		(130.2	)		(144.6	)
Net change in cash and cash equivalents		(23.8	)		(212.8	)		254.1
Net change in cash related to discontinued operations		(2.3	)		131.6			(67.0	)
Cash and cash equivalents, beginning of year		316.5			397.7			210.6
Cash and cash equivalents, end of year	$	290.4		$	316.5		$	397.7
Supplemental Cash Flow information
Interest payments	$	40.3		$	35.5		$	40.9
Income tax net payments	$	11.3		$	47.9		$	36.5

The accompanying notes are an integral part of these consolidated financial statements.

-84-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation and Principles of Consolidation

The consolidated financial statements of The Hanover Insurance Group, Inc. (“THG” or the “Company”), include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), THG’s principal property and casualty companies; and certain other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments as discussed in Note 14 – “Segment Information”. All significant intercompany accounts and transactions have been eliminated. The Company’s results of operations also included the results of First Allmerica Financial Life Insurance Company (“FAFLIC”) through December 31, 2008. On January 2, 2009, the Company sold FAFLIC to Commonwealth Annuity and Life Insurance Company (“Commonwealth Annuity”) a subsidiary of the Goldman Sachs Group, Inc. (“Goldman Sachs”). Accordingly, the FAFLIC business was classified as a discontinued operation in accordance with Accounting Standards Codification (“ASC 205”), Presentation of Financial Statements - Discontinued Operations (“ASC 205”). FAFLIC’s accounts have been classified as assets and liabilities of discontinued operations in the consolidated Balance Sheets (See Note 2 – Discontinued Operations). The results of operations for FAFLIC are reported as discontinued operations and prior periods in the Consolidated Statements of Income have been reclassified to conform to this presentation. The following discussion reflects the significant accounting policies for the Company, including the discontinued operations as applicable, except for those policies specifically identified in item Q below which relate solely to the discontinued operations of the Company.

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

B. Valuation of Investments

In accordance with the provisions of ASC 320, Investments – Debt and Equity Securities (“ASC 320”), the Company is required to classify its investments into one of three categories: held-to-maturity, available-for-sale or trading. The Company determines the appropriate classification of fixed maturity and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Fixed maturities and equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported in accumulated other comprehensive income, a separate component of shareholders’ equity. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in net investment income.

Fixed maturities that are delinquent are placed on non-accrual status, and thereafter interest income is recognized only when cash payments are received.

Realized investment gains and losses are reported as a component of revenues based upon specific identification of the investment assets sold. When an other-than-temporary decline in value of a specific investment is deemed to have occurred, and a charge to earnings is required, the Company recognizes a realized investment loss. The Company reviews all investments in an unrealized loss position to identify other-than-temporary declines in value. On April 1, 2009, the Company adopted accounting guidance which modified the assessment of other-than-temporary impairments (“OTTI”) on debt securities, as well as the method of recording and reporting other-than-temporary impairments. When it is determined that a decline in value of an equity security is other-than-temporary, the Company reduces the cost basis of the security to fair value with a corresponding charge to earnings. When an other-than-temporary decline in value of a debt security is deemed to have occurred, the Company must assess whether it intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. If the Company does not intend to sell the debt security and it is not more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, the credit loss portion of an other-than-temporary impairment

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is recorded through earnings while the portion attributable to all other factors is recorded separately as a component of other comprehensive income. The amount of the other-than-temporary impairment that relates to credit is estimated by comparing the amortized cost of the fixed maturity security with the net present value of the fixed maturity security’s projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment. The non-credit portion of the impairment is equal to the difference between the fair value and the net present value of the fixed maturity security at the impairment measurement date. Once an OTTI has been recognized, the new amortized cost basis of the security is equal to the previous amortized cost less the amount of OTTI recognized in earnings. Prior to the adoption of this guidance on April 1, 2009, an other-than-temporary impairment recognized in earnings for fixed maturity securities was equal to the difference between amortized cost and fair value at the time of impairment. For equity method investments, an impairment is recognized when evidence demonstrates that an other-than-temporary loss in value has occurred, including the absence of the ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.

C. Financial Instruments

In the normal course of business, the Company may enter into transactions involving various types of financial instruments, including debt, investments such as fixed maturities, mortgage loans and equity securities, investment and loan commitments, swap contracts, option contracts, forward contracts and futures contracts. These instruments involve credit risk and could also be subject to risk of loss due to interest rate and foreign currency fluctuation. The Company evaluates and monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses.

D. Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, amounts due from banks and highly liquid debt instruments purchased with an original maturity of three months or less.

E. Deferred Policy Acquisition Costs

Acquisition costs consist of commissions, underwriting costs and other costs, which vary with, and are primarily related to, the production of revenues. Acquisition costs are deferred and amortized over the terms of the insurance policies.

Deferred acquisition costs (“DAC”) for each line of business are reviewed to determine if it is recoverable from future income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. Although recoverability of DAC is not assured, the Company believes it is more likely than not that all of these costs will be recovered. The amount of DAC considered recoverable, however, could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of a disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised.

F. Reinsurance Recoverables

The Company shares certain insurance risks it has underwritten, through the use of reinsurance contracts, with various insurance entities. Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944, Financial Services – Insurance (“ASC 944”), have been met. As a result, when the Company experiences loss or claims events that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business or an aggregate amount associated with a particular accident year. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, or an incurred but not reported loss. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve. The reinsurance recoverables are based on what the Company believes are reasonable estimates and the balance is disclosed separately in the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled.

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G. Property, Equipment and Capitalized Software

Property, equipment, leasehold improvements and capitalized software are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line or accelerated method over the estimated useful lives of the related assets, which generally range from 3 to 30 years. The estimated useful life for capitalized software is generally 3 to 5 years. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the term of the leases or the estimated useful life of the improvements.

The Company tests for the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of long-lived assets exceed the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. When an impairment loss occurs, the Company reduces the carrying value of the asset to fair value. Fair values are estimated using discounted cash flow analysis.

H. Goodwill

In accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, the Company carries its goodwill at amortized cost, net of impairments. Increases to goodwill are generated through acquisition and represent the excess of the cost of an acquisition over the fair value of the assets and liabilities acquired, including any intangible assets acquired. During the year ended December 31, 2010, the Company recorded $7.8 million in goodwill related to acquisitions of several businesses. The Company tests for the recoverability of goodwill annually or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of reporting units with goodwill exceed the fair value. The amount of the impairment loss that is recognized is determined based upon the excess of the carrying value of goodwill compared to the implied fair value of the goodwill, as determined with respect to all assets and liabilities of the reporting unit. The Company has performed its annual review of goodwill for impairment in the fourth quarters of 2010, 2009 and 2008 with no impairments recognized.

I. Liabilities for Losses, LAE, and Unearned Premiums

Liabilities for outstanding claims, losses and loss adjustment expenses (“LAE”) are estimates of payments to be made on property and casualty contracts for reported losses and LAE and estimates of losses and LAE incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. These estimates are continually reviewed and adjusted as necessary; adjustments for our property and casualty business are reflected in current operations. Estimated amounts of salvage and subrogation on unpaid property and casualty losses are deducted from the liability for unpaid claims.

Premiums for property and casualty insurance are reported as earned on a pro-rata basis over the contract period. The unexpired portion of these premiums is recorded as unearned premiums.

All losses, LAE and unearned premium liabilities are based on the various estimates discussed above. Although the adequacy of these amounts cannot be assured, the Company believes that it is more likely than not that these liabilities and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised.

J. Debt

The Company’s debt includes senior debentures, junior subordinated debentures, trust preferred capital securities, and advances under the Company’s collateralized borrowing program with the Federal Home Loan Bank of Boston (“FHLBB”). The senior debentures are carried at principal amount borrowed, net of unamortized discounts. The junior subordinated debentures and borrowings under the FHLBB program are carried at principal amount borrowed. Debt also includes liabilities connected to trust preferred capital securities, related to outstanding securities issued by AIX Holdings, Inc. (“AIX”) and Professionals Direct, Inc. (“PDI”). Cash distributions on such trust preferred stock are accounted for as interest expense. (See Note 7 – Debt).

K. Premium, Premium Receivable, Fee Revenue and Related Expenses

Property and casualty insurance premiums are recognized as revenue over the related contract periods. Premium receivables reflect the unpaid balance of premium written as of the balance sheet date. Premium receivables are generally short-term in nature. The Company reviews its receivables for collectibility at the balance sheet date.

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The allowance for uncollectible accounts was not material as of December 31, 2010 and 2009. Losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through estimated and unpaid losses and amortization of deferred policy acquisition costs.

L. Federal Income Taxes

THG and its domestic subsidiaries (including certain non-insurance operations) file a consolidated United States federal income tax return. In 2009 and 2008 entities included within the consolidated group were segregated into either a life insurance or a non-life insurance company subgroup. The consolidation of these subgroups is subject to certain statutory restrictions on the percentage of eligible non-life tax losses that can be applied to offset life company taxable income. In 2010, as a result of the sale of FAFLIC, all entities are designated non-life insurance companies.

Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by ASC 740, Income Taxes (“ASC 740”). These differences result primarily from insurance reserves, deferred policy acquisition costs, tax credit carryforwards, capital loss carryforwards, employee benefit plans, and internally developed software. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized. Changes in valuation allowances are generally reflected in federal income tax expense or as an adjustment to other comprehensive income (loss) depending on the nature of the item for which the valuation allowance is being recorded.

M. Stock-Based Compensation

The Company recognizes the fair value of compensation costs for all share-based payments, including employee stock options, in the financial statements. Unvested awards are generally expensed on a straight line basis, by tranche, over the vesting period of the award. The Company’s stock-based compensation plans are discussed further in Note 11 – “Stock-Based Compensation Plans”.

N. Earnings Per Share

Earnings per share (“EPS”) for the years ended December 31, 2010, 2009 and 2008 is based on a weighted average of the number of shares outstanding during each year. Basic and diluted EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. The weighted average shares outstanding used to calculate basic EPS differ from the weighted average shares outstanding used in the calculation of diluted EPS due to the effect of dilutive employee stock options, nonvested stock grants and other contingently issuable shares. If the effect of such items are antidilutive, the weighted average shares outstanding used to calculate diluted EPS equal those used to calculate basic EPS.

Options to purchase shares of common stock whose exercise prices are greater than the average market price of the common shares are not included in the computation of diluted earnings per share because the effect would be antidilutive.

O. New Accounting Pronouncements

Recently Implemented Standards

ASC 105, Generally Accepted Accounting Principles (“ASC 105”) reorganized by topic existing accounting and reporting guidance issued by the Financial Accounting Standards Board (“FASB”) into a single source of authoritative generally accepted accounting principles (“GAAP”) to be applied by nongovernmental entities. All guidance contained in the ASC carries an equal level of authority. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Accordingly, all other accounting literature will be deemed “non-authoritative”. ASC 105 was effective on a prospective basis for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has implemented the guidance included in ASC 105 as of July 1, 2009. The implementation of this guidance changed the Company’s references to GAAP authoritative guidance but did not impact the Company’s financial position or results of operations.

As of April 1, 2009, the Company adopted guidance included in ASC 320, which modifies the assessment of OTTI for fixed maturity securities, as well as the method of recording and reporting OTTI. Under the new guidance, if a company intends to sell or more likely than not will be required to sell a fixed maturity security before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings. If a company does not intend to sell the fixed maturity security, or more likely than not will not be required to sell it, the company is required to separate the other-than-temporary impairment into the portion which represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings and the amount related to non-credit factors is recognized in accumulated

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other comprehensive income, net of applicable taxes. A cumulative effect adjustment was recognized by the Company upon adoption of this guidance to reclassify the non-credit component of previously recognized impairments from retained earnings to accumulated other comprehensive income. The Company increased the amortized cost basis of these fixed maturity securities and recorded a cumulative effect adjustment of $33.3 million as an increase to retained earnings and reduction to accumulated other comprehensive income. (See further disclosure in Note 5 – Investment Income and Gains and Losses).

ASC 805, Business Combinations (“ASC 805”) contains guidance which provided additional clarification of application issues regarding initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. ASC 805 was effective for business combinations initiated on or after the first annual reporting period beginning after December 15, 2008. The Company implemented this guidance effective January 1, 2009. Implementing this guidance did not have an effect on the Company’s financial position or results of operations upon adoption; however, the Company applied this guidance in accounting for the Company’s acquisitions during 2010.

In December 2009, the FASB issued ASC Update No. 2009-17, Consolidation (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASC Update No. 2009-17”) which codified Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R). This guidance amends FASB Interpretation No. 46R, Consolidation of Variable Interest Entities an interpretation of ARB No. 51 to require an analysis to determine whether a company has a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The statement requires an ongoing assessment of whether a company is the primary beneficiary of a variable interest entity when the holders of the entity, as a group, lose power, through voting or similar rights, to direct the actions that most significantly affect the entity’s economic performance. This statement also enhances disclosures about a company’s involvement in variable interest entities. ASC Update No. 2009-17 was effective as of the beginning of the first annual reporting period that began after November 15, 2009. The Company implemented this guidance as of January 1, 2010. The effect of implementing this guidance was not material to the Company’s financial position or results of operations.

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) includes guidance that was issued by the FASB which is to be considered when determining whether or not a transaction is orderly and clarifies the valuation of securities in markets that are not active. This guidance includes information related to a company’s use of judgment, in addition to market information, in certain circumstances to value assets which have inactive markets. This fair value guidance in ASC 820 was effective for interim and annual reporting periods ending after June 15, 2009.

In August 2009, the FASB issued ASC Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820): Measuring Liabilities at Fair Value. This update amends ASC 820, Fair Value Measurements and Disclosures (“ASC Update No. 2009-05”) and provides further guidance on measuring the fair value of a liability. The guidance establishes the types of valuation techniques to be used to value a liability when a quoted market price in an active market for the identical liability is not available, such as the use of an identical or similar liability when traded as an asset. The guidance also further clarifies that a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are both Level 1 fair value measurements. If adjustments are required to be applied to the quoted price, it results in a level 2 or 3 fair value measurement. The guidance provided in the update was effective for the first reporting period (including interim periods) beginning after issuance.

In September 2009, the FASB issued ASC Update No. 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent) (“ASC Update No. 2009-12”). This update sets forth guidance on using the net asset value per share provided by an investee to estimate the fair value of an alternative investment. Specifically, the update permits a reporting entity to measure the fair value of this type of investment on the basis of the net asset value per share of the investment (or its equivalent) if all or substantially all of the underlying investments used in the calculation of the net asset value is consistent with ASC 820. The update also requires

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additional disclosures by each major category of investment, including, but not limited to, fair value of underlying investments in the major category, significant investment strategies, redemption restrictions, and unfunded commitments related to investments in the major category. The amendments in this update were effective for interim and annual periods ending after December 15, 2009.

In January 2010, the FASB issued ASC Update No. 2010-06 (Topic 820) – Improving Disclosures about Fair Value Measurements. This update amends ASC 820 and requires new and clarified disclosures for fair value measurements. The guidance requires that transfers in and out of Levels 1 and 2 be disclosed separately, including a description of the reasons for such transfers. Additionally, the reconciliation of fair value measurements of Level 3 assets should separately disclose information about purchases, sales, issuance and settlements in a gross, rather than net disclosure presentation. The guidance further clarifies that fair value disclosures should be separately presented for each class of assets and liabilities and disclosures should be provided for valuation techniques and inputs for both recurring and non-recurring fair value measurements related to Level 2 and Level 3 categories. The disclosure guidance provided in the update was effective for reporting periods beginning after December 15, 2009. The Company implemented this guidance effective January 1, 2010. Implementing this guidance did not have an effect on the Company’s financial position or results of operations.

The Company applied the provisions of ASC 820 to its financial assets and liabilities upon adoption at January 1, 2008 and adopted the remaining provisions relating to certain nonfinancial assets and liabilities on January 1, 2009. The difference between the carrying amounts and fair values of those financial instruments held upon initial adoption, on January 1, 2008, was recognized as a cumulative effect adjustment to the opening balance of retained earnings and was not material to the Company’s financial position or results of operations. The Company implemented the guidance related to orderly transactions under current market conditions as of April 1, 2009, which also was not material to the Company’s financial position or results of operations. Furthermore, the implementation as of October 1, 2009 of ASC Update No. 2009-05 and ASC Update No. 2009-12 did not have a material effect on the Company’s financial position or results of operations. (See further disclosure in Note 6 – Fair Value).

ASC 855, Subsequent Events (“ASC 855”), and as modified by ASC Update 2010-09, Amendments to Certain Recognition and Disclosure Requirements, includes guidance that was issued by the FASB in May 2009, and is consistent with current auditing standards in defining a subsequent event. Additionally, the guidance provides for disclosure regarding the existence of a company’s evaluation of its subsequent events. ASC 855 defines two types of subsequent events, “recognized” and “non-recognized”. Recognized subsequent events provide additional evidence about conditions that existed at the date of the balance sheet and are required to be reflected in the financial statements. Non-recognized subsequent events provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date and, therefore, are not required to be reflected in the financial statements. However, certain non-recognized subsequent events may require disclosure to prevent the financial statements from being misleading. This guidance was effective prospectively for interim or annual financial periods ending after June 15, 2009. The Company implemented the guidance included in ASC 855 as of April 1, 2009 and the updated guidance as of December 31, 2009. The effect of implementing the guidance was not material to the Company’s financial position or results of operations.

In December 2009, the FASB issued ASC Update No. 2009-16 Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets (“ASC Update No. 2009-16”) which codified Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140. This guidance revises FASB Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Extinguishment of Liabilities a replacement of FASB Statement 125 and requires additional disclosures about transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial assets. It also eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets, and enhances disclosure requirements. ASC Update 2009-16 was effective prospectively, for annual periods beginning after November 15, 2009, and interim and annual periods thereafter. The Company has implemented this guidance as of January 1, 2010. The effect of implementing this guidance was not material to the Company’s financial position or results of operations.

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Recently Issued Standards

In December 2010, the FASB issued ASC Update No. 2010-29 (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). This update provides clarity on the presentation of comparable proforma financial statements for business combinations. Revenues and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Additionally, this update requires the disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported proforma revenue and earnings. The disclosure guidance provided in this ASC update is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 and is not expected to have an impact on the Company’s results of operations or financial position.

In December 2010, the FASB issued ASC Update No. 2010-28 (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force) (“ASC Update No. 2010-28”). This update modifies Step 1 of the goodwill impairment test for companies with zero or negative carrying amounts to require Step 2 of the goodwill impairment test to be performed if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This ASC update is effective for annual and interim periods beginning after December 15, 2010. The Company does not expect the adoption of ASC Update No. 2010-28 to have a material impact on its financial position or results of operations.

In October 2010, the FASB issued ASC Update No. 2010-26 (Topic 944) Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force). This update provides clarity in defining which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, commonly known as deferred acquisition costs. Additionally, this update specifies that only costs associated with the successful acquisition of a policy or contract may be deferred, whereas current industry practice often includes costs relating to unsuccessful contract acquisitions. This ASC update is effective for annual and interim periods, beginning after December 15, 2011. The Company is currently assessing the impact of this guidance to its financial position and results of operations.

In July 2010, the FASB issued ASC Update No. 2010-20 (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASC update is applicable for financing receivables recognized on a company’s balance sheet that have a contractual right to receive payment either on demand or on fixed or determinable dates. This update enhances the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses, at disaggregated levels. The disclosure guidance provided in the update relating to those required as of the end of the reporting period was effective for interim and annual reporting periods ending on or after December 15, 2010. The effect of implementing the guidance was not significant to the Company’s financial statement disclosures. The disclosure guidance related to activity that occurs during the reporting period is effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company expects that the implementation of the disclosure guidance related to activity will not be significant to its financial statement disclosures.

P. Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Q. Discontinued Operations Significant Accounting Policy Discussion

The following accounting policies relate only to the Company’s discontinued operations, which are in run-off. Please refer to the above captions for policies related to assets and liabilities that were held by both the Company’s ongoing business and the discontinued business.

Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944 have been met. As a result, when the Company experiences loss or claims events, or unfavorable mortality or morbidity experience that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, an incurred but not reported loss or a future policy benefit. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses and future policy benefits, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical

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reinsurance recovery information and applies that information to the gross loss reserve and future policy benefit estimates. The reinsurance recoverables are based on what the Company believes are reasonable estimates. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled.

Liabilities for outstanding claims, losses and LAE are estimates of payments to be made on health insurance contracts for reported losses and LAE and estimates of losses and LAE incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. These estimates are continually reviewed and adjusted as necessary; adjustments are reflected in discontinued operations. Although the adequacy of these amounts cannot be assured, the Company believes that it is more likely than not that policy liabilities and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised.

2. DISCONTINUED OPERATIONS

Discontinued operations consist of: (i) Discontinued FAFLIC Business, including both the loss associated with the sale of FAFLIC on January 2, 2009 and the loss or income resulting from its prior business operations; (ii) Discontinued Operations of the Company’s Variable Life Insurance and Annuity Business in 2005; and (iii) Discontinued Accident and Health Business.

Discontinued FAFLIC Business

On January 2, 2009, THG sold its remaining life insurance subsidiary, FAFLIC, to Commonwealth Annuity, a subsidiary of Goldman Sachs. Approval was obtained from the Massachusetts Division of Insurance for a pre-close dividend from FAFLIC consisting of designated assets with a statutory book value of approximately $130 million. Total proceeds from the sale, including the dividend, were approximately $230 million, net of transaction costs. Additionally, coincident with the sale transaction, Hanover Insurance and FAFLIC entered into a reinsurance contract whereby Hanover Insurance assumed FAFLIC’s discontinued accident and health insurance business. THG has also indemnified Commonwealth Annuity for certain litigation, regulatory matters and other liabilities related to the pre-closing activities of the business transferred.

At December 31, 2008, the Company reflected FAFLIC at its fair value less estimated disposition costs. This resulted in the recognition of a $77.3 million impairment as of December 31, 2008 for the asset group that was being disposed of in the sale transaction. Of this amount, $48.5 million related to depreciated securities and was reflected as an adjustment to accumulated other comprehensive income and $26.0 million was reflected as a valuation allowance against the FAFLIC assets. The loss is presented in the Consolidated Statements of Income as a component of income from operations of discontinued FAFLIC business. In addition, the operating results of FAFLIC during 2008 are also reflected as income from operations of discontinued FAFLIC business.

The following table summarizes the results for this discontinued business for the periods indicated:

For the Years Ended December 31	2010		2009		2008
(In millions)
Gain (loss) on sale of FAFLIC, net of taxes	$	0.5	$	7.1	$	(77.3	)
Loss from operations of FAFLIC business, net of income tax expense of $4.6 in 2008		—		—		(7.5	)
Gain (loss) from discontinued FAFLIC business, net of taxes	$	0.5	$	7.1	$	(84.8	)

Gain (Loss) on Sale of FAFLIC

The following table summarizes the components of the loss recognized in 2008 related to the sale of FAFLIC.

For the Year Ended December 31	2008
(In millions)
Carrying value of FAFLIC before pre-close dividend	$	267.7	(1)
Pre-close net dividend		(129.8	)(2)
		137.9
Proceeds from sale		105.8	(3)
Loss on sale before impact of transaction and other costs		(32.1	)
Transaction costs		(3.9	)(4)
Liability for certain legal indemnities and employee-related costs		(8.2	)(5)
Other miscellaneous adjustments		(33.1	)(6)
Net loss	$	(77.3	)

⁽¹⁾  Shareholder’s equity in the FAFLIC business, prior to the impact of the sale transaction.

⁽²⁾  Net pre-close dividends.

⁽³⁾  Proceeds to THG from Commonwealth Annuity.

⁽⁴⁾  Transaction costs include legal, actuarial and other professional fees.

⁽⁵⁾  Liability for expected contractual indemnities of FAFLIC recorded at December 31, 2008. These costs also include severance and retention payments anticipated to result from this transaction.

⁽⁶⁾  Included in other miscellaneous adjustments are investment losses of $48.5 million, as well as favorable reserve adjustments related to the accident and health business of $15.6 million.

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In 2010 and 2009, the Company recognized a gain of $0.5 million and $7.1 million, respectively, related to the sale of FAFLIC. These gains were primarily due to the change in the estimate of indemnification liabilities related to the sale. The gain in 2009 also reflects the release of sale-related accruals and a tax adjustment relating to FAFLIC’s operations in prior tax years.

In connection with the sales transaction, the Company agreed to indemnify Commonwealth Annuity for certain legal, regulatory and other matters that existed as of the sale. Accordingly, the Company established a gross liability for these guarantees and indemnifications of $9.9 million. As of December 31, 2010, the Company’s total gross liability related to these guarantees was $1.2 million. The Company regularly reviews and updates this liability for legal and regulatory matter indemnities. Although the Company believes its current estimate for this liability is appropriate, there can be no assurance that these estimates will not materially increase in the future. Adjustments to this reserve are recorded in the results of the Company in the period in which they are determined.

Loss from Operations of FAFLIC Business

The table below shows the discontinued operating results related to FAFLIC.

For the Years Ended December 31	2008
(In millions)
Total revenues	$	76.7
Loss included in discontinued operations before federal income taxes, including net realized losses of $14.4	$	(2.9	)

Discontinued Operations of the Company’s Variable Life Insurance and Annuity Business

On December 30, 2005, the Company sold its variable life insurance and annuity business to Goldman Sachs, including the reinsurance of 100% of the variable business of FAFLIC. THG agreed to indemnify Goldman Sachs for certain litigation, regulatory matters and other liabilities relating to the pre-closing activities of the business that was sold.

In 2010 and 2009, the Company recorded gains of $1.3 million and $4.9 million, net of tax, respectively, related to the disposal of the Company’s variable life insurance and annuity business, primarily due to a change in the estimate of liabilities for certain contractual indemnities to Goldman Sachs relating to pre-sale activities of the business sold.

In 2008, the Company recognized a $11.3 million adjustment to its loss on disposal of variable life insurance and annuity business, including $8.6 million related to a release of liabilities associated with the Company’s estimated liability for certain contractual indemnities to Goldman Sachs relating to the pre-sale activities of the business sold and $2.7 million tax benefit from a settlement with the Internal Revenue Service (“IRS”) related to tax years 1995 through 2001 (See Note 8 – Federal Income Taxes for further discussion).

As of December 31, 2010, the Company’s total gross liability related to its guarantees associated with the disposal of its variable life insurance and annuity business was $4.2 million. The Company regularly reviews and updates this liability for legal and regulatory matter indemnities. Although the Company believes its current estimate for this liability is appropriate, there can be no assurance that these estimates will not materially increase in the future. Adjustments to this reserve are recorded in the results of the Company in the period in which they are determined.

Discontinued Accident and Health Insurance Business

During 1999, the Company exited its accident and health insurance business, consisting of its Employee Benefit Services business, its Affinity Group Underwriters business and its accident and health assumed reinsurance pool business. Prior to 1999, these businesses comprised substantially all of the former Corporate Risk Management Services segment. Accordingly, the operating results of the discontinued segment have been reported in accordance with Accounting Principles Board Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB Opinion No. 30”). On January 2, 2009, Hanover Insurance directly assumed a portion of the accident and health business; and therefore continues to apply APB Opinion No. 30 to this business. In addition, the remainder of the FAFLIC accident and health business was reinsured also by Hanover Insurance and has been reported in accordance with ASC 205.

In 2010 and 2009, the Company recorded losses of $0.3 million and $2.6 million, net of tax, respectively, related to the disposal of its accident and health insurance business. Losses in 2010 were driven by increased reserves resulting from the Company’s current interpretation of the provisions of the Patient Protection and Affordable Care Act, as well as realized investment losses due to impairments, which were partially offset by net investment income. Losses in 2009 primarily reflect realized investment losses due to impairments.

At December 31, 2010 and 2009, the portion of the discontinued accident and health business that was directly assumed had assets of $59.3 million and $54.0 million, respectively, consisting primarily of invested assets and reinsurance recoverables, and liabilities of

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approximately $53.2 million and $48.7 million, respectively, consisting primarily of policy liabilities. At December 31, 2010 and 2009, the assets and liabilities of this business, as well as those of the reinsured portion of the accident and health business are classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.

3. OTHER SIGNIFICANT TRANSACTIONS

During 2010, the Company paid quarterly dividends of 25 cents per share to its shareholders. Total dividends paid in the quarters ended December 31, 2010, September 30, 2010, June 30, 2010 and March 31, 2010 were $11.3 million, $11.6 million, $12.0 million and $12.3 million, respectively. The Company’s dividend payments in 2010 represented a 33% increase over the annual dividend payment of 75 cents per share in 2009.

Since October 2007 and through December 2010, the Company’s Board of Directors has authorized aggregate repurchases of the Company’s common stock of up to $500 million, including a $100 million increase in the program in the fourth quarter of 2010. Under the repurchase authorizations, the Company may repurchase its common stock from time to time, in amounts and prices and at such times as deemed appropriate, subject to market conditions and other considerations. The Company’s repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. The Company is not required to purchase any specific number of shares or to make purchases by any certain date under this program. On March 30, 2010 and December 8, 2009, the Company entered into accelerated share repurchase agreements with Barclays Bank PLC, acting through its agent Barclays Capital, Inc., for the immediate repurchase of 2.3 million and 2.4 million shares, respectively, of the Company’s common stock at a cost of $105.0 million and $105.2 million, respectively. Total repurchases under the program as of December 31, 2010 were 7.9 million shares at a cost of $342.9 million, for an average price per share of $43.27.

On June 14, 2010, the Company purchased approximately 11 acres of developable land in Worcester, Massachusetts for $5 million. A portion of the land will be developed with the construction of a new 200,000 square foot office building and the redevelopment of an adjacent parking garage (the “City Square Project”). In addition, the Company signed a 17 year lease agreement with a tenant for the new building and garage. The tenant is an unaffiliated public company with an investment grade credit rating. Through December 31, 2010, the Company capitalized $8.3 million in related lease acquisition, legal, architectural and associated costs. Development costs are estimated between $65 million and $70 million and the project will be financed, in part, through the issuance of collateralized debt through the Company’s membership in the FHLBB. In July 2010, Hanover Insurance committed to borrow $46.3 million from the FHLBB to finance the project. These borrowings will be drawn in several increments from July 2010 to January 2012. During 2010, Hanover Insurance received an advance of $9.5 million from this commitment. Amounts drawn from the $46.3 million mature on July 20, 2020 and carry fixed interest rates with a weighted average of 3.88%. (See also below for further information related to participation in the FHLBB’s collateralized borrowing program).

On March 31, 2010, the Company acquired Campania for a cash purchase price of approximately $24 million, subject to various terms and conditions. Campania specializes in insurance solutions for portions of the healthcare industry.

On February 23, 2010, the Company issued $200.0 million aggregate principal amount of 7.50% senior unsecured notes due March 1, 2020. The senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of capital stock of restricted subsidiaries and limitations on liens. These debentures pay interest semi-annually on March 1 and September 1.

On December 3, 2009, the Company entered into a renewal rights agreement with OneBeacon Insurance Group, LTD. (“OneBeacon”). Through this agreement, the Company acquired access to a portion of OneBeacon’s small and middle market commercial business at renewal, including industry programs and middle market niches. This transaction included consideration of approximately $23 million, plus certain potential additional consideration estimated to total approximately $11 million, primarily representing purchased renewal rights intangible assets which are included as other assets in the Consolidated Balance Sheets. The agreement was effective for renewals beginning January 1, 2010.

On September 25, 2009, Hanover Insurance received an advance of $125 million through its membership in the FHLBB as part of a collateralized borrowing program. This advance bears interest at a fixed rate of 5.50% per annum over a twenty-year term. The proceeds from the borrowing were used by Hanover Insurance to acquire AIX and its subsidiaries from the holding company. As collateral to the FHLBB for all advances received, including those relating to the City Square Project, as of December 31, 2010, Hanover Insurance has pledged government agency securities with a fair value of $162.7 million. Collateral pledged to the FHLBB totaled $142.0 million as of December 31, 2009.

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The fair value of the collateral pledged must be maintained at certain specified levels of the borrowed amount, which can vary depending on the type of assets pledged. If the fair value of this collateral declines below these specified levels, Hanover Insurance would be required to pledge additional collateral or repay outstanding borrowings. Hanover Insurance is permitted to voluntarily repay the outstanding borrowings at any time, subject to a repayment fee. As a requirement of membership in the FHLBB, Hanover Insurance acquired $2.5 million of FHLBB stock, and as a condition to participating in the FHLBB’s collateralized borrowing program, it was required to purchase additional shares of FHLBB stock in an amount equal to 4.5% of its outstanding borrowings. These additional purchases totaled $6.1 million through December 31, 2010.

The Company liquidated AFC Capital Trust I (the “Trust”) on July 30, 2009. Each holder of 8.207% Series B Capital Securities (“Capital Securities”) as of that date received a principal amount of the Company’s Series B 8.207% Junior Subordinated Deferrable Interest Debentures (“Junior Debentures”) due February 3, 2027 equal to the liquidation amount of the Capital Securities held by such holder. The liquidation of the Trust did not have a material effect on the Company’s results of operations or financial position. On June 29, 2009, prior to liquidating the Trust, the Company completed a cash tender offer to repurchase a portion of its Capital Securities that were issued by the Trust (subsequently redeemed and exchanged for Junior Debentures) and a portion of its 7.625% Senior Debentures (“Senior Debentures”) due in 2025 that were issued by THG. As of that date, $69.3 million of Capital Securities were tendered at a price equal to $800 per $1,000 of face value. In addition, the Company accepted for tender a principal amount of $77.3 million of Senior Debentures. Depending on the time of tender, holders of the Senior Debentures accepted for purchase received a price of either $870 or $900 per $1,000 of face value. Separately, the Company held $65.0 million of Capital Securities previously repurchased at a discount in the open market prior to the tender offer, and $1.1 million of Senior Debentures. The Company recognized a pre-tax gain of $34.5 million in 2009 as a result of such purchases. In 2010, the Company repurchased $36.5 million of Junior Subordinated Debentures at a cost of $38.5 million, resulting in a $2.0 million loss on the repurchase. On February 15, 2011, the Company repurchased an additional $48.0 million of Junior Subordinated Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million on the repurchase. As of February 15, 2011 and December 31, 2010, a net principal amount of $81.2 million and $129.2 million, respectively, of the Company’s Junior Debentures remained outstanding. As of December 31, 2010, $121.4 million of the Company’s Senior Debentures remained outstanding.

On November 28, 2008, the Company acquired AIX for approximately $100 million, subject to various terms and conditions. AIX is a specialty property and casualty insurer that underwrites and manages program business.

On June 2, 2008, the Company completed the sale of its premium financing subsidiary, AMGRO, Inc. to Premium Financing Specialists, Inc. The Company recorded a gain of $11.1 million related to this sale, which was reflected in the Consolidated Statement of Income as part of discontinued operations.

On March 14, 2008, the Company acquired all of the outstanding shares of Verlan Holdings, Inc. (“Verlan”) for $29.0 million. Verlan, now referred to as Hanover Specialty Industrial, is a specialty company providing property insurance to chemical, paint, solvent and other manufacturing and distribution companies.

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4. INVESTMENTS

A. FIXED MATURITIES AND EQUITY SECURITIES

The amortized cost and fair value of available-for-sale fixed maturities and equity securities were as follows:

DECEMBER 31, 2010
(In millions)
							Gross Unrealized Losses
	Amortized Cost (1)			Gross Unrealized Gains			Unrealized Losses			OTTI Unrealized Losses(2)			Fair Value
U.S. Treasury securities and U.S. government and agency securities	$	261.4		$	5.0		$	3.2		$	—		$	263.2
States and political subdivisions		963.4			21.5			19.4			—			965.5
Corporate fixed maturities		2,413.7			186.0			11.2			25.4			2,563.1
Residential mortgage-backed securities		725.4			41.9			3.7			8.3			755.3
Commercial mortgage-backed securities		350.7			18.4			1.0			—			368.1
Total fixed maturities, including assets of discontinued operations		4,714.6			272.8			38.5			33.7			4,915.2
Less: fixed maturities of discontinued operations		(115.8	)		(8.1	)		(0.7	)		(5.9	)		(117.3	)
Total fixed maturities, excluding discontinued operations	$	4,598.8		$	264.7		$	37.8		$	27.8		$	4,797.9
Equity securities, excluding discontinued operations	$	120.7		$	9.8		$	1.9		$	—		$	128.6

DECEMBER 31, 2009
(In millions)
							Gross Unrealized Losses
	Amortized Cost (1)			Gross Unrealized Gains			Unrealized Losses			OTTI Unrealized Losses(2)			Fair Value
U.S. Treasury securities and U.S. government and agency securities	$	355.2		$	3.2		$	3.7		$	—		$	354.7
States and political subdivisions		844.7			13.1			25.6			—			832.2
Corporate fixed maturities		2,246.7			131.4			14.3			29.9			2,333.9
Residential mortgage-backed securities		858.8			29.7			3.4			10.7			874.4
Commercial mortgage-backed securities		334.5			10.1			7.4			—			337.2
Total fixed maturities, including assets of discontinued operations		4,639.9			187.5			54.4			40.6			4,732.4
Less: fixed maturities of discontinued operations		(119.6	)		(6.0	)		(2.0	)		(6.8	)		(116.8	)
Total fixed maturities, excluding discontinued operations	$	4,520.3		$	181.5		$	52.4		$	33.8		$	4,615.6
Equity securities, excluding discontinued operations	$	57.3		$	12.2		$	0.3		$	—		$	69.2

(1) Amortized cost for fixed maturities and cost for equity securities.

(2) Represents other-than-temporary impairments recognized in accumulated other comprehensive income. Amount excludes net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date of $40.4 million and $30.1 million as of December 31, 2010 and December 31, 2009, respectively.

The Company participates in a security lending program for the purpose of enhancing income. Securities on loan to various counterparties had a fair value of $65.2 million and $72.8 million at December 31, 2010 and 2009, respectively, and were fully collateralized by cash. The fair value of the loaned securities is monitored on a daily basis, and the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. Securities lending collateral is recorded by the Company in cash and cash equivalents, with an offsetting liability included in expenses and taxes payable.

At December 31, 2010 and 2009, fixed maturities with fair values of $87.3 million and $77.6 million, respectively, and amortized cost of $84.1 million and $76.2 million, respectively, were on deposit with various state and governmental authorities.

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The Company enters into various agreements that may require its fixed maturities to be held as collateral by others. At December 31, 2010, fixed maturities with a fair value of $177.5 million were held as collateral for collateralized borrowings and other arrangements. At December 31, 2009, fixed maturities with a fair value of $181.8 million were held as collateral for collateralized borrowings, reinsurance and other arrangements. Of these amounts, $162.7 million and $142.0 million related to the FHLBB collateralized borrowing program at December 31, 2010 and 2009, respectively.

At December 31, 2010, there were contractual investment commitments of up to $77.5 million, consisting primarily of the Company’s commitment to invest approximately $58 million in a real estate project. In addition to these investment commitments, the Company has contractual obligations to purchase tax credits of up to $18.8 million.

The amortized cost and fair value by maturity periods for fixed maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Company may have the right to put or sell the obligations back to the issuers. Mortgage-backed securities are included in the category representing their stated maturity.

DECEMBER 31	2010
(In millions)
	Amortized Cost			Fair Value
Due in one year or less	$	178.2		$	181.4
Due after one year through five years		1,211.1			1,287.9
Due after five years through ten years		1,636.7			1,720.0
Due after ten years		1,688.6			1,725.9
Total fixed maturities including assets of discontinued operations		4,714.6			4,915.2
Less: fixed maturities of discontinued operations		(115.8	)		(117.3	)
Total fixed maturities, excluding assets of discontinued operations	$	4,598.8		$	4,797.9

B. UNREALIZED GAINS AND LOSSES

Unrealized gains and losses on available-for-sale and other securities are summarized in the following table.

FOR THE YEARS ENDED DECEMBER 31
(In millions)
2010	Fixed Maturities			Equity Securities And Other (1)			Total
Net appreciation, beginning of year	$	97.8		$	9.9		$	107.7
Net appreciation (depreciation) on available-for-sale securities		101.1			(3.3	)		97.8
Portion of OTTI losses transferred from other comprehensive income		6.9			—			6.9
Benefit for deferred federal income taxes		4.5			1.4			5.9
		112.5			(1.9	)		110.6
Net appreciation, end of year	$	210.3		$	8.0		$	218.3
2009
Net depreciation, beginning of year	$	(266.0	)	$	(10.1	)	$	(276.1	)
Cumulative effect of change in accounting principle		(33.3	)		—			(33.3	)
Balance at beginning of year, as adjusted		(299.3	)		(10.1	)		(309.4	)
Net appreciation on available-for-sale securities		403.2			19.9			423.1
Portion of OTTI losses transferred to other comprehensive income		(7.3	)		—			(7.3	)
Benefit for deferred federal income taxes		1.2			0.1			1.3
		397.1			20.0			417.1
Net appreciation, end of year	$	97.8		$	9.9		$	107.7
2008
Net (depreciation) appreciation, beginning of year	$	(3.1	)	$	8.6		$	5.5
Net depreciation on available-for-sale securities		(267.9	)		(19.1	)		(287.0	)
Net appreciation from the effect on policy liabilities		2.7			—			2.7
Benefit for deferred federal income taxes		2.3			0.4			2.7
		(262.9	)		(18.7	)		(281.6	)
Net depreciation, end of year	$	(266.0	)	$	(10.1	)	$	(276.1	)

⁽¹⁾  Equity securities and other balances at December 31, 2010, 2009 and 2008 include after-tax net appreciation on other invested assets of $0.7 million, $1.3 million and $1.4 million, respectively.

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C. SECURITIES IN AN UNREALIZED LOSS POSITION

The following tables provide information about the Company’s fixed maturities and equity securities that are in an unrealized loss position at December 31, 2010 and 2009:

DECEMBER 31, 2010
(In millions)	12 months or less				Greater than 12 months				Total
	Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI (1)		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S. government and agency securities	$	2.7	$	85.1	$	0.5	$	16.4	$	3.2	$	101.5
States and political subdivisions		10.4		292.3		9.0		86.7		19.4		379.0
Corporate fixed maturities		6.7		256.9		14.0		78.3		20.7		335.2
Residential mortgage-backed securities		3.2		103.8		8.8		31.0		12.0		134.8
Commercial mortgage-backed securities		0.1		13.1		0.9		7.3		1.0		20.4
Total investment grade		23.1		751.2		33.2		219.7		56.3		970.9
Below investment grade (2):
Corporate fixed maturities		1.1		56.8		14.8		102.5		15.9		159.3
Total fixed maturities		24.2		808.0		48.0		322.2		72.2		1,130.2
Equity securities:
Common equity securities		1.9		45.8		—		—		1.9		45.8
Total (3)	$	26.1	$	853.8	$	48.0	$	322.2	$	74.1	$	1,176.0

(1) Includes $33.7 million unrealized loss related to other-than-temporary impairment losses recognized in other comprehensive income, of which $14.8 million are below investment grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss had been rated by the National Association of Insurance Commissioners (“NAIC”), Standard & Poor’s or Moody’s at December 31, 2010.

(3) Includes discontinued accident and health business of $6.6 million in gross unrealized losses with $48.6 million in fair value at December 31, 2010.

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DECEMBER 31, 2009
(In millions)
	12 months or less				Greater than 12 months				Total
	Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI (1)		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S. government and agency securities	$	3.7	$	170.8	$	—	$	—	$	3.7	$	170.8
States and political subdivisions		9.0		275.2		15.6		176.5		24.6		451.7
Corporate fixed maturities		3.4		115.8		13.3		152.7		16.7		268.5
Residential mortgage-backed securities		6.6		89.1		7.5		62.6		14.1		151.7
Commercial mortgage-backed securities		0.4		13.5		7.0		30.0		7.4		43.5
Total investment grade		23.1		664.4		43.4		421.8		66.5		1,086.2
Below investment grade (2):
States and political subdivisions		0.2		8.7		0.8		8.2		1.0		16.9
Corporate fixed maturities		10.6		84.1		16.9		150.1		27.5		234.2
Total below investment grade		10.8		92.8		17.7		158.3		28.5		251.1
Total fixed maturities		33.9		757.2		61.1		580.1		95.0		1,337.3
Equity securities:
Common equity securities		—		—		0.3		1.4		0.3		1.4
Total (3)	$	33.9	$	757.2	$	61.4	$	581.5	$	95.3	$	1,338.7

(1) Includes $40.6 million unrealized loss related to other-than-temporary impairment losses recognized in other comprehensive income, of which $14.8 million are below investment grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss had been rated by the NAIC, Standard & Poor’s or Moody’s at December 31, 2009.

(3) Includes discontinued accident and health business of $8.8 million in gross unrealized losses with $55.0 million in fair value at December 31, 2009.

The Company employs a systematic methodology to evaluate declines in fair value below amortized cost for fixed maturity securities or cost for equity securities. In determining other-than-temporary impairments of fixed maturity and equity securities, the Company evaluates several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends, dividend payments and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the length of time and the degree to which the fair value of an issuer’s securities remains below the Company’s cost. With respect to fixed maturity investments, the Company considers any factors that might raise doubt about the issuer’s ability to pay all amounts due according to the contractual terms and whether the Company expects to recover the entire amortized cost basis of the security. With respect to equity securities, the Company considers its ability and intent to hold the investment for a period of time to allow for a recovery in value. The Company applies these factors to all securities.

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The following tables provide information on the Company’s gross unrealized losses of fixed maturity securities by credit ratings, including ratings of securities with third party guarantees, as of December 31, 2010 and 2009.

DECEMBER 31	2010
(In millions)
	AAA			AA			A			BBB			Total investment grade			BB			B			CCC and below			Total below investment grade			Total
U.S. Treasury securities and U.S government and agency securities	$	3.2		$	—		$	—		$	—		$	3.2		$	—		$	—		$	—		$	—		$	3.2
States and political subdivisions		4.0			6.2			1.5			7.7			19.4			—			—			—			—			19.4
Corporate fixed maturities		0.3			1.1			6.5			12.8			20.7			5.6			5.7			4.6			15.9			36.6
Residential mortgage-backed securities		3.7			0.6			—			7.7			12.0			—			—			—			—			12.0
Commercial mortgage-backed securities		—			—			1.0			—			1.0			—			—			—			—			1.0
Total fixed maturities, including discontinued operations		11.2			7.9			9.0			28.2			56.3			5.6			5.7			4.6			15.9			72.2
Less: losses included in discontinued operations		(0.2	)		—			(0.4	)		(3.1	)		(3.7	)		(2.3	)		(0.2	)		(0.4	)		(2.9	)		(6.6	)
Total fixed maturities, excluding discontinued operations	$	11.0		$	7.9		$	8.6		$	25.1		$	52.6		$	3.3		$	5.5		$	4.2		$	13.0		$	65.6
DECEMBER 31	2009
(In millions)
	AAA			AA			A			BBB			Total investment grade			BB			B			CCC and below			Total below investment grade			Total
U.S. Treasury securities and U.S government and agency securities	$	3.7		$	—		$	—		$	—		$	3.7		$	—		$	—		$	—		$	—		$	3.7
States and political subdivisions		4.1			7.3			4.8			8.4			24.6			0.8			—			0.2			1.0			25.6
Corporate fixed maturities		—			1.4			7.1			8.2			16.7			11.8			9.7			6.0			27.5			44.2
Residential mortgage-backed securities		2.4			1.4			7.9			2.4			14.1			—			—			—			—			14.1
Commercial mortgage-backed securities		0.5			0.8			6.1			—			7.4			—			—			—			—			7.4
Total fixed maturities, including discontinued operations		10.7			10.9			25.9			19.0			66.5			12.6			9.7			6.2			28.5			95.0
Less: losses included in discontinued operations		—			(0.2	)		(1.4	)		(3.2	)		(4.8	)		(0.5	)		(2.8	)		(0.7	)		(4.0	)		(8.8	)
Total fixed maturities, excluding discontinued operations	$	10.7		$	10.7		$	24.5		$	15.8		$	61.7		$	12.1		$	6.9		$	5.5		$	24.5		$	86.2

D. OTHER

The Company had no concentration of investments in a single investee that exceeded 10% of shareholders’ equity except as follows:

DECEMBER 31	2010		2009
(in millions)
	Fair Value
Fixed maturities:
Federal Home Loan Mortgage Corp. (1)	$	445.5	$	574.0
Federal National Mortgage Association (2)	$	205.4	$	260.3

(1) Includes securities of discontinued operations of $6.4 million and $27.7 million at December 31, 2010 and 2009, respectively.

(2) Holdings in Federal National Mortgage Association at December 31, 2010 were less than 10% of shareholders’ equity but are included for comparative purposes.

5. INVESTMENT INCOME AND GAINS AND LOSSES

A. NET INVESTMENT INCOME

The components of net investment income were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Fixed maturities	$	248.6		$	249.3		$	251.3
Equity securities		4.5			5.2			4.7
Mortgage loans		0.7			2.3			0.9
Other long-term investments		0.1			(0.1	)		2.2
Short-term investments		0.2			2.0			4.5
Gross investment income		254.1			258.7			263.6
Less investment expenses		(6.9	)		(6.6	)		(4.9	)
Net investment income	$	247.2		$	252.1		$	258.7

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The carrying value of non-income producing fixed maturities, as well as the carrying value of fixed maturity securities on non-accrual status, at December 31, 2010 and 2009 was not material. The effect of non-accruals for the years ended December 31, 2010, 2009 and 2008, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, was a reduction in net investment income of $2.3 million, $3.1 million and $2.1 million, respectively.

B. NET REALIZED INVESTMENT GAINS AND LOSSES

Net realized gains (losses) on investments were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Fixed maturities	$	17.7		$	5.3		$	(90.8	)
Equity securities		13.0			(4.3	)		(7.6	)
Other investments		(1.0	)		0.4			0.6
Net realized investment gains (losses)	$	29.7		$	1.4		$	(97.8	)

Included in the net realized investment gains (losses) were other-than-temporary impairments of investment securities recognized in earnings totaling $13.9 million, $32.9 million and $113.1 million in 2010, 2009 and 2008, respectively.

Other-than-temporary-impairments

As of April 1, 2009, the Company adopted the guidance included in ASC 320, which modified the assessment of OTTI on fixed maturity securities, as well as the method of recording and reporting OTTI. Under the new guidance, if a company intends to sell or more likely than not will be required to sell a fixed maturity security before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings. If a company does not intend to sell the debt security, or more likely than not will not be required to sell it, the company is required to separate the other-than-temporary impairment into the portion which represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings and the amount related to non-credit factors is recognized in other comprehensive income, net of applicable taxes.

ASC 320 requires a cumulative effect adjustment upon adoption to reclassify the non-credit component of previously recognized impairments from retained earnings to other comprehensive income. The Company reviewed previously recognized OTTI recorded through realized losses on securities held at April 1, 2009, which was approximately $121 million, and determined that $33.3 million of these OTTI were related to non-credit factors, such as interest rates and market conditions. Accordingly, the Company increased the amortized cost basis of these debt securities and recorded a cumulative effect adjustment of $33.3 million within shareholders’ equity. The cumulative effect adjustment had no effect on total shareholders’ equity as it increased retained earnings and reduced accumulated other comprehensive income.

For 2010, total OTTI were $9.4 million. Of this amount, $13.9 million was recognized in earnings, including $4.5 million that was transferred from unrealized losses in accumulated other comprehensive income. Of the $13.9 million recorded in earnings, $4.4 million related to certain low-income housing tax credit limited partnerships, $4.3 million was estimated credit losses on fixed maturity securities, $3.3 million related to fixed maturity securities that the Company intends to sell and $1.9 million related to common stocks. Other-than-temporary impairments recognized on fixed maturity securities during 2010 primarily included $2.9 million on below investment grade corporate bonds principally in the industrial and utilities sectors, $2.7 million on investment grade residential mortgage-backed securities and $1.2 million on investment grade corporate bonds in the industrial sector.

For 2009, total OTTI were $42.2 million. Of this amount, $32.9 million was recognized in earnings and the remaining $9.3 million was recorded as unrealized losses in accumulated other comprehensive income. Of the OTTI recognized in earnings, $15.7 million related primarily to below investment grade corporate bonds in the industrial sector that the Company intended to sell and $9.6 million were from equities, including perpetual preferred securities primarily in the financial sector. In addition, the Company recorded OTTI of $7.6 million that was estimated credit losses, primarily on below investment grade fixed maturity securities, including $4.1 million on corporate bonds, $2.1 million on residential mortgage-backed securities and $1.4 million on a municipal bond.

The methodology and significant inputs used to measure the amount of credit losses on fixed maturities in 2010 and 2009 are as follows:

Corporate bonds - the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating and asset duration and loss-given-default factors based on security type. These factors are based on historical data provided by an independent third-party rating agency.

Asset-backed securities, including commercial and residential mortgage backed securities - the Company utilized cash flow estimates based on bond specific facts and circumstances that include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayment speeds and structural support, including subordination and guarantees.

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Municipals - the Company utilized cash flow estimates based on bond specific facts and circumstances that may include the political subdivision’s taxing authority, the issuer’s ability to adjust user fees or other sources of revenue to satisfy its debt obligations and the ability to access insurance or guarantees.

The following table provides rollforwards of the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on fixed maturity securities for which the non-credit portion of the loss is included in other comprehensive income.

FOR THE YEARS ENDED DECEMBER 31	2010			2009 (1)
(In millions)
Credit losses as of the beginning of the period	$	22.1		$	17.3
Credit losses for which an OTTI was not previously recognized		1.2			4.0
Additional credit losses on securities for which an OTTI was previously recognized		3.1			3.6
Reductions for securities sold, matured or called during the period		(8.3	)		(1.4	)
Reductions for securities reclassified as intend to sell		(0.4	)		(1.4	)
Credit losses as of the end of the year	$	17.7		$	22.1

(1) The effective date of the section of ASC 320 requiring this disclosure was April 1, 2009, therefore the period represented is April 1, 2009 through December 31, 2009.

The proceeds from voluntary sales of available-for-sale securities and the gross realized gains and gross realized losses on those sales, excluding discontinued operations, are provided in the following table for the periods indicated:

FOR THE YEARS ENDED DECEMBER 31
(In millions)
2010	Proceeds from Voluntary Sales		Gross Gains		Gross Losses
Fixed maturities	$	456.2	$	24.1	$	2.2
Equity securities	$	112.1	$	13.5	$	—
2009
Fixed maturities	$	1,522.4	$	40.4	$	14.2
Equity securities	$	44.6	$	7.6	$	2.6
2008
Fixed maturities	$	498.1	$	16.4	$	7.8
Equity securities	$	1.1	$	0.2	$	—

C. OTHER COMPREHENSIVE INCOME (LOSS) RECONCILIATION

The following table provides a reconciliation of gross unrealized investment gains (losses) to the net balance shown in the Consolidated Statements of Comprehensive Income (Loss).

FOR THE YEARS ENDED DECEMBER 31	2010		2009			2008
(In millions)
Unrealized appreciation (depreciation) on available-for-sale securities:
Unrealized holding gains (losses) arising during period, net of income tax benefit of $9.1, $1.3 and $2.9 in 2010, 2009 and 2008.	$	139.8	$	414.9		$	(397.0	)
Less: reclassification adjustment for gains (losses) included in net income		29.2		(2.2	)		(115.0	)
Total available-for-sale securities		110.6		417.1			(282.0	)
Unrealized depreciation on derivative instruments:
Unrealized holding losses arising during period, net of income tax benefit of $1.7 in 2008.		—		—			(3.2	)
Less: reclassification adjustment for losses included in net income, net of income tax benefit of $1.9 in 2008.		—		—			(3.6	)
Total derivative instruments		—		—			0.4
Other comprehensive income (loss)	$	110.6	$	417.1		$	(281.6	)

6. FAIR VALUE

The Company follows the guidance in ASC 820, as it relates to the fair value of its financial assets and liabilities. ASC 820 provides for a standard definition of fair value to be used in new and existing pronouncements. This guidance requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet. The fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants and also provides a hierarchy

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for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1 as these are the most reliable, and the lowest priority given to Level 3.

Level 1 – Quoted prices in active markets for identical assets.

Level 2 – Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.

Level 3 – Unobservable inputs that are supported by little or no market activity.

When more than one level of input is used to determine fair value, the financial instrument is classified as Level 2 or 3 according to the lowest level input that has a significant impact on the fair value measurement.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments and have not changed during the year:

Cash and Cash Equivalents

For these short-term investments, the carrying amount approximates fair value.

Fixed Maturities

Level 1 securities generally include U.S. Treasury issues and other securities that are highly liquid and for which quoted market prices are available. Level 2 securities are valued using pricing for similar securities and pricing models that incorporate observable inputs including, but not limited to yield curves and issuer spreads. Level 3 securities include issues for which little observable data can be obtained, primarily due to the illiquid nature of the securities, and for which significant inputs used to determine fair value are based on the Company’s own assumptions. Non-binding broker quotes are also included in Level 3.

The Company utilizes a third party pricing service for the valuation of the majority of its fixed maturity securities and receives one quote per security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value for those securities using pricing applications based on a market approach. Inputs into the fair value pricing applications which are common to all asset classes include benchmark U.S. Treasury security yield curves, reported trades of identical or similar fixed maturity securities, broker/dealer quotes of identical or similar fixed maturity securities and structural characteristics of the security, such as maturity date, coupon, mandatory principal payment dates, frequency of interest and principal payments and optional principal redemption features. Inputs into the fair value applications that are unique by asset class include, but are not limited to:

• Corporate fixed maturities - overall credit quality, including assessments of the level and variability of: industry economic sensitivity; company financial policies; quality of management; regulatory environment; competitive position; indenture restrictive covenants; and security or collateral.

• States and political subdivisions - overall credit quality, including assessments of the level and variability of: sources of payment such as income, sales or property taxes, levies or user fees; credit support such as insurance; state or local economic and political base; natural resource availability; and susceptibility to natural or man-made catastrophic events such as hurricanes, earthquakes or acts of terrorism.

• Residential mortgage-backed securities, U.S. agency pass-thrus and collateralized mortgage obligations (“CMOs”) - estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; U.S. government support programs; tax policies; and delinquency/default trends.

• Residential mortgage-backed securities, non-agency CMOs - estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; U.S. government support programs; tax policies; delinquency/default trends; and severity of loss upon default and length of time to recover proceeds following default.

• Commercial mortgage-backed securities - overall credit quality, including assessments of the level and variability of: collateral type such as office, retail, residential, lodging, or other; geographic concentration by region, state, metropolitan statistical area and locale; vintage year; historical collateral performance including defeasance, delinquency, default and special servicer trends; and capital structure support features.

Generally, all prices provided by the pricing service, except actively traded securities with quoted market prices, are reported as Level 2.

The Company holds privately placed fixed maturity securities and certain other fixed maturity securities that do not have an active market and for which the pricing

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service cannot provide fair values. The Company determines fair values for these securities using either matrix pricing utilizing the market approach or broker quotes. The Company will use observable market data as inputs into the fair value applications, as discussed in the determination of Level 2 fair values, to the extent it is available, but is also required to use a certain amount of unobservable judgment due to the illiquid nature of the securities involved. Unobservable judgment reflected in the Company’s matrix model accounts for estimates of additional spread required by market participants for factors such as issue size, structural complexity, high bond coupon, long maturity term or other unique features. These matrix-priced securities are reported as Level 2 or Level 3, depending on the significance of the impact of unobservable judgment on the security’s value. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.

Equity Securities

Level 1 includes publicly traded securities valued at quoted market prices. Level 2 includes securities that are valued using pricing for similar securities and pricing models that incorporate observable inputs. Level 3 consists of common stock of private companies for which observable inputs are not available.

The Company utilizes a third party pricing service for the valuation of the majority of its equity securities and receives one quote for each equity security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Generally, all prices provided by the pricing service, except quoted market prices, are reported as Level 2. Occasionally, the Company may obtain non-binding broker quotes which are reported as Level 3.

Mortgage Loans

Fair values are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.

Legal Indemnities

Fair values are estimated using probability-weighted discounted cash flow analyses.

Debt

The fair value of debt was estimated based on quoted market prices. If a quoted market price is not available, fair values are estimated using discounted cash flows that are based on current interest rates and yield curves for debt issuances with maturities and credit risks consistent with the debt being valued.

The estimated fair values of the financial instruments were as follows:

DECEMBER 31	2010						2009
(In millions)
	Carrying Value			Fair Value			Carrying Value			Fair Value
Financial Assets
Cash and cash equivalents	$	292.9		$	292.9		$	316.7		$	316.7
Fixed maturities		4,915.2			4,915.2			4,732.4			4,732.4
Equity securities		128.6			128.6			69.3			69.3
Mortgage loans		5.5			5.8			14.1			15.0
Total financial assets, including financial assets of discontinued operations		5,342.2			5,342.5			5,132.5			5,133.4
Less: financial assets of discontinued operations		(119.8	)		(119.8	)		(117.1	)		(117.1	)
Total financial assets of continuing operations	$	5,222.4		$	5,222.7		$	5,015.4		$	5,016.3
Financial Liabilities
Client claim funds	$	—		$	—		$	2.0		$	2.0
Legal indemnities		5.4			5.4			7.0			7.0
Debt		605.9			603.9			433.9			387.9
Total financial liabilities of continuing operations (1)	$	611.3		$	609.3		$	442.9		$	396.9

(1) There were no financial liabilities associated with the discontinued operations.

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The Company performs a review of the fair value hierarchy classifications and of prices received from its third party pricing service on a quarterly basis. The Company reviews the pricing services’ policy describing its processes, practices and inputs, including various financial models used to value securities. Also, the Company reviews the portfolio pricing. Securities with changes in prices that exceed a defined threshold are verified to independent sources such as Bloomberg. If upon review, the Company is not satisfied with the validity of a given price, a pricing challenge would be submitted to the pricing service along with supporting documentation for its review. The Company does not adjust quotes or prices obtained from the pricing service unless the pricing service agrees with the Company’s challenge. During 2010 and 2009, the Company did not adjust any prices received from brokers or its pricing service.

Changes in the observability of valuation inputs may result in a reclassification of certain financial assets within the fair value hierarchy. Reclassifications between levels of the fair value hierarchy are reported as of the beginning of the period in which the reclassification occurs. As previously discussed, the Company utilizes a third party pricing service for the valuation of the majority of its fixed maturities and equity securities. The pricing service has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company will use observable market data to the extent it is available, but may also be required to make assumptions for market based inputs that are unavailable due to market conditions.

The Company currently holds fixed maturity securities and equity securities for which fair value is determined on a recurring basis. The following tables present for each hierarchy level, the Company’s assets that were measured at fair value at December 31, 2010 and 2009.

December 31, 2010
(In millions)
	Fair Value
	Total			Level 1			Level 2			Level 3
Fixed maturities:
U.S. Treasury securities and U.S. government and agency securities	$	263.2		$	124.9		$	138.3		$	—
States and political subdivisions		965.5			—			948.9			16.6
Corporate fixed maturities		2,563.1			—			2,520.9			42.2
Residential mortgage-backed securities, U.S. agency backed		621.6			—			621.6			—
Residential mortgage-backed securities, non-agency		133.7			—			132.9			0.8
Commercial mortgage-backed securities		368.1			—			362.6			5.5
Total fixed maturities		4,915.2			124.9			4,725.2			65.1
Equity securities (1)		120.0			106.6			10.5			2.9
Total investment assets at fair value, including assets of discontinued operations		5,035.2			231.5			4,735.7			68.0
Investment assets of discontinued operations at fair value		(117.3	)		(0.9	)		(115.9	)		(0.5	)
Total investment assets of continuing operations at fair value	$	4,917.9		$	230.6		$	4,619.8		$	67.5
December 31, 2009
(In millions)
Fixed maturities:
U.S. Treasury securities and U.S. government and agency securities	$	354.7		$	100.6		$	254.1		$	—
States and political subdivisions		832.2			—			816.7			15.5
Foreign governments		3.0			—			3.0			—
Corporate fixed maturities		2,330.9			—			2,292.8			38.1
Residential mortgage-backed securities, U.S. agency backed		689.0			—			689.0			—
Residential mortgage-backed securities, non-agency		185.4			—			185.4			—
Commercial mortgage-backed securities		337.2			—			331.0			6.2
Total fixed maturities		4,732.4			100.6			4,572.0			59.8
Equity securities (1)		60.6			51.0			6.8			2.8
Total investment assets at fair value, including assets of discontinued operations		4,793.0			151.6			4,578.8			62.6
Investment assets of discontinued operations at fair value		(116.9	)		(0.3	)		(116.6	)		—
Total investment assets of continuing operations at fair value	$	4,676.1		$	151.3		$	4,462.2		$	62.6

(1) Excludes equities carried at cost of $8.6 million at December 31, 2010 and $8.7 million at December 31, 2009, which consists primarily of Federal Home Loan Bank common stock.

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The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

YEAR ENDED DECEMBER 31, 2010
(In millions)
	Fixed Maturities
	States and political subdivisions			Corporate			Residential mortgage backed securities, non- agency			Commercial mortgage backed securities			Total			Equities			Total Assets
Balance at beginning of year	$	15.5		$	38.1		$	—		$	6.2		$	59.8		$	2.8		$	62.6
Transfers into Level 3		—			17.3			—			—			17.3			—			17.3
Transfers out of Level 3		—			(4.7	)		—			—			(4.7	)		—			(4.7	)
Total gains (losses):
Included in earnings		—			0.7			—			—			0.7			(0.3	)		0.4
Included in other comprehensive income		(0.5	)		0.4			—			—			(0.1	)		(0.6	)		(0.7	)
Purchases and sales:
Purchases		3.0			5.3			1.4			—			9.7			1.0			10.7
Sales		(1.4	)		(14.9	)		(0.6	)		(0.7	)		(17.6	)		—			(17.6	)
Balance at end of year	$	16.6		$	42.2		$	0.8		$	5.5		$	65.1		$	2.9		$	68.0

YEAR ENDED DECEMBER 31, 2009
(In millions)
	Fixed Maturities
	States and political subdivisions			Corporate			Residential mortgage backed securities, non- agency			Commercial mortgage backed securities			Total			Equities		Total Assets
Balance at beginning of year	$	18.2		$	44.5		$	6.9		$	19.5		$	89.1		$	1.2	$	90.3
Assets of discontinued operations sold with FAFLIC		(0.1	)		(3.4	)		—			(2.3	)		(5.8	)		—		(5.8	)
Transfers into Level 3		—			1.4			—			—			1.4			1.6		3.0
Transfers out of Level 3		(3.1	)		(20.2	)		—			(14.6	)		(37.9	)		—		(37.9	)
Total (losses) gains:
Included in earnings		(0.3	)		(0.5	)		0.2			—			(0.6	)		—		(0.6	)
Included in other comprehensive income		(1.0	)		3.6			—			1.0			3.6			—		3.6
Purchases and sales:
Purchases		3.2			17.5			—			3.2			23.9			—		23.9
Sales		(1.4	)		(4.8	)		(7.1	)		(0.6	)		(13.9	)		—		(13.9	)
Balance at end of year	$	15.5		$	38.1		$	—		$	6.2		$	59.8		$	2.8	$	62.6

During the twelve months ended December 31, 2010 and 2009, the Company transferred fixed maturities between Level 2 and Level 3 primarily a result of assessing the significance of unobservable inputs on the fair value measurement. There were no transfers between Level 1 and Level 2 during 2010.

The following table summarizes gains and losses due to changes in fair value that are recorded in net income for Level 3 assets.

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Years Ended December 31	2010								2009
(In millions)
	Other-than- temporary impairments			Net realized investment gains (losses)		Total			Other-than- temporary impairments			Net realized investment gains (losses)			Total
Level 3 Assets:
Fixed maturities:
States and political subdivisions	$	—		$	—	$	—		$	—		$	(0.3	)	$	(0.3	)
Corporate fixed maturities		—			0.7		0.7			(1.1	)		0.6			(0.5	)
Residential mortgage backed securities, U.S. agency backed		—			—		—			—			0.2			0.2
Total fixed maturities		—			0.7		0.7			(1.1	)		0.5			(0.6	)
Equity securities		(0.3	)		—		(0.3	)		—			—			—
Total assets	$	(0.3	)	$	0.7	$	0.4		$	(1.1	)	$	0.5		$	(0.6	)

There were no Level 3 liabilities held by the Company for the years ended December 31, 2010 and 2009.

7. DEBT

Debt consists of the following:

DECEMBER 31	2010		2009
(In millions)
Senior debentures (unsecured) maturing March 1, 2020	$	199.3	$	—
Senior debentures (unsecured) maturing October 16, 2025		121.4		121.4
Holding company junior debentures		129.2		165.7
FHLBB borrowing		134.5		125.0
Capital securities		17.5		17.8
Surplus notes		4.0		4.0
	$	605.9	$	433.9

On February 23, 2010, the Company issued $200.0 million aggregate principal amount of 7.50% senior unsecured notes due March 1, 2020. These senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of capital stock of restricted subsidiaries and limitations on liens. These debentures pay interest semi-annually (See also Note 3 – Other Significant Transactions). The Company is in compliance with the covenants associated with this indenture.

The Company also issued senior unsecured notes with a face value of $200.0 million on October 16, 1995. In 2009, the Company repurchased a portion of these senior debentures with a face value of $78.4 million (See also Note 3 – Other Significant Transactions). The remaining senior debentures have a $121.6 million face value, pay interest semi-annually at a rate of 7.625% and mature on October 16, 2025. The senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of stock of restricted subsidiaries and limitations on liens. The Company is in compliance with the covenants associated with this indenture.

The Company established a business trust in 1997, AFC Capital Trust I, for the sole purpose of issuing mandatorily redeemable preferred securities to investors. Through the trust, the Company issued $300.0 million of Series B Capital Securities, which were registered under the Securities Act of 1933, the proceeds of which were used to purchase related junior subordinated debentures from the holding company. The Company liquidated the Trust on July 30, 2009. Each holder of Capital Securities as of that date received a principal amount of the Company’s Series B Junior Debentures equal to the liquidation amount of the Capital Securities held by such holder. In 2010 and 2009, the Company repurchased a portion of these debentures with a face value of $36.5 million and $134.3 million, respectively. These junior subordinated debentures have a face value of $129.2 million and $165.7 million as of December 31, 2010 and December 31, 2009, respectively. Consistent with the Capital Securities, these debentures pay cumulative dividends semi-annually at 8.207% and mature February 3, 2027 (See also Note 3 – Other Significant Transactions). On February 15, 2011, the Company repurchased an additional $48.0 million of Junior Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million on the repurchase.

On November 28, 2008, the Company acquired all of the outstanding shares of AIX. Prior to this acquisition, AIX Group Trust issued $15.0 million floating rate preferred capital securities and $0.5 million floating rate preferred common securities. The proceeds were used to purchase $15.5 million floating rate subordinated debentures issued by AIX. Coincident with the issuances, AIX issued $0.5 million of the floating rate subordinate debentures to purchase all of the common stock of AIX Group Trust. The Company carries the debt issued by this trust as a component of its debt. The Company also has $4.0 million of surplus notes outstanding related to AIX.

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On September 14, 2007, the Company acquired all of the outstanding shares of PDI. Prior to this acquisition, Professionals Direct Statutory Trust II issued $3.0 million of preferred securities in 2005, the proceeds of which were used to purchase junior subordinated debentures issued by PDI. Coincident with the issuance of the preferred securities, PDI issued $0.1 million of junior subordinated debentures to purchase all of the common stock of Professionals Direct Statutory Trust II.

In September 2009, Hanover Insurance received an advance of $125.0 million through its membership in the FHLBB as part of a collateralized borrowing program. This advance bears interest at a fixed rate of 5.50% per annum over a twenty-year term. In July 2010, the Company committed to borrow an additional $46.3 million from FHLBB to finance the development of the City Square Project. These borrowings will be drawn in several increments from July 2010 to January 2012. All amounts mature on July 20, 2020 and carry fixed interest rates with a weighted average of 3.88%. Through December 31, 2010, the Company has borrowed $9.5 million under this arrangement. All interest associated with this additional $46.3 million will be capitalized through the construction phase of the City Square Project. As collateral to FHLBB, Hanover Insurance has pledged government agency securities with a fair value of $162.7 million and $142.0 million as of December 31, 2010 and 2009, respectively (See also Note 3 – Other Significant Transactions). The Company is in compliance with the covenants associated with these borrowings.

In June 2007, the Company entered into a $150.0 million committed syndicated credit agreement which expired in June 2010. There were no borrowings under this agreement. The agreement provided for several covenants; all of which the Company was in compliance with for the duration of the contract. The Company did not renew or replace this syndicated credit agreement upon expiration. Additionally, the Company had no commercial paper borrowings as of December 31, 2010.

Interest expense was $44.3 million in 2010, $35.5 million in 2009 and $41.0 million in 2008, and included interest related to the Company’s senior debentures, junior subordinated debentures, FHLBB borrowing, capital securities and surplus notes. All interest expense is recorded in other operating expenses.

8. FEDERAL INCOME TAXES

Provisions for federal income taxes have been calculated in accordance with the provisions of ASC 740. A summary of the federal income tax expense in the Consolidated Statements of Income is shown below:

FOR THE YEARS ENDED DECEMBER 31	2010		2009		2008
(In millions)
Federal income tax expense:
Current	$	5.7	$	51.2	$	17.5
Deferred		52.2		31.9		62.4
	$	57.9	$	83.1	$	79.9

The federal income tax expense attributable to the consolidated results of operations is different from the amount determined by multiplying income before federal income taxes by the statutory federal income tax rate of 35%. The sources of the difference and the tax effects of each were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Expected federal income tax expense	$	73.9		$	94.8		$	57.5
Change in valuation allowance		(57.1	)		(6.9	)		34.2
Expired capital loss carryforward		47.4			—			—
Tax difference related to investment disposals and maturities		(3.2	)		—			—
Tax-exempt interest		(2.2	)		(3.1	)		(3.9	)
Dividend received deduction		(0.8	)		(0.8	)		(0.6	)
Tax credits		(0.4	)		(1.5	)		(2.1	)
Prior years’ federal income tax settlement		—			(0.3	)		(6.4	)
Changes in other tax estimates		—			—			(0.2	)
Other, net		0.3			0.9			1.4
Federal income tax expense	$	57.9		$	83.1		$	79.9
Effective tax rate		27.4	%		30.7	%		48.6	%

The following are the components of the Company’s deferred tax assets and liabilities (excluding those associated with discontinued operations).

DECEMBER 31	2010			2009
(In millions)
Deferred tax assets (liabilities)
Insurance reserves	$	171.8		$	157.3
Deferred acquisition costs		(120.9	)		(100.8	)
Tax credit carryforwards		111.1			112.1
Capital losses		69.2			228.6
Employee benefit plans		38.3			70.0
Software capitalization		(28.3	)		(27.0	)
Investments, net		23.4			(28.1	)
Other, net		4.3			11.0
Gross deferred tax asset		268.9			423.1
Valuation allowance		(91.5	)		(194.5	)
Deferred tax asset, net	$	177.4		$	228.6

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Gross deferred income tax assets totaled approximately $1.2 billion at December 31, 2010 and 2009. Gross deferred income tax liabilities totaled approximately $1.0 billion at December 31, 2010 and 2009.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized.

In January, July, September, and December 2010, the Company completed transactions which resulted in the realization, for tax purposes only, of unrealized gains in its investment portfolio of $98.4 million, $37.1 million, $31.1 million, and $120.8 million, respectively. These transactions enabled the Company to realize capital loss carryforwards to offset these gains, and resulted in the release of $66.2 million and $34.4 million, in 2010 and 2009, respectively, of the valuation allowance held against the deferred tax asset related to these capital loss carryforwards. The total release of $100.6 million was accounted for as an increase in income from continuing operations of $3.2 million and $6.0 million in 2010 and 2009, respectively, with the remaining $91.4 million reflected as a benefit in accumulated other comprehensive income at December 31, 2010. This amount will be released into income from continuing operations related to non-segment income in future years, as the investment securities subject to these transactions are sold or mature.

In 2010, the Company reduced its valuation allowance, for both continuing and discontinued operations, related to its deferred tax assets by $104.1 million, from $195.6 million to $91.5 million. There were four principal components to this reduction. First, the Company reduced the valuation allowance by $66.2 million as a result of the aforementioned transactions, which utilized the capital loss carryforwards. Second, the Company increased its valuation allowance by $20.3 million for certain tax basis unrealized losses which the Company does not believe it can utilize. This increase was reflected as a decrease in accumulated other comprehensive income. Third, $135.5 million of the capital loss carryforwards expired in 2010. As a result, the Company released $47.4 million of its valuation allowance attributable to these expirations with an equal and offsetting reduction in the related deferred tax asset. Fourth, as a result of $29.7 million in net realized gains during 2010, the Company decreased its valuation allowance by $9.7 million as an increase to income from continuing operations, since these gains utilized the Company’s capital loss carryforwards. The remaining $1.1 million decrease was attributable to other items reflected as income from discontinued operations.

During 2009, the Company reduced the valuation allowance, for both continuing and discontinued operations, related to its deferred tax assets by $152.6 million, from $348.2 million to $195.6 million. There were two principal components to this reduction. First, the Company reversed through other comprehensive income, the $118.4 million valuation allowance that was recognized at December 31, 2008 associated with the tax benefit related to net unrealized depreciation in the Company’s investment portfolio at that time. During 2009, appreciation in the portfolio changed the nature of the tax attribute from that of an asset to that of a liability, and thus there was no longer a need for that portion of the valuation allowance. Second, as a result of the aforementioned transactions, the Company reversed $28.4 million of the valuation allowance as an adjustment to other comprehensive income and $6.0 million of the valuation allowance as an adjustment to income from continuing operations. The remaining $0.2 million net increase in the valuation allowance was attributable to other items, and reflected as a $0.9 million increase in income from continuing operations and a $1.1 million decrease in income from discontinued operations.

At December 31, 2010, the Company’s pre-tax capital loss carryforwards are $197.8 million, including $176.5 million resulting from the sale of FAFLIC in 2009. At December 31, 2010, the Company has recorded a full valuation allowance against this asset, since it is the Company’s opinion that it is more likely than not that the asset will not be realized. The Company’s estimate of the gross amount and likely realization of capital loss carryforwards may change over time.

At December 31, 2010, the Company has a deferred tax asset of $111.1 million of alternative minimum tax credit carryforwards. The alternative minimum tax credit carryforwards have no expiration date. The Company may utilize the credits to offset regular federal income taxes due from future income, and although the Company believes that these assets are fully recoverable, there can be no certainty that future events will not affect their recoverability. The Company believes, based on objective evidence, the remaining deferred tax assets will be realized.

The table below provides a reconciliation of the beginning and ending reserves for uncertain tax positions as follows:

FOR THE YEARS ENDED DECEMBER 31	2010		2009		2008
(In millions)
Liability at beginning of year, net	$	0.8	$	0.8	$	27.7
Additions based on tax positions related to the current year		—		—		0.1
Additions for tax positions of prior years		—		—		0.3
Reductions for tax positions of prior years		—		—		(8.2	)
Settlements		—		—		(19.1	)
Liability at end of year, net	$	0.8	$	0.8	$	0.8

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Included in the December 31, 2010 balance is a receivable of $3.6 million for tax positions, for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, a change in the timing of deductions would not impact the annual effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in federal income tax expense. In 2008, as part of the settlement of the 1995 through 2001 audit period, the Company reduced its accrued interest by $34.8 million. The Company had accrued interest of $1.0 million and $0.8 million as of December 31, 2010 and 2009, respectively. The Company has not recognized any penalties associated with unrecognized tax benefits.

The Company or its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2005. In 2008, the Company received written notification from the IRS Appeals Division that the Joint Committee on Taxation had completed its review of tax years 1995 through 2001 and found no exceptions. This settlement resulted in a tax benefit of $8.3 million recorded as a component of Net Income in the Consolidated Statement of Income and is comprised of a $6.4 million adjustment to Federal Income Tax Expense and a $1.9 million benefit to Discontinued Operations. Additionally, in 2009, the Company received a Revenue Agents Report for the 2005 and 2006 IRS audit. The Company has agreed to all proposed adjustments other than a disallowance of Separate Account Dividends Received Deductions for which the Company has requested an Appeals conference. Due to available net operating loss carryovers and the 2005 sale of Allmerica Financial Life Insurance and Annuity Company, the effects of the proposed adjustments do not materially affect the Company’s financial position. The IRS audits of the years 2007 and 2008 commenced in April 2010. The Company and its subsidiaries are still subject to U.S. state income tax examinations by tax authorities for years after 1998.

A corporation is entitled to a tax deduction from gross income for a portion of any dividend which was received from a domestic corporation that is subject to income tax. This is referred to as a “dividends received deduction.” In prior years, the Company has taken this dividends received deduction when filing its federal income tax return. Many separate accounts held by life insurance companies receive dividends from such domestic corporations, and therefore, were regarded as entitled to this dividends received deduction. In its Revenue Ruling 2007-61, issued on September 25, 2007, the IRS announced its intention to issue regulations with respect to certain computational aspects of the dividends received deduction on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are not yet known, but they could result in the elimination of some or all of the separate account dividends received deduction tax benefit that the Company receives. Management believes that it is more likely than not that any such regulation would apply prospectively only, and application of this regulation is not expected to be material to the Company’s results of operations in any future annual period. However, there can be no assurance that the outcome of the revenue ruling will be as anticipated. The Company believes that retroactive application would not materially affect the Company’s financial position or results of operations. In September 2009, as part of the audit of 2005 and 2006, the IRS disallowed the dividends received deduction related to separate account assets for both 2005 and 2006. The Company has challenged the disallowance by filing a formal protest, and has requested an IRS Appeals Conference. As discussed above, should the Company ultimately be unsuccessful in its challenge, due to tax attributes and the sale of Allmerica Financial Life Insurance and Annuity Company, the effects of this proposed adjustment would not be material to the Company’s financial position or results of operations.

9. PENSION PLANS

Defined Benefit Plans

Prior to 2005, THG provided retirement benefits to substantially all of its employees under defined benefit pension plans. These plans were based on a defined benefit cash balance formula, whereby the Company annually provided an allocation to each covered employee based on a percentage of that employee’s eligible salary, similar to a defined contribution plan arrangement. In addition to the cash balance allocation, certain transition group employees who had met specified age and service requirements as of December 31, 1994 were eligible for a grandfathered benefit based primarily on the employees’ years of service and compensation during their highest five consecutive plan years of employment. The Company’s policy for the plans is to fund at least the minimum amount required by the Employee Retirement Income Security Act of 1974 (“ERISA”).

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As of January 1, 2005, the defined benefit pension plans were frozen and since that date, no further cash balance allocations have been credited to participants. Participants’ accounts are credited with interest daily, based upon the General Agreement of Trades and Tariffs (“GATT”). In addition, the grandfathered benefits for the transition group were also frozen at January 1, 2005 levels with an annual transition pension adjustment calculated at an interest rate equal to 5% per year up to 35 years of completed service, and 3% thereafter.

The Company recognizes the funded status of its defined benefit plans in its Consolidated Balance Sheet. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation of the Company’s defined benefit plans. ASC 715, Compensation - Retirement Plans (“ASC 715”), requires the aggregation of all overfunded plans separately from all underfunded plans. On January 4, 2010 the Company made a discretionary contribution of $100 million to the qualified defined benefit pension plan. With this contribution, and based on current estimates of plan liabilities and other assumptions, including future returns of plan assets, its qualified defined benefit pension plan is essentially fully funded.

Assumptions

In order to measure the expense associated with these plans, management must make various estimates and assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates, for example. The estimates used by management are based on the Company’s historical experience, as well as current facts and circumstances. In addition, the Company uses outside actuaries to assist in measuring the expense and liability associated with these plans.

The Company measures the funded status of its plans as of the date of its year-end statement of financial position. The Company utilizes a measurement date of December 31^st to determine its benefit obligations, consistent with the date of its Consolidated Balance Sheets. Weighted-average assumptions used to determine pension benefit obligations are as follows:

DECEMBER 31	2010			2009			2008
Discount rate (1)		5.63	%		6.13	%		6.63	%
Cash balance interest crediting rate		4.50	%		4.50	%		5.00	%

(1) In 2010 and 2009, the discount rate utilized for the non-qualified plans was 5.50% and 6.00%, respectively. The discount rate for 2008 for the non-qualified plan is consistent with the qualified plan.

The decrease in the interest crediting rate in 2009 reflects a change in expectations regarding long-term interest rate levels due to the current economic impact of the financial markets on the GATT rate.

The Company utilizes a measurement date of January 1st to determine its periodic pension costs. Weighted-average assumptions used to determine net periodic pension costs are as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
Discount rate		6.13	%		6.63	%		6.38	%
Expected return on plan assets		7.00	%		7.50	%		7.75	%
Cash balance interest crediting rate		4.50	%		5.00	%		5.00	%

The expected rate of return was determined by using historical mean returns, adjusted for certain factors believed to have an impact on future returns. Specifically, because the allocation of assets between fixed maturities and equities has changed, as discussed in “Plan Assets” below, the historical mean return was adjusted downward slightly to reflect this asset mix. The adjusted mean returns were weighted to the plan’s actual asset allocation at December 31, 2010, resulting in an expected rate of return on plan assets for 2010 of 7.00%. The Company reviews and updates, at least annually, its expected return on plan assets based on changes in the actual assets held by the plan.

Plan Assets

The Company utilizes a target allocation strategy, which focuses on creating a mix of assets that will generate modest growth from equity securities while minimizing volatility in the Company’s earnings from changes in the markets and economic environment. Various factors are taken into consideration in determining the appropriate asset mix, such as census data, actuarial valuation information and capital market assumptions. During 2010 and 2009, the plan assets were shifted out of equity securities and into fixed income securities to the current allocation of 74% in fixed income securities and 26% in equity securities. The Company reviews and updates, at least annually, the target allocation and makes changes periodically. The following table provides target allocations and actual invested asset allocations for 2010 and 2009.

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DECEMBER 31	2010 TARGET LEVELS			2010			2009
Fixed Income Securities:
Fixed Maturities		73	%		73	%		56	%
Money Market Funds		2	%		1	%		1	%
Total Fixed Income Securities		75	%		74	%		57	%
Equity Securities:
Domestic		18	%		18	%		31	%
International		7	%		7	%		10	%
THG Common Stock		—			1	%		2	%
Total Equity Securities		25	%		26	%		43	%
Total Assets		100	%		100	%		100	%

Included in total plan assets of $547.8 million at December 31, 2010 were $541.7 million of invested assets carried at fair value and $6.1 million of cash and equivalents. Total plan assets at December 31, 2009 of $424.5 million included $421.0 million of invested assets carried at fair value and $3.5 million of cash and equivalents.

The following table presents for each hierarchy level the Plan’s investment assets that are measured at fair value at December 31, 2010 and 2009. (Please refer to Note 6 – Fair Value, for a description of the different levels in the Fair Value Hierarchy).

December 31, 2010
(in millions)
	Fair Value
	Total		Level 1		Level 2		Level 3
Description
Fixed Income Securities
Fixed Maturities	$	397.0	$	2.8	$	394.2	$	—
Equity Securities:
Domestic		96.7		0.4		96.3		—
International		41.4		0.2		41.2		—
THG Common Stock		6.6		6.6		—		—
Total Equity Securities		144.7		7.2		137.5		—
Total Investments at Fair Value	$	541.7	$	10.0	$	531.7	$	—

December 31, 2009
(in millions)
	Fair Value
	Total		Level 1		Level 2		Level 3
Description
Fixed Income Securities
Fixed Maturities	$	241.2	$	60.9	$	180.3	$	—
Equity Securities:
Domestic		129.9		0.9		129.0		—
International		43.6		0.4		43.2		—
THG Common Stock		6.3		6.3		—		—
Total Equity Securities		179.8		7.6		172.2		—
Total Investments at Fair Value	$	421.0	$	68.5	$	352.5	$	—

Fixed Income Securities

Securities classified as Level 1 at December 31, 2010 and 2009 include actively traded mutual funds that are publicly traded securities which are valued at quoted market prices. Securities classified as Level 1 in 2009 include a separate investment account, which is invested entirely in the Vanguard Total Bond Market Index Fund, a mutual fund that in turn invests in investment grade fixed maturities.

Securities classified as Level 2 at December 31, 2010 include the aforementioned separate investment account. Additionally, included in Level 2 at December 31, 2010 is a custom fund that invests in commingled pools and investment grade fixed income securities. In 2009, Level 2 securities reflected investments in commingled pools that primarily invest in investment grade fixed income securities. These investments are valued using independent pricing models that incorporate observable inputs related to the aggregated underlying investments.

During 2010, the separate investment account was reclassified from Level 1 in 2009 to Level 2 due to the application of new accounting guidance related to the use of daily pricing as a practical expedient for fair value of these investments.

Equity Securities

Level 1 securities primarily consist of 141,462 shares of THG common stock held by the plan. THG common stock is valued through quoted market prices. Securities also classified as Level 1 at December 31, 2010 and 2009 include actively traded mutual funds that primarily invest in equity securities which are valued at quoted market prices.

Securities classified as Level 2 include investments in commingled pools that primarily invest in publicly traded common stocks and international equities. These pools are valued using independent pricing models that incorporate observable inputs related to the aggregated underlying investments.

Obligations and Funded Status

The Company recognizes the current net underfunded status of its plans in its Consolidated Balance Sheet. Changes in the funded status of the plans are reflected as components of accumulated other comprehensive loss or income. The components of accumulated other comprehensive loss or income are reflected as either a net actuarial gain or loss, a net prior service cost or a net transition asset. The following table reflects the benefit obligations, fair value of plan assets and funded status of the plans at December 31, 2010 and 2009.

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DECEMBER 31	Qualified Pension Plans						Non-Qualified Pension Plans
(in millions)
	2010			2009			2010			2009
Accumulated benefit obligation	$	548.0		$	518.4		$	39.1		$	38.2
Change in benefit obligation:
Projected benefit obligation, beginning of year	$	518.4		$	494.1		$	38.2		$	37.9
Service cost – benefits earned during the year		0.1			0.1			—			—
Interest cost		30.4			31.5			2.2			2.4
Actuarial losses		32.0			22.9			2.1			1.2
Benefits paid		(32.9	)		(30.2	)		(3.4	)		(3.3	)
Projected benefit obligation, end of year		548.0			518.4			39.1			38.2
Change in plan assets:
Fair value of plan assets, beginning of year		424.5			338.5			—			—
Actual return on plan assets		56.2			71.0			—			—
Company contribution		100.0			45.2			3.4			3.3
Benefits paid		(32.9	)		(30.2	)		(3.4	)		(3.3	)
Fair value of plan assets, end of year		547.8			424.5			—			—
Funded status of the plans	$	(0.2	)	$	(93.9	)	$	(39.1	)	$	(38.2	)

Components of Net Periodic Pension Cost

The components of net periodic pension cost for pension and other postretirement benefit plans are as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Service cost – benefits earned during the year	$	0.1		$	0.1		$	0.1
Interest cost		32.6			33.9			32.8
Expected return on plan assets		(35.1	)		(25.4	)		(33.8	)
Recognized net actuarial loss		16.8			26.9			2.6
Amortization of transition asset		(1.6	)		(1.6	)		(1.7	)
Amortization of prior service cost		0.1			—			0.1
Net periodic pension cost	$	12.9		$	33.9		$	0.1

The following table reflects the amounts recognized in accumulated other comprehensive income (loss) relating to the Company’s defined benefit pension plans as of December 31, 2010 and 2009.

December 31	2010		2009
(In millions)
Net actuarial loss	$	134.4	$	138.1
Net prior service cost		0.1		0.2
Net transition asset		—		(1.6	)
	$	134.5	$	136.7

The following table reflects the estimated amount that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in 2011:

Estimated Amortization in 2011 Expense
(In millions)
Net actuarial gain	$	15.0
Net prior service cost		0.1
	$	15.1

The unrecognized net actuarial gains (losses) which exceed 10% of the greater of the projected benefit obligation or the fair value of plan assets are amortized as a component of net periodic pension cost in future years.

Contributions

On January 4, 2010, the Company made a discretionary contribution of $100.0 million to the qualified defined benefit pension plan. These funds were invested primarily in fixed income investments. With this contribution, and based upon the current estimate of liabilities and certain assumptions regarding investment return and other factors, the Company’s qualified defined benefit pension plan is essentially fully funded. In addition, the Company expects to contribute $3.3 million to its non-qualified pension plans to fund 2011 benefit payments. At this time, no additional discretionary contributions are expected to be made to the plans during 2011 and the Company does not expect that any funds will be returned from the plans to the Company during 2011.

Benefit Payments

The Company estimates that benefit payments over the next 10 years will be as follows:

FOR THE YEARS ENDED DECEMBER 31	2011		2012		2013		2014		2015		2016-2020
(In millions)
Qualified pension plans	$	37.1	$	38.1	$	38.3	$	39.5	$	40.2	$	204.2
Non-qualified pension plans	$	3.3	$	3.2	$	3.1	$	3.3	$	3.6	$	14.9

The benefit payments are based on the same assumptions used to measure the Company’s benefit obligations at the end of 2010. Benefit payments related to the qualified plans will be made from plan assets, whereas those payments related to the non-qualified plans will be provided for by the Company.

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Defined Contribution Plan

In addition to the defined benefit plans, THG provides a defined contribution 401(k) plan for its employees, whereby the Company matches employee elective 401(k) contributions, up to a maximum percentage of 6% in both 2010 and 2009 and 5% in 2008. The Company’s expense for this matching provision was $16.5 million, $14.2 million and $12.0 million for 2010, 2009 and 2008, respectively. In addition to this matching provision, the Company can elect to make an annual contribution to employees’ accounts. There was no additional contribution in 2010 and the Company’s cost for additional contributions in 2009 and 2008 was $2.0 million and $5.4 million, respectively.

10. OTHER POSTRETIREMENT BENEFIT PLANS

In addition to the Company’s pension plans, the Company also has postretirement medical and death benefits that it provides to certain full-time employees, former agents and retirees and their dependents. Benefits include hospital, major medical and a payment at death up to retirees’ final annual salary with certain limits. Dependent coverage is generally provided for up to two years after death of the retiree. The medical plans have varying co-payments and deductibles, depending on the plan.

Generally, employees who were actively employed on December 31, 1995 became eligible with at least 15 years of service after the age of 40. Effective January 1, 1996, the Company revised these benefits so as to establish limits on future benefit payments to beneficiaries of retired employees and to restrict eligibility to then current employees. In 2009, the Company changed the postretirement medical benefits, only as they relate to current employees who still qualify for participation in the plan under the above formula. For these participants, the plan now provides for only post age 65 benefits. The population of agents receiving postretirement benefits was frozen as of December 31, 2002, when the Company ceased its distribution of proprietary life and annuity products. These plans are unfunded.

The Company applies the guidance in ASC 715 and as such, has recognized the funded status of its postretirement benefit plans in its Consolidated Balance Sheet. Since these plans are unfunded, the amount recognized in the Consolidated Balance Sheet is equal to the accumulated benefit obligation of these plans. The components of accumulated other comprehensive income or loss are reflected as either a net actuarial gain or loss or a net prior service cost. There are no unrecognized transition assets or obligations associated with these plans.

Obligation and Funded Status

The following table reflects the funded status of these plans:

DECEMBER 31	2010			2009
(In millions)
Change in benefit obligation:
Accumulated postretirement benefit obligation, beginning of year	$	44.7		$	50.1
Service cost		0.1			0.2
Interest cost		2.7			2.8
Net actuarial losses		0.8			—
Plan amendments		—			(4.5	)
Benefits paid		(2.5	)		(3.9	)
Accumulated postretirement benefit obligation, end of year		45.8			44.7
Fair value of plan assets, end of year		—			—
Funded status of plans	$	(45.8	)	$	(44.7	)

A plan amendment in 2009 resulted in a benefit of $4.5 million. The amendment modified the level of benefits provided to active participants, resulting in decreased plan costs to the Company.

Benefit Payments

The Company estimates that benefit payments over the next 10 years will be as follows:

FOR THE YEARS ENDED DECEMBER 31
(In millions)
2011	$	4.8
2012		4.6
2013		4.4
2014		4.1
2015		3.9
2016-2020		16.5

The benefit payments are based on the same assumptions used to measure the Company’s benefit obligation at the end of 2010 and reflect benefits attributable to estimated future service.

Components of Net Periodic Postretirement (Benefit) Expense

The components of net periodic postretirement (benefit) expense were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Service cost	$	0.1		$	0.2		$	0.5
Interest cost		2.7			2.8			3.2
Recognized net actuarial loss		0.4			0.3			0.4
Amortization of prior service cost		(5.9	)		(5.8	)		(5.0	)
Net periodic postretirement benefit	$	(2.7	)	$	(2.5	)	$	(0.9	)

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The following table reflects the balances in Accumulated Other Comprehensive (Income) Loss relating to the Company’s postretirement benefit plans:

DECEMBER 31	2010			2009
(In millions)
Net actuarial loss	$	7.7		$	7.3
Net prior service cost		(16.5	)		(22.4	)
	$	(8.8	)	$	(15.1	)

The following table reflects the estimated amortization to be recognized in net periodic benefit cost in 2011:

Estimated Amortization in 2011 Expense (Benefit)
(In millions)
Net actuarial loss	$	0.3
Net prior service cost		(5.3	)
	$	(5.0	)

Assumptions

ASC 715 requires that employers measure the funded status of their plans as of the date of their year-end statement of financial position. As such, the Company has utilized a measurement date of December 31, 2010 and 2009, to determine its postretirement benefit obligations, consistent with the date of its Consolidated Balance Sheets. Weighted-average discount rate assumptions used to determine postretirement benefit obligations and periodic postretirement costs are as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009
Postretirement benefit obligations discount rate		5.50	%		6.00	%
Postretirement benefit cost discount rate		6.00	%		6.63	%

Assumed health care cost trend rates are as follows:

DECEMBER 31	2010			2009
Health care cost trend rate assumed for next year		8	%		9	%
Rate to which the cost trend is assumed to decline (ultimate trend rate)		5	%		5	%
Year the rate reaches the ultimate trend rate		2015			2015

A one-percentage point change in assumed health care cost trend rates in each year would have an immaterial effect on net periodic benefit cost during 2010 and accumulated postretirement benefit obligation at December 31, 2010.

11. STOCK-BASED COMPENSATION PLANS

On May 16, 2006, the shareholders approved the adoption of The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan (the “Plan”). Key employees, directors and certain consultants of the Company and its subsidiaries are eligible for awards pursuant to the Plan, which is administered by the Compensation Committee of the Board of Directors (the “Committee”) of the Company. Under the Plan, awards may be granted in the form of non-qualified or incentive stock options, stock appreciation rights, performance awards, restricted stock, unrestricted stock, stock units, or any other award that is convertible into or otherwise based on the Company’s stock, subject to certain limits. The Plan authorizes the issuance of 3,000,000 new shares that may be used for awards. In addition, shares of stock underlying any award granted and outstanding under the Company’s Amended Long-Term Stock Incentive Plan (the “1996 Plan”) as of the adoption date of the Plan that are forfeited or cancelled, or expire or terminate, after the adoption date without the issuance of stock become available for future grants under the Plan. As of December 31, 2010, there were 1,856,704 shares available for grants under the Plan. The Company utilizes shares of stock held in the treasury account for option exercises and other awards granted under both plans.

Compensation cost totaled $11.1 million for 2010 and $11.6 million for both 2009 and 2008. Related tax benefits were $3.9 million for 2010 and $4.1 million for both 2009 and 2008.

Stock Options

Under the Plan (or the 1996 Plan, as applicable), options may be granted to eligible employees, directors or consultants at an exercise price equal to the market price of the Company’s common stock on the date of grant. Option shares may be exercised subject to the terms prescribed by the Committee at the time of grant. Options granted in 2008 generally vest over three years with a 25% vesting rate in each of the first two years and a 50% vesting rate in the final year. Options granted in 2009 and 2010 generally vest over 4 years with a 50% vesting rate in the third year and a 50% vesting rate in the final year. Options must be exercised not later than ten years from the date of grant.

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Information on the Company’s stock option plans is summarized below.

For the years ended December 31	2010					2009					2008
(In whole shares and dollars)	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding, beginning of year		3,131,142		$	39.16		2,998,821		$	41.02		3,268,912		$	41.15
Granted		412,250			42.72		530,000			34.13		126,159			44.81
Exercised		(326,823	)		36.88		(87,469	)		35.68		(228,512	)		35.84
Forfeited or cancelled		(247,260	)		44.49		(126,110	)		45.81		(44,338	)		53.23
Expired		(125,400	)		44.91		(184,100	)		52.07		(123,400	)		53.32
Outstanding, end of year		2,843,909		$	39.22		3,131,142		$	39.16		2,998,821		$	41.02
Exercisable, end of year		2,037,159		$	39.74		2,398,725		$	39.39		2,550,797		$	39.96

Cash received for options exercised for the years ended December 31, 2010, 2009 and 2008 was $12.1 million, $3.1 million and $8.2 million, respectively. The intrinsic value of options exercised for the years ended December 31, 2010, 2009 and 2008 was $2.6 million, $0.6 million and $2.5 million, respectively.

The excess tax expense realized from options exercised for both the years ended December 31, 2010 and 2009 was $0.1 million. There was no excess tax benefit or expense realized from options exercised for the year ended December 31, 2008. The aggregate intrinsic value at December 31, 2010 for shares outstanding and shares exercisable was $24.4 million and $17.4 million, respectively. At December 31, 2010, the weighted average remaining contractual life for shares outstanding and shares exercisable was 4.8 years and 3.2 years, respectively. Additional information about employee options outstanding and exercisable at December 31, 2010 is included in the following table:

	Options Outstanding						Options Currently Exercisable
Range of Exercise Prices	Number		Weighted Average Remaining Contractual Lives		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
$14.94 to $28.88		359,308		2.58	$	22.32		359,308	$	22.32
$30.29 to $35.56		454,800		8.05	$	34.12		10,800	$	34.11
$35.86 to $38.16		759,250		3.59	$	36.52		759,250	$	36.52
$41.05 to $44.05		526,557		6.01	$	42.86		211,307	$	43.92
$44.62 to $48.46		487,744		6.19	$	47.46		440,244	$	47.59
$57.00		256,250		0.13	$	57.00		256,250	$	57.00

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. For all options granted through December 31, 2010, the exercise price equaled the market price on the grant date. Compensation cost related to options is based upon the grant date fair value and expensed on a straight-line basis over the service period for each separately vesting portion of the option as if the option was, in substance, multiple awards.

The weighted average grant date fair value of options granted during the years ended December 31, 2010, 2009 and 2008 was $11.48, $9.51 and $10.72, respectively.

The following significant assumptions were used to determine the fair value for options granted in the years indicated.

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	2010	2009	2008
Dividend yield	1.68% to 2.37%	1.31% to 1.48%	0.88% to 0.96%
Expected volatility	32.45% to 39.18%	32.40% to 34.28%	22.43% to 30.25%
Weighted average expected volatility	33.50%	32.72%	26.12%
Risk-free interest rate	0.87% to 2.70%	1.54% to 2.24%	2.23% to 3.97%
Expected term, in years	2.5 to 5.5	4.5 to 5.5	2.5 to 6

The expected dividend yield is based on the Company’s dividend payout rate(s), in the year noted. Expected volatility is based on the Company’s historical daily stock price volatility. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted represents the period of time that options are expected to be outstanding and is derived using historical exercise, forfeit and cancellation behavior, along with certain other factors expected to differ from historical data.

The fair value of shares that vested during the years ended December 31, 2010 and 2009 was lower than the value of these shares on their grant date. The vesting date fair value of shares that vested during the year ended December 31, 2008 was $3.7 million. As of December 31, 2010, the Company had unrecognized compensation expense of $5.4 million related to unvested stock options that is expected to be recognized over a weighted average period of 2.7 years.

Restricted Stock and Restricted Stock Units

Stock grants may be awarded to eligible employees at a price established by the Committee (which may be zero). Under the Plan, the Company may award shares of restricted stock, restricted stock units, as well as shares of unrestricted stock. Restricted stock grants may vest based upon performance criteria or continued employment and be in the form of shares or units. Vesting periods are established by the Committee.

In 2010 and 2009, the Company granted performance-based restricted share units to certain employees. These share units vest after the achievement of certain corporate goals at a rate of 50% after three years and the remaining 50% after four years of continued employment. The Company also granted restricted stock units to eligible employees that generally vest at a rate of 50% after three years and the remaining 50% after 4 years of continued employment. In 2008, the Company granted performance-based restricted stock units to certain employees that vested after the achievement of certain corporate goals and after three years of continued employment. The Company also granted restricted stock units to eligible employees that generally vested after three years of continued employment. The following table summarizes information about employee nonvested stock, restricted stock units and performance-based restricted share units.

For the years ended December 31	2010					2009					2008
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Restricted stock and restricted stock units:
Outstanding, beginning of year		700,904		$	41.12		470,905		$	45.41		179,416		$	46.79
Granted		367,197			42.77		304,680			34.74		334,555			44.50
Vested		(118,730	)		47.92		(13,169	)		45.21		(17,588	)		38.27
Forfeited		(111,242	)		40.73		(61,512	)		42.10		(25,478	)		46.56
Outstanding, end of year		838,129		$	40.93		700,904		$	41.12		470,905		$	45.41
Performance-based restricted stock units:
Outstanding, beginning of year (1)		145,635		$	42.79		164,442		$	46.10		402,929		$	44.16
Granted (1)		41,250			42.15		47,375			34.19		127,624			42.40
Vested		(31,558	)		48.46		(63,432	)		43.65		(363,313	)		44.15
Forfeited (2)		(53,647	)		44.97		(2,750	)		34.19		(2,798	)		46.04
Outstanding, end of year (1)		101,680		$	39.62		145,635		$	42.79		164,442		$	46.10

(1) Performance based restricted stock units are based upon the achievement of the performance metric at 100%. These units have the potential to range from 0% to 150% of the shares disclosed, which varies based on grant year and individual participation level. Increases to the 100% target level are reflected as granted in the period in which performance-based stock unit goals are achieved. Decreases to the 100% target level are reflected as forfeited. In 2008, 26,004 and 43,640 performance-based stock units were included as granted due to completion levels in excess of 100% for units originally granted in 2006 and 2005, respectively. The weighted average grant date fair value for these awards was $46.28 and $36.34 for 2006 and 2005 grants, respectively. There were 57,980 shares awarded as new grants in 2008, which have a weighted average grant date fair value of $45.21, respectively.

(2) In 2010, 11,472 performance-based stock units were included as forfeited due to completion levels less than 100% for units originally granted in 2007. The weighted average grant date fair value for these awards was $48.46. Additionally, in 2010, 25,055 performance- based stock units were included as forfeited due to estimated completion levels of less than 100% for units originally granted in 2008. The weighted average grant date fair value for this award was $45.21.

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The intrinsic value, which is equal to the fair value for restricted stock and for restricted stock units that vested during the year ended December 31, 2010 was $5.0 million and the intrinsic value of performance-based restricted stock units that vested during 2010 was $1.3 million. The intrinsic value of restricted stock units and performance-based restricted units that vested during the year ended December 31, 2009 were $0.5 million and $2.5 million, respectively. The intrinsic value of restricted stock units and performance-based restricted units that vested during the year ended December 31, 2008 were $0.8 million and $15.9 million, respectively.

At December 31, 2010, the aggregate intrinsic value of restricted stock and restricted stock units was $39.2 million and the weighted average remaining contractual life was 2.0 years. The aggregate intrinsic value of performance based restricted stock units was $4.8 million and the weighted average remaining contractual life was 2.0 years. As of December 31, 2010, there was $19.0 million of total unrecognized compensation cost related to unvested restricted stock units and performance-based restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.3 years. Compensation cost associated with restricted stock, restricted stock units and performance-based restricted stock units is generally calculated based upon grant date fair value, which is determined using current market prices.

12. EARNINGS PER SHARE

The following table provides share information used in the calculation of the Company’s basic and diluted earnings per share:

DECEMBER 31	2010			2009			2008
(In millions, except per share data)
Basic shares used in the calculation of earnings per share		45.6			50.6			51.3
Dilutive effect of securities:
Employee stock options		0.3			0.2			0.3
Non-vested stock grants		0.4			0.3			0.1
Diluted shares used in the calculation of earnings per share		46.3			51.1			51.7
Per share effect of dilutive securities on income from continuing operations	$	(0.05	)	$	(0.03	)	$	(0.02	)
Per share effect of dilutive securities on net income	$	(0.05	)	$	(0.04	)	$	—

Diluted earnings per share during 2010, 2009 and 2008 excludes 1.4 million, 2.1 million and 1.7 million, respectively, of common shares issuable under the Company’s stock compensation plans, because their effect would be antidilutive.

13. DIVIDEND RESTRICTIONS

The individual law of all states, including New Hampshire, Michigan and Massachusetts, restrict the payment of dividends to stockholders by insurers. These laws affect the dividend paying ability of Hanover Insurance and Citizens, and prior to its sale in January 2009, FAFLIC.

Pursuant to New Hampshire’s statute, the maximum dividends and other distributions that an insurer may pay in any twelve month period, without prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of such insurer’s statutory policyholder surplus as of the preceding December 31. Hanover Insurance declared dividends to its parent totaling $75.0 million, $153.7 million, and $166.0 million in 2010, 2009 and 2008, respectively. Hanover Insurance can pay additional dividends to its parent without prior approval of $98.7 million until December 2011. If no dividends are declared prior to December 2011, the maximum dividend payable without prior approval would increase at that time to $174.3 million.

Pursuant to Michigan’s statute, the maximum dividends and other distributions that an insurer may pay in any twelve month period, without prior approval of the Michigan Insurance Commissioner, is limited to the greater of 10% of policyholders’ surplus as of December 31 of the immediately preceding year or the statutory net income less net realized gains, for the immediately preceding calendar year. Citizens declared dividends to its parent, Hanover Insurance, totaling $70.0 million, $72.0 million and $116.0 million in 2010, 2009 and 2008, respectively. Citizens cannot pay a further dividend to its parent without prior approval until July 2011, at which time the maximum dividend payable without prior approval would be $69.8 million.

In connection with the sale of FAFLIC to Commonwealth Annuity, the Massachusetts Division of Insurance approved a pre-close net dividend from FAFLIC consisting of designated assets with a statutory book value of $130.0 million. This dividend was paid January 2, 2009. Prior to the sale of FAFLIC to Commonwealth Annuity, FAFLIC had no statutory unassigned funds, and therefore could not pay dividends without prior approval from the Massachusetts Commissioner of Insurance. In January 2008, with permission from the Massachusetts Commissioner of Insurance, FAFLIC declared a dividend of $17.0 million to its parent, THG.

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14. SEGMENT INFORMATION

The Company’s primary business operations include insurance products and services in three property and casualty operating segments. These segments are Commercial Lines, Personal Lines, and Other Property and Casualty. Commercial Lines includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial coverages, such as specialty program business, inland marine, bonds, professional liability and management liability, while Personal Lines includes personal automobile, homeowners and other personal coverages. The Other Property and Casualty segment consists of: Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; as well as voluntary pools business which is in run-off. Additionally, prior to the sale of FAFLIC on January 2, 2009, the operations included the results of this run-off life insurance and annuity business as a separate segment. This business is now reflected as discontinued operations. Certain ongoing expenses were also reclassified from this former life segment to the Property and Casualty business. The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company reports interest expense related to its debt separately from the earnings of its operating segments. The Company’s debt consists of senior debentures, junior subordinated debentures, advances under the Company’s collateralized borrowing program with the FHLBB, capital securities and surplus notes.

Management evaluates the results of the aforementioned segments on a pre-tax basis. Segment income excludes certain items which are included in net income, such as federal income taxes and net realized investment gains and losses, because fluctuations in these gains and losses are determined by interest rates, financial markets and the timing of sales. Also, segment income excludes net gains and losses on disposals of businesses, discontinued operations, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from segment income may be significant components in understanding and assessing the Company’s financial performance, management believes that the presentation of segment income enhances an investor’s understanding of the Company’s results of operations by highlighting net income attributable to the core operations of the business. However, segment income should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles.

Summarized below is financial information with respect to business segments:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Segment revenues:
Property and Casualty:
Commercial Lines	$	1,522.3		$	1,228.8		$	1,154.8
Personal Lines		1,583.8			1,585.3			1,607.4
Other Property and Casualty		21.0			22.6			21.6
Total Property and Casualty		3,127.1			2,836.7			2,783.8
Intersegment revenues		(4.6	)		(4.0	)		(5.6	)
Total segment revenues		3,122.5			2,832.7			2,778.2
Adjustments to segment revenues:
Net realized investment gains (losses)		29.7			1.4			(97.8	)
Total revenues	$	3,152.2		$	2,834.1		$	2,680.4
Segment income before federal income taxes:
Property and Casualty:
Commercial Lines:
GAAP underwriting (loss) income	$	(20.6	)	$	60.9		$	39.8
Net investment income		129.9			125.6			124.4
Other		1.9			3.2			5.5
Commercial Lines segment income		111.2			189.7			169.7
Personal Lines:
GAAP underwriting income (loss)		1.6			(43.6	)		(7.7	)
Net investment income		102.9			109.6			118.9
Other		8.5			10.4			12.3
Personal Lines segment income		113.0			76.4			123.5
Other Property and Casualty:
GAAP underwriting income		0.8			11.7			1.2
Net investment income		14.4			16.5			14.7
Other net expenses		(11.7	)		(24.2	)		(6.9	)
Other Property and Casualty segment income		3.5			4.0			9.0
Total Property and Casualty		227.7			270.1			302.2
Interest on debt		(44.3	)		(35.1	)		(39.9	)
Segment income before federal income taxes		183.4			235.0			262.3
Adjustments to segment income:
Net realized investment gains (losses)		29.7			1.4			(97.8	)
(Loss) gain on retirement of debt		(2.0	)		34.5			—
Other items		—			—			(0.1	)
Income from continuing operations before federal income taxes	$	211.1		$	270.9		$	164.4

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DECEMBER 31	2010			2009
(In millions)	Identifiable Assets
Property and Casualty (1)	$	8,449.1		$	7,922.6
Assets of discontinued operations (2)		133.6			130.6
Intersegment eliminations		(12.8	)		(10.5	)
Total	$	8,569.9		$	8,042.7

⁽¹⁾  The Company reviews assets based on the total Property and Casualty Group and does not allocate between the Commercial Lines, Personal Lines and Other Property and Casualty segments.

⁽²⁾  Includes assets related to the Company’s discontinued accident and health insurance business.

15. LEASE COMMITMENTS

Rental expenses for operating leases amounted to $17.2 million, $15.4 million and $16.9 million in 2010, 2009 and 2008, respectively. These expenses relate primarily to building leases of the Company. At December 31, 2010, future minimum rental payments under non-cancelable operating leases were approximately $42.9 million, payable as follows: 2011 - $14.1 million; 2012 - $10.8 million; 2013 - $8.8 million; 2014 - $5.8 million and $3.4 million thereafter. It is expected that in the normal course of business, leases that expire may be renewed or replaced by leases on other property and equipment.

16. REINSURANCE

In the normal course of business, the Company seeks to reduce the losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance transactions are accounted for in accordance with the provisions of ASC 944.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company determines the appropriate amount of reinsurance based on evaluations of the risks accepted and analyses prepared by consultants and on market conditions (including the availability and pricing of reinsurance). The Company also believes that the terms of its reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. The Company believes that its reinsurers are financially sound. This belief is based upon an ongoing review of its reinsurers’ financial statements, reported financial strength ratings from rating agencies, reputations in the marketplace, and the analysis and guidance of THG’s reinsurance advisors.

The Company is subject to concentration of risk with respect to reinsurance ceded to various residual market mechanisms. As a condition to conduct certain business in various states, the Company is required to participate in residual market mechanisms and pooling arrangements which provide insurance coverages to individuals or other entities that are otherwise unable to purchase such coverage voluntarily. These market mechanisms and pooling arrangements include, among others, the Michigan Catastrophic Claims Association (“MCCA”). Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders. The Company ceded to the MCCA premiums earned and losses and LAE of $64.7 million and $135.6 million in 2010, $55.8 million and $97.7 million in 2009 and $60.9 million and $129.8 million in 2008, respectively. MCCA, which represented 60% of the total reinsurance receivable balance at December 31, 2010, is the Company’s only reinsurer representing at least 10% of its reinsurance assets.

Reinsurance recoverables related to MCCA were $752.5 million and $672.4 million at December 31, 2010 and 2009, respectively. Because the MCCA is supported by assessments permitted by statute, and there have been no significant uncollectible balances from MCCA identified during the three years ending December 31, 2010, the Company believes that it has no significant exposure to uncollectible reinsurance balances from this entity.

Coincident with the sale of FAFLIC to Commonwealth Annuity on January 2, 2009. Hanover and FAFLIC entered into a reinsurance contract whereby Hanover directly assumed a portion, and reinsured the remainder, of FAFLIC’s discontinued accident and health business. Additionally, during 2008 FAFLIC had ceded $106.9 million of its variable universal life insurance and annuity business pursuant to a reinsurance agreement with Commonwealth Annuity (See Note 2 – Discontinued Operations on pages 92 and 94 of this Form 10-K).

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The effects of reinsurance were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Property and casualty premiums written:
Direct	$	3,087.9		$	2,883.8		$	2,715.0
Assumed (1)		270.6			8.6			22.6
Ceded		(310.5	)		(283.7	)		(219.6	)
Net premiums written	$	3,048.0		$	2,608.7		$	2,518.0
Property and casualty premiums earned:
Direct	$	2,970.6		$	2,824.3		$	2,700.0
Assumed (1)		174.8			13.8			26.8
Ceded		(304.4	)		(291.7	)		(241.9	)
Net premiums earned	$	2,841.0		$	2,546.4		$	2,484.9
Property and casualty losses and LAE:
Direct	$	2,001.8		$	1,909.1		$	1,790.0
Assumed (1)(2)		96.9			(11.7	)		19.2
Ceded		(242.4	)		(258.2	)		(183.0	)
Net losses and LAE	$	1,856.3		$	1,639.2		$	1,626.2

⁽¹⁾  Assumed reinsurance activity in 2010 primarily related to the OneBeacon renewal rights transaction (See Note 3 – Other Significant Transactions).

⁽²⁾ Assumed reinsurance activity in 2009 primarily related to favorable reserve development on the Excess and Casualty Reinsurance Association (“ECRA”) and Massachusetts Commonwealth Automobile Reinsures (“CAR”) pools.

17. DEFERRED POLICY ACQUISITION COSTS

Changes to the deferred policy acquisition asset are as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Balance at beginning of year	$	286.3		$	264.8		$	246.8
Acquisition expenses deferred		728.0			602.8			574.2
Amortized to expense		(669.0	)		(581.3	)		(556.2	)
Balance at end of year	$	345.3		$	286.3		$	264.8

18. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in results of operations as adjustments to losses and LAE. Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and loss event occurred. These types of subsequent adjustments are described as “prior year reserve development”. Such development can be either favorable or unfavorable to the Company’s financial results and may vary by line of business.

The table below provides a reconciliation of the beginning and ending reserve for the Company’s property and casualty unpaid losses and LAE as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Reserve for losses and LAE, beginning of year	$	3,152.1		$	3,201.3		$	3,165.8
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of current year (1)		1,966.4			1,793.5			1,784.6
Decrease in provision for insured events of prior years		(111.1	)		(155.3	)		(159.0	)
Total incurred losses and LAE		1,855.3			1,638.2			1,625.6
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year		1,077.8			970.9			999.9
Losses and LAE attributable to insured events of prior years		738.6			788.5			712.4
Total payments		1,816.4			1,759.4			1,712.3
Change in reinsurance recoverable on unpaid losses		48.3			72.0			(11.9	)
Purchase of Verlan Fire Insurance Company		—			—			4.2
Purchase of AIX Holdings, Inc.		—			—			129.9
Purchase of Campania Holding Company, Inc.		36.5			—			—
Reserve for losses and LAE, end of year	$	3,275.8		$	3,152.1		$	3,201.3

(1) Includes unfavorable reserve development related to catastrophe losses of $4.1 million, $7.0 million and $0.7 million in 2010, 2009 and 2008, respectively.

As part of an ongoing process, the reserves have been re-estimated for all prior accident years and were decreased by $111.1 million, $155.3 million and $159.0 million in 2010, 2009 and 2008, respectively. Prior year loss reserve development in 2010, 2009 and 2008 was favorable by $88.5 million, $133.1 million and $154.4 million, respectively. Prior year LAE reserve development was favorable by $22.6 million, $22.2 million and $4.6 million in 2010, 2009 and 2008, respectively.

The favorable loss reserve development during the year ended December 31, 2010 is primarily the result of lower than expected severity in the personal automobile line across all coverages and lower frequency in the personal automobile line in property coverages, primarily related to

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the 2009 accident year, and lower than expected frequency in the workers’ compensation line, primarily related to the 2008 and 2009 accident years. In addition, lower than expected severity in the commercial multiple peril line in liability coverages, primarily related to the 2007 through 2009 accident years and in the commercial umbrella line related to the 2007 through 2009 accident years contributed to the favorable development, partially offset by unfavorable development in our bond line, primarily related to the 2009 accident year.

The favorable loss reserve development during the year ended December 31, 2009 is primarily the result of lower than expected severity of bodily injury in the personal automobile line, primarily in the 2005 through 2008 accident years, lower than expected severity in the workers’ compensation line, primarily in the 2000 through 2008 accident years and lower than expected severity in the commercial multiple peril line, primarily in the 2005 through 2007 accident years. In addition, lower than expected severity in the bond line, lower projected losses in our run-off voluntary pools and lower projected exposures to asbestos and environmental liability for our direct written business contributed to the favorable development. Partially offsetting the favorable development was unfavorable non-catastrophe weather-related property loss development, primarily related to our homeowners, commercial property and personal automobile physical damage lines, which developed unfavorably by $6.8 million, $6.7 million, and $1.6 million, respectively.

The favorable loss reserve development during the year ended December 31, 2008 is primarily the result of lower than expected severity of bodily injury in the personal automobile line, primarily in the 2003 through 2007 accident years, and lower than expected severity of liability claims in the commercial multiple peril line for the 2002 through 2007 accident years. In addition, lower than expected severity in the workers’ compensation line, primarily in the 2003 through 2007 accident years, contributed to the favorable development.

During the years ended December 31, 2010, 2009 and 2008, estimated LAE reserves for claims occurring in prior years developed favorably by $22.6 million, $22.2 and $4.6 million, respectively. The 2010 amount includes $9.8 million of favorable development resulting from a change in the cost factors used for establishing unallocated loss adjustment expense reserves. The favorable LAE development in 2010 is also attributable to improvements in ultimate loss activity on prior accident years, primarily in the commercial multiple peril, personal automobile, and workers’ compensation lines. In 2009, the Company changed its unallocated loss adjustment expense reserving methodology from that based on cash payments to that based on unit costs, which resulted in a $20.0 million benefit, of which $16.0 million related to prior years. The Company believes that the methodology based on unit costs is more representative of its future costs of settling existing claims. The favorable LAE development in 2008 is primarily attributable to improvements in ultimate loss activity on prior accident years, primarily in the commercial multiple peril line.

The Company may be required to defend claims related to policies that include environmental damage and toxic tort liability. The table below summarizes direct business asbestos and environmental reserves (net of reinsurance and excluding pools).

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Reserves for losses and LAE, beginning of year	$	11.3		$	18.5		$	19.4
Reductions in losses and LAE		(0.4	)		(7.1	)		(2.3	)
(Paid) reimbursed losses and LAE		(0.8	)		(0.1	)		1.4
Reserves for losses and LAE, end of year	$	10.1		$	11.3		$	18.5

Ending loss and LAE reserves for all direct business written by the Company’s property and casualty companies related to asbestos and environmental damage liability, included in the reserve for losses and LAE, were $10.1 million, $11.3 million and $18.5 million, net of reinsurance of $19.9 million for both 2010 and 2009, and $13.9 million in 2008. During 2010, the Company reduced its asbestos and environmental reserves by $1.2 million due to several small settlements. In recent years, average asbestos and environmental payments have declined modestly. As a result of the declining payments, the Company’s actuarial indicated point estimate of asbestos and environmental liability reserves was lowered resulting in favorable reserve development of $7.1 million during the year ended December 31, 2009. During 2008, our asbestos and environmental reserves decreased by $0.9 million, primarily due to a favorable cash recovery from a reinsurer on a prior year environmental claim. As a result of our historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos and environmental damage liability loss experience has remained minimal in relation to our total loss and LAE incurred experience.

In addition, and not included in the numbers above, the Company has established loss and LAE reserves for assumed reinsurance pool business with asbestos and environmental damage liability of $33.9 million, $45.6 million and $58.4 million at December 31, 2010, 2009 and 2008, respectively. These reserves relate to pools in which the Company has terminated its participation; however, the

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Company continues to be subject to claims related to years in which we were a participant. Results of operations from these pools are included in the Company’s Other Property and Casualty segment. The $11.7 million decrease in these reserves during 2010 was primarily due to a large claim settlement within these pools. A significant part of our pool reserves relates to the Company’s participation in the ECRA voluntary pool from 1950 to 1982. In 1982, the pool was dissolved and since that time, the business has been in runoff. The Company’s percentage of the total pool liabilities varied from 1% to 6% during these years. The Company’s participation in this pool has resulted in average paid losses of approximately $2 million annually over the past ten years. During the year ended December 31, 2009, the Company’s ECRA pool reserves were lowered by $6.3 million as the result of an actuarial study completed by the ECRA pool manager. Management reviewed the ECRA actuarial study, concurred that the study was reasonable, and adopted its actuarial point estimate. In addition, during the year, management recorded favorable development of $4.3 million on a separate large claim settlement within these pools. Because of the inherent uncertainty regarding the types of claims in these pools, the Company cannot provide assurance that our reserves will be sufficient.

The Company estimates its ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, assumed reinsurance and pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. The Company believes that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. The asbestos, environmental and toxic tort liability could be revised in the near term if the estimates used in determining the liability are revised, and any such revisions could have a material adverse effect on our results of operations for a particular quarterly or annual period or on our financial position.

On January 2, 2009, the Company sold its remaining life insurance subsidiary, FAFLIC, to Commonwealth Annuity, a subsidiary of Goldman Sachs. Coincident with the sale transaction, Hanover Insurance and FAFLIC entered into a reinsurance contract whereby Hanover Insurance assumed FAFLIC’s discontinued accident and health insurance business. In addition to the property and casualty reserves, the Company also has liabilities for future policy benefits, other policy liabilities and outstanding claims, losses and LAE as well as the related reinsurance recoverables, all of which relates to the Company’s assumed accident and health business in 2009, as well as for a majority of these liabilities in 2008. These reserves are reflected in the balance sheet as liabilities and assets of discontinued operations. The cumulative liability, excluding the effect of reinsurance that consists of the Company’s exited individual health business and its discontinued accident and health business, was $129.7 million and $130.5 million at December 31, 2010 and 2009, respectively. Reinsurance recoverables related to this business were $6.8 million and $6.6 million in 2010 and 2009, respectively.

19. COMMITMENTS AND CONTINGENCIES

LITIGATION

Durand Litigation

On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named plaintiff, a former employee who received a lump sum distribution from the Company’s Cash Balance Plan (the “Plan”) at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, the Company understated the accrued benefit in the calculation. The Company filed a Motion to Dismiss on the basis that the Plaintiff failed to exhaust administrative remedies, which motion was granted without prejudice in a decision dated November 7, 2007. This decision was reversed by an order dated March 24, 2009 issued by the United States Court of Appeals for the Sixth Circuit, and the case was remanded to the district court.

The Plaintiff filed an Amended Complaint on December 11, 2009. In response, the Company filed a Motion to Dismiss on January 30, 2010. In addition to the pending calculation of the lump sum distribution claim, the Amended Complaint includes: (a) a claim that the Plan failed to calculate participants’ account balances properly because interest credits were based solely upon the performance of each participant’s selection from among various hypothetical investment options (as the Plan provided) rather than crediting the greater of that performance or the 30 year Treasury rate; (b) a claim that the 2004 Plan amendment, which changed interest crediting for all participants from the performance of participant’s investment selections to the 30 year Treasury rate, reduced benefits in violation of the ERISA for participants who had account

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balances as of the amendment date by not continuing to provide them performance-based interest crediting on those balances; and (c) claims for breach of fiduciary duty and ERISA notice requirements for not properly informing participants of the various interest crediting and lump sum distribution matters of which Plaintiffs complain. In the Company’s judgment, the outcome is not expected to be material to its financial position, although it could have a material effect on the results of operations for a particular quarter or annual period and on the funding of the Plan.

Hurricane Katrina Litigation

In August 2007, the State of Louisiana filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including the Company, and asserts a right to benefit payments from insurers on behalf of current and former Louisiana citizens who have applied for and received or will receive funds through Louisiana’s “Road Home” program. The case was thereafter removed to the Federal District Court for the Eastern District of Louisiana.

On March 5, 2009, the court issued an Order granting in part and denying in part a Motion to Dismiss filed by Defendants. The court dismissed all claims for bad faith and breach of fiduciary duty and all claims for flood damages under policies with flood exclusions or asserted under Louisiana’s Valued Policy Law, but rejected the insurers’ arguments that the purported assignments from individual claimants to the state were barred by anti-assignment provisions in the insurers’ policies. On April 30, 2009, Defendants filed a Petition for Permission to Appeal to the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”), which was granted. On July 28, 2010, the Fifth Circuit certified the anti-assignment issue to the Louisiana Supreme Court. Oral arguments have been scheduled to be heard by the Louisiana Supreme Court on March 14, 2011.

The Company has established its total loss and LAE reserves on the assumption that it will not have any liability under the “Road Home” or similar litigation, and that it will otherwise prevail in litigation as the cause of certain large losses and not incur extracontractual or punitive damages.

Certain Regulatory and Industry Developments

Unfavorable economic conditions may contribute to an increase in the number of insurance companies that are under regulatory supervision. This may result in an increase in mandatory assessments by state guaranty funds, or voluntary payments by solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. The Company is not able to reasonably estimate the potential impact of any such future assessments or voluntary payments.

Over the past several years, state-sponsored insurers, reinsurers and involuntary pools have increased significantly, particularly in those states which have Atlantic or Gulf Coast exposures. As a result, the potential assessment exposure of insurers doing business in such states and the attendant collection risks have increased, particularly, in the Company’s case, in the states of Massachusetts, Louisiana and Florida. Such actions and related regulatory restrictions on rate increases, underwriting and the ability to non-renew business may limit the Company’s ability to reduce the potential exposure to hurricane related losses. At this time, the Company is unable to predict the likelihood or impact of any such potential assessments or other actions.

On August 1, 2010, the Michigan Supreme Court issued a decision in a case captioned McCormick v. Carrier, et. al, overturning the so-called Kreiner decision, and in so doing, the Company believes that the Court significantly expanded the circumstances under which claimants can sue for non-economic losses resulting from automobile accidents in Michigan. Although the full implications and application of the McCormick decision are not yet understood and may evolve in the future, the Company believes that the revised standard will adversely affect both past claims which are not finally resolved, as well as future claims. Although the Company’s reserves reflect the Company’s best estimate of the impact of this decision, in light of evolving law and the uncertain application of this new standard, the Company cannot be certain as to the adequacy of these reserves or of the Company’s ability to raise rates for liability coverage of Michigan commercial and personal automobile polices to reflect the additional losses it expects to incur.

From time to time, proposals have been made to establish a federal based insurance regulatory system and to allow insurers to elect either federal or state-based regulation (“optional federal chartering”). In light of the economic environment and the focus on increased regulatory

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controls, particularly with regard to financial institutions, there has been renewed interest in such proposals.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Financial Reform Act”) was enacted. The Financial Reform Act includes a provision to establish a Federal Insurance Office, with the primary purpose of collecting information to better understand insurance issues at the federal level and to monitor the extent to which traditional underserved communities and consumers, minorities and low and moderate income persons have access to affordable insurance products. The Financial Reform Act also contains provisions affecting financial institutions, credit rating agencies and other commercial and consumer businesses.

Other Matters

The Company has been named a defendant in various other legal proceedings arising in the normal course of business. In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry or investigation, and its ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. In the Company’s opinion, based on the advice of legal counsel, the ultimate resolutions of such proceedings will not have a material effect on its financial position, although they could have a material effect on the results of operations for a particular quarter or annual period.

Residual Markets

The Company is required to participate in residual markets in various states, which generally pertain to high risk insureds, disrupted markets or lines of business or geographic areas where rates are regarded as excessive. The results of the residual markets are not subject to the predictability associated with the Company’s own managed business, and are significant to the workers’ compensation line of business, the homeowners line of business and both the commercial and personal automobile lines of business.

20. STATUTORY FINANCIAL INFORMATION

The Company’s insurance subsidiaries are required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis), as codified by the National Association of Insurance Commissioners. Statutory surplus differs from shareholders’ equity reported in accordance with generally accepted accounting principles primarily because policy acquisition costs are expensed when incurred, the recognition of deferred tax assets is based on different recoverability assumptions and postretirement benefit costs are based on different assumptions and reflect a different method of adoption. Additionally, prior to the sale of FAFLIC on January 2, 2009, statutory surplus for FAFLIC differed as a result of life insurance reserves being based on different assumptions and statutory accounting principles requiring asset valuation and interest maintenance reserves for life insurance companies.

The following table provides statutory net income and surplus as of the periods indicated:

	2010		2009		2008
(In millions)
Statutory Net Income
Property and Casualty Companies - Combined	$	101.7	$	187.4	$	142.5
First Allmerica Financial Life Insurance Company		—		—		33.1
Statutory Surplus
Property and Casualty Companies - Combined	$	1,747.3	$	1,741.6	$	1,600.7
First Allmerica Financial Life Insurance Company		—		—		113.7

21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The quarterly results of operations for 2010 and 2009 are summarized below.

FOR THE THREE MONTHS ENDED
(In millions, except per share data)
2010	March 31		June 30		Sept. 30		Dec. 31
Total revenues	$	746.6	$	768.3	$	804.0	$	833.3
Income from continuing operations	$	42.2	$	2.2	$	51.4	$	57.4
Net income	$	41.8	$	2.3	$	52.3	$	58.4
Income from continuing operations per share:
Basic	$	0.89	$	0.05	$	1.14	$	1.27
Diluted	$	0.88	$	0.05	$	1.12	$	1.25
Net income per share:
Basic	$	0.88	$	0.05	$	1.16	$	1.29
Diluted	$	0.87	$	0.05	$	1.15	$	1.27
Dividends declared per share	$	0.25	$	0.25	$	0.25	$	0.25

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FOR THE THREE MONTHS ENDED
(In millions, except per share data)
2009	March 31		June 30		Sept. 30		Dec. 31
Total revenues	$	698.9	$	696.4	$	708.5	$	730.3
Income from continuing operations (1)	$	20.2	$	63.1	$	48.6	$	55.9
Net income	$	25.8	$	64.4	$	49.7	$	57.3
Income from continuing operations per share: (1)
Basic	$	0.40	$	1.23	$	0.96	$	1.13
Diluted	$	0.39	$	1.23	$	0.95	$	1.11
Net income per share:
Basic	$	0.51	$	1.26	$	0.98	$	1.16
Diluted	$	0.50	$	1.25	$	0.97	$	1.14
Dividends declared per share	$	—	$	—	$	—	$	0.75

(1) On January 2, 2009, the Company sold substantially all of the remaining business of its former Life Companies Segment. The results of operations related to this business are reflected as Discontinued Operations for all time periods presented. See also Note 2 – “Discontinued Operations of FAFLIC Business” on pages 92 to 94.

Note:  Due to the use of weighted average shares outstanding when calculating earnings per common share, the sum of the quarterly per common share data may not equal the per common share data for the year.

22. SUBSEQUENT EVENTS

There were no subsequent events requiring adjustment to the financial statements.

On February 15, 2011, the Company repurchased an additional $48.0 million of Junior Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million on the repurchase. See also Note 7 - “Debt”.

ITEM 9–CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A–CONTROLS AND PROCEDURES

Disclosure Controls and Procedures Evaluation

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Based on our controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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In conducting our evaluation of the effectiveness of internal control over financial reporting, we excluded the acquisition of Campania Holding Company, Inc., which was completed on March 31, 2010. The total assets constitute approximately $35 million, or less than 1% of our consolidated assets at December 31, 2010, and total revenues of $10.8 million, or less than 1% of consolidated revenues for the period from the March 31, 2010 closing date until December 31, 2010. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.

The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

CHANGES IN INTERNAL CONTROL

Our management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the internal control over financial reporting, as required by Rule 13a-15(d) of the Exchange Act, to determine whether any changes occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, the Chief Executive and Chief Financial Officer concluded that there was no such change during the last quarter of the fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B–OTHER INFORMATION

None.

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PART III

ITEM 10–DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS OF THE REGISTRANT

Except for the portion about executive officers and our Code of Conduct which is set forth below, this information is incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2011 to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is biographical information concerning our executive officers.

Bryan D. Allen, 43

Senior Vice President, Chief Human Resources Officer

Mr. Allen has been Chief Human Resources Officer of THG since joining the Company in 2006. From 2002 until 2006, Mr. Allen was Managing Director, Head of Human Resources at US Trust. Prior to that, from 1989 until 2002, Mr. Allen held a variety of positions within the human resources organization at Morgan Stanley, last serving as Global Chief of Staff for Human Resources.

Steven J. Bensinger, 56

Executive Vice President, Chief Financial Officer

Mr. Bensinger has been Executive Vice President, Chief Financial Officer since March 2010. Prior to that, from January 2010 to March 2010 he served as Executive Vice President - Senior Finance Officer. Mr. Bensinger began his career in 1976 with the accounting firm then known as Coopers & Lybrand, where he rose to partner in the firm’s financial services practice. From 1987 until 1992, Mr. Bensinger worked for Skandia America Corporation, initially serving as its Senior Vice President and Chief Financial Officer, and later as its President and Chief Operating Officer. From 1993 until its acquisition by Trenwick Group Ltd. in 1999, Mr. Bensinger served as President and a director of Chartwell Re Corporation. In connection with the acquisition of Chartwell Re Corporation, Mr. Bensinger became an officer of Trenwick Group Ltd., and continued in that capacity with Trenwick Group Ltd. until 2001. In August 2003, Trenwick Group, Ltd. and certain of its subsidiaries filed insolvency proceedings in the Supreme Court of Bermuda and in the United States under Chapter 11 of the US Bankruptcy Code. During 2002, Mr. Bensinger served as Executive Vice President and Chief Financial Officer of Combined Speciality Group, Inc., the insurance underwriting operations of Aon Corporation. Mr. Bensinger joined American International Group, Inc. as its Vice President and Treasurer in 2002. From 2005 until 2008, Mr. Bensinger served as Executive Vice President and Chief Financial Officer of American International Group. During 2008, Mr. Bensinger also served as American International Group’s Vice Chairman-Financial Services and Chief Financial Officer. Mr. Bensinger plans to relinquish his role as Chief Financial Officer in March 2011 and resign from the Company in June 2011.

Antonio Z. dePadua, 58

Senior Vice President, Chief Underwriting Officer

President, Specialty Lines

Mr. dePadua has been President, Specialty Lines and Chief Underwriting Officer since joining the Company in 2009. Prior to joining THG, from 2003 until 2009, Mr. dePadua was a Senior Vice President at CNA Financial Corporation. Prior to that, from 1996 until 2003, Mr. dePadua was a Senior Vice President at The St. Paul Travelers Companies. From 1980 until it was acquired by St. Paul in 1996, Mr. dePadua held several positions at Northbrook Property & Casualty, last serving as its Chief Underwriting Officer.

Mark R. Desrochers, 42

Senior Vice President

President, Personal Lines

Mr. Desrochers has been President, Personal Lines since 2009. From 2006 until 2009, Mr. Desrochers was Vice President, State Management. Prior to joining THG, from 2003 until 2006, Mr. Desrochers held several positions with Liberty Mutual Insurance Company, last serving as Vice President and Product Manager. Mr. Desrochers worked at Electric Insurance Company from 1997 until 2003 and at Applied Insurance Research from 1995 to 1997.

Frederick H. Eppinger, Jr., 52

Director, President and Chief Executive Officer

Mr. Eppinger has been Director, President and Chief Executive Officer of THG since joining the Company in 2003. Before joining the Company, Mr. Eppinger was Executive Vice President of Property and Casualty Field and Service Operations for The Hartford Financial Services Group, Inc. Prior to that, he was Senior Vice President of Strategic Marketing from 2000 to 2001 for ChannelPoint, Inc., a firm that provided business-to-business technology for insurance and financial service companies, and was a senior partner at the international consulting firm of McKinsey & Company. Mr. Eppinger led the insurance practice at McKinsey, where he worked

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closely with chief executive officers of many leading insurers over a period of 15 years, beginning in 1985. Mr. Eppinger began his career as an accountant with the firm then known as Coopers & Lybrand. He is a director of Centene Corporation, a publicly-traded, multi-line healthcare company. Mr. Eppinger is an employee of THG, and therefore is not an independent director. Mr. Eppinger’s term of office as a director of THG expires in 2012.

David B. Greenfield, 48

Executive Vice President – Senior Finance Officer

Mr. Greenfield has served as Executive Vice President – Senior Finance Officer since joining the Company in December 2010. Prior to joining the Company, Mr. Greenfield served as the Chief Financial Officer of Axis Capital Holdings Limited from 2006 until 2010. From 1984 to 2006, Mr. Greenfield worked for KPMG LLP, where he advanced to partnership serving as KPMG’s Global Sector Chair for Insurance and a member of KPMG’s Global Financial Services Leadership Team. Mr. Greenfield will assume the position of Chief Financial Officer in March 2011, succeeding Mr. Bensinger.

J. Kendall Huber, 56

Executive Vice President, General Counsel and Assistant Secretary

Mr. Huber has been General Counsel and Assistant Secretary since joining THG in 2000. Prior to joining THG, Mr. Huber was Executive Vice President, General Counsel and Secretary of Promus Hotel Corporation from 1999 to 2000. Previously, Mr. Huber was Vice President and Deputy General Counsel of Legg Mason, Inc., from 1998 to 1999. He has also served as Vice President and Deputy General Counsel of USF&G Corporation, where he was employed from 1990 to 1998.

Andrew Robinson, 45

Executive Vice President, Corporate Development and Risk Management

Mr. Robinson has been Executive Vice President, Corporate Development and Risk Management since February 2011. From 2006 until 2011, Mr. Robinson was Senior Vice President, Corporate Development and he also served as the Company’s President, Specialty Casualty from 2009 to 2011. Prior to joining the Company, from 1996 until 2006, Mr. Robinson held a variety of positions at Diamond Consultants, last serving as Managing Director, Global Insurance Practice.

John C. Roche, 47

Senior Vice President

President, Business Insurance

Mr. Roche has been President, Business Insurance since 2009. From 2007 to 2009, Mr. Roche served as Vice President, Field Operations and from 2006 to 2007, Mr. Roche was Vice President, Underwriting and Product Management, Commercial Lines. From 1994 to 2006, Mr. Roche served in a variety of leadership positions at St. Paul Travelers Companies, Inc., last serving as Vice President Commercial Accounts. Prior to joining St. Paul Travelers Companies, Inc., Mr. Roche served in a variety of underwriting and management positions at Fireman’s Fund Insurance Company and Atlantic Mutual Insurance Company.

Gregory D. Tranter, 54

Executive Vice President, Chief Information Officer and Chief Operations Officer

Mr. Tranter joined the Company in 1998, has been Chief Information Officer since 2000 and Chief Operations Officer since 2007. Prior to joining THG, Mr. Tranter was Vice President, Automation Strategy of Travelers Property and Casualty Company from 1996 to 1998. Mr. Tranter was employed by Aetna Life and Casualty Company from 1983 to 1996.

Marita Zuraitis, 50

Executive Vice President and President of the Property and Casualty Companies

Ms. Zuraitis has been Executive Vice President of the Company and President, Property and Casualty Companies since 2004. Prior to joining THG, Ms. Zuraitis was President and Chief Executive Officer of the commercial lines division of The St. Paul Travelers Companies from 1998 to 2004.

Pursuant to section 4.4 of the Company’s by-laws, each officer shall hold office until the first meeting of the Board of Directors following the next annual meeting of the stockholders and until his or her respective successor is chosen and qualified unless a shorter period shall have been specified by the terms of his or her election or appointment, or in each case until such officer sooner dies, resigns, is removed or becomes disqualified.

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CODE OF CONDUCT

Our Code of Conduct is available, free of charge, on our website at www.hanover.com under “Corporate Governance—Company Policies”. The Code of Conduct applies to our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Controller. While we do not expect to grant waivers to our Code of Conduct, any such waivers to our Chief Executive Officer, Chief Financial Officer or Controller will be posted on our website at www.hanover.com, as required by applicable law or New York Stock Exchange requirements.

NEW YORK STOCK EXCHANGE RULE 303A.12(a)

Our Chief Executive Officer filed his annual certification required by the New York Stock Exchange Rule 303A.12(a) with the New York Stock Exchange on or about May 14, 2010. The certification of our Chief Executive Officer and Chief Financial Officer regarding the quality of our disclosure in this Annual Report on Form 10-K have been filed as Exhibits 31.1 and 31.2.

ITEM 11–EXECUTIVE COMPENSATION

Incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 17, 2011, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

ITEM 12–SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2010 with respect to compensation plans under which equity securities of the Company are authorized for issuance.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (2)
Equity compensation plans approved by security holders		4,093,539	$	39.22		1,856,704
Equity compensation plans not approved by security holders		—		—		—
Total		4,093,539	$	39.22		1,856,704

(1) Includes 1,053,439 shares of Common Stock which may be issued upon vesting of outstanding, restricted stock units or performance-based restricted stock units (assuming the maximum award amount). The weighted-average exercise price does not take these awards into account.

(2) The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan (the “Plan”), which was adopted on May 16, 2006, authorizes the issuance of 3,000,000 new shares that may be used for awards. In addition, shares of stock underlying any award granted and outstanding under the Company’s Amended Long-Term Stock Incentive Plan (the “1996 Plan”) as of the adoption date of the Plan that are forfeited or cancelled, or expire or terminate, after the adoption date without the issuance of stock, become available for future grants under the Plan.

Additional information related to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 17, 2011, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

ITEM 13–CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 17, 2011, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

ITEM 14–PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 17, 2011, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

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PART IV

ITEM 15–EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(A)(1) FINANCIAL STATEMENTS

The consolidated financial statements and accompanying notes thereto are included on pages 78 to 126 of this Form 10-K.

	Page No. in this Report
Report of Independent Registered Public Accounting Firm		78
Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008		79-80
Consolidated Balance Sheets as of December 31, 2010 and 2009		81
Consolidated Statements of Shareholders’ Equity for the years ended December  31, 2010, 2009 and 2008		82
Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008		83
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008		84
Notes to Consolidated Financial Statements		85-126

(A)(2) FINANCIAL STATEMENT SCHEDULES

	Page No. in this Report
I Summary of Investments—Other than Investments in Related Parties		137
II Condensed Financial Information of Registrant		138-140
III Supplementary Insurance Information		141
IV Reinsurance		142
V Valuation and Qualifying Accounts		143
VI Supplemental Information Concerning Property and Casualty Insurance Operations		144

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(A)(3) EXHIBIT INDEX

Exhibits filed as part of this Form 10-K are as follows:

2.1	Stock Purchase Agreement, dated as of August 22, 2005, between The Goldman Sachs Group, Inc., as Buyer, and Registrant, as Seller (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) previously filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on August 24, 2005 and incorporated herein by reference.
2.2	Stock Purchase Agreement by and between the Registrant and Commonwealth Annuity and Life Insurance Company, dated July 30, 2008 (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K), previously filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on August 4, 2008 and incorporated herein by reference.
3.1	Certificate of Incorporation of the Registrant previously filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 16, 2006 and incorporated herein by reference.
3.2	Amended By-Laws of the Registrant, previously filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on November 21, 2006 and incorporated herein by reference.
4.1	Specimen Certificate of Common Stock previously filed as Exhibit 4 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 16, 2006 and incorporated herein by reference.
4.2	Form of Indenture relating to the Debentures between the Registrant and State Street Bank & Trust Company, as trustee, previously filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (No. 33-96764) filed with the Commission on September 11, 1995 and incorporated herein by reference.
4.3	Form of Global Debenture previously filed as Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 16, 2006 and incorporated herein by reference.
4.4	Indenture dated February 3, 1997 relating to the Junior Subordinated Debentures of the Registrant previously filed as Exhibit 3 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 5, 1997 and incorporated herein by reference.
4.5	First Supplemental Indenture dated July 30, 2009 amending the indenture dated February 3, 1997 relating to the Junior Subordinated Debentures of the Registrant previously filed as Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2010 and incorporated herein by reference.
4.6	Form of Global Security representing $300,000,000 principal amount of Junior Subordinated Debentures of the Registrant previously filed as Exhibit 4.6 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2010 and incorporated herein by reference.
4.7	Indenture dated January 21, 2010, between the Registrant and U.S. Bank National Association, as trustee, previously filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-3 ASR (No. 333-164446) filed with the Commission on January 21, 2010 and incorporated herein by reference.
4.8	First Supplemental Indenture and Form of Global Note dated February 23, 2010, related to the Notes of the Registrant, between the Registrant and U.S. Bank National Association, as trustee, previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 23, 2010 and incorporated herein by reference.
+10.1	State Mutual Life Assurance Company of America Excess Benefit Retirement Plan previously filed as Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 (No. 33-91766) filed with the Commission on May 1, 1995 and incorporated herein by reference.
10.2	Form of Accident and Health Coinsurance Agreement between The Hanover Insurance Company, as Reinsurer, and First Allmerica Financial Life Insurance Company (the schedules and certain exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on August 4, 2008 and incorporated by reference herein.

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+10.3	The Hanover Insurance Group, Inc. Amended Long-Term Stock Incentive Plan previously filed as Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed with the Commission on April 1, 2002 and incorporated herein by reference.
10.4	Confirmation between the Registrant and Barclays Bank PLC acting through its agent Barclays Capital, Inc. dated March 30, 2010 previously filed as Exhibit 10.1 to the Registrant’s Current Report on From 8-K filed with the Commission on March 31, 2010 and incorporated herein by reference.
+10.5	The Hanover Insurance Group, Inc. 2009 Short-Term Incentive Compensation Plan previously filed as Annex 2 to the Registrant’s Proxy Statement (Commission File No. 001-13754) filed with the Commission on March 27, 2009 and incorporated herein by reference.
10.6	Federal Home Loan Bank of Boston Agreement for Advances, Collateral Pledge, and Security Agreement dated September 11, 2009 previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 4, 2009 and incorporated herein by reference.
+10.7	The Hanover Insurance Group Amended and Restated Employment Continuity Plan previously filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 11, 2008 and incorporated herein by reference.
+10.8	Form of Non-Qualified Stock Option Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 21, 2007 and incorporated herein by reference.
+10.9	Form of Corporate Goals-Based Performance-Based Restricted Stock Unit Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 21, 2007 and incorporated herein by reference.
+10.10	Form of Incentive Compensation Deferral and Conversion Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 21, 2007 and incorporated herein by reference.
+10.11	Form of Restricted Stock Unit Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Stock Plan previously filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 21, 2007 and incorporated herein by reference.
+10.12	Form of Amended and Restated Form of Non-Qualified Stock Option Agreement under The Hanover Insurance Group, Inc. Amended Long-Term Stock Incentive Plan previously filed as Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 21, 2007 and incorporated herein by reference.
+10.13	Description of 2009-2010 Non-Employee Director Compensation previously filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2009 and incorporated herein by reference.
+10.14	Offer Letter dated November 6, 2007 between the Registrant and Eugene M. Bullis previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2007 and incorporated herein by reference.
+10.15	Description of 2008 Incentive Compensation Deferral and Conversion Program previously filed as Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2008 and incorporated herein by reference.
+10.16	The Hanover Insurance Group 2006 Long-Term Incentive Plan previously filed as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2008 and incorporated herein by reference.
+10.17	Description of 2010-2011 Non-Employee Director Compensation previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 6, 2010 and incorporated herein by reference.
+10.18	Offer Letter, dated August 14, 2003, between the Registrant and Frederick H. Eppinger, Jr., as amended December 10, 2008 previously filed as Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference.

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10.19	Confirmation between The Hanover Insurance Group, Inc. and Barclays Bank PLC acting through its agent Barclays Capital, Inc., dated December 8, 2009 previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 9, 2009 and incorporated herein by reference.
+10.20	The Hanover Insurance Group, Inc. Non-Employee Director Deferral Plan previously filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference.
+10.21	Offer Letter dated January 5, 2010 between Steven J. Bensinger and The Hanover Insurance Group, Inc. previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on January 8, 2010 and incorporated herein by reference.
+10.22	Description of 2009 Short-Term Incentive Compensation Awards, 2010 Short-Term Incentive Compensation Program and 2010 Long-Term Incentive Program and OneBeacon Bonuses previously filed as Item 9B to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2010 and incorporated herein by reference.
+10.23	Restricted Stock Unit Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference.
+10.24	Performance-Based Restricted Stock Unit Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference.
+10.25	Non-Qualified Stock Option Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference.
+10.26	IRC Section 162(m) Deferral Letter for Certain Executive Officers of the Registrant previously filed as Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference.
+10.27	Offer Letter dated December 15, 2010 between David Greenfield and the Registrant previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 17, 2010 and incorporated herein by reference.
+10.28	Separation Letter dated December 29, 2010 between Steven J. Bensinger and the Registrant previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 29, 2010 and incorporated herein by reference.
+10.29	The Hanover Insurance Group Retirement Savings Plan, as amended, previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 4, 2010 and incorporated herein by reference.
+10.30	The Hanover Insurance Group, Inc. Amended and Restated Non-Qualified Retirement Savings Plan.
+10.31	Letter Agreement between David Greenfield and the Registrant dated January 20, 2011 regarding his participation in The Hanover Insurance Group Amended and Restated Employment Continuity Plan.
+10.32	The Hanover Insurance Group Cash Balance Pension Plan.
21	Subsidiaries of THG.
23	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney.
31.1	Certification of the Chief Executive Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

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32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Internal Revenue Service Ruling dated April 15, 1995 previously filed as Exhibit 99.1 to the Registrant’s Registration Statement on Form S-1 (No. 33-91766) filed with the Commission on May 1, 1995 and incorporated herein by reference.
101	The following materials from The Hanover Insurance Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010 formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008; (ii) Consolidated Balance Sheets at December 31, 2010 and 2009; (iii) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2010, 2009 and 2008; (iv) Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; (vi) related notes to these financial statements, tagged as blocks of text; and (vii) Financial Statement Schedules, tagged as blocks of text.

+ Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	THE HANOVER INSURANCE GROUP, INC.
	Registrant
Date: February 23, 2011	By:	/S/    FREDERICK H. EPPINGER, JR.
		Frederick H. Eppinger, Jr.,
		President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: February 23, 2011	By:	/S/    FREDERICK H. EPPINGER, JR.
		Frederick H. Eppinger, Jr.,
		President, Chief Executive Officer and Director
Date: February 23, 2011	By:	/S/    STEVEN J. BENSINGER
		Steven J. Bensinger,
		Executive Vice President, Chief Financial Officer and Principal Accounting Officer
Date: February 23, 2011	By:	*
		Michael P. Angelini,
		Chairman of the Board
Date: February 23, 2011	By:	*
		P. Kevin Condron,
		Director
Date: February 23, 2011	By:	*
		Neal F. Finnegan,
		Director
Date: February 23, 2011	By:	*
		David J. Gallitano,
		Director
Date: February 23, 2011	By:	*
		Wendell J. Knox,
		Director
Date: February 23, 2011	By:	*
		Robert J. Murray,
		Director
Date: February 23, 2011	By:	*
		Joseph R. Ramrath,
		Director
Date: February 23, 2011	By:	*
		Harriet T. Taggart,
		Director
Date: February 23, 2011	*By:	/S/    STEVEN J. BENSINGER
		Steven J. Bensinger,
		Attorney-in-fact

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SCHEDULE I

THE HANOVER INSURANCE GROUP, INC.

SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 2010

(In millions)

Type of investment	Cost(1)			Value		Amount at which shown in the balance sheet(2)
Fixed maturities:
Bonds:
United States Government and government agencies and authorities	$	856.9		$	884.8	$	884.8
States, municipalities and political subdivisions		963.4			965.5		965.5
Public utilities		487.7			521.8		521.8
All other corporate bonds		2,406.6			2,543.1		2,543.1
Total fixed maturities		4,714.6			4,915.2		4,915.2
Equity securities:
Common stocks:
Public utilities		41.8			40.9		40.9
Banks, trust and insurance companies		15.9			15.6		15.6
Industrial, miscellaneous and all other		52.9			55.2		55.2
Nonredeemable preferred stocks		10.1			16.9		16.9
Total equity securities		120.7			128.6		128.6
Other long-term investments (3)		36.7			XXXXXX		39.4
Total investments		4,872.0			XXXXXX		5,083.2
Less: investments of discontinued operations (2)		(115.8	)		XXXXXX		(117.3	)
Total investments, excluding investments of discontinued operations	$	4,756.2			XXXXXX	$	4,965.9

(1) For equity securities, represents original cost, and for fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums and accretion of discounts.

(2) The separate classifications include investment assets classified as discontinued operations on the balance sheet. Investment assets classified as discontinued operations are adjusted in total and are reflected as such in this schedule. The discontinued operations portfolio is comprised solely of fixed maturities.

(3) The cost of other long-term investments differs from the carrying value due to market value changes in the Company’s equity ownership of limited partnership investments.

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SCHEDULE II

THE HANOVER INSURANCE GROUP, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PARENT COMPANY ONLY

STATEMENTS OF INCOME

For the Years Ended December 31	2010			2009			2008
(In millions)
Revenues
Net investment income	$	12.2		$	16.5		$	15.2
Net realized investment gains:
Total other-than-temporary impairment losses on investments		(0.3	)		—			—
Portion of loss transferred to other comprehensive income		—			—			—
Net other-than-temporary impairment losses on investments recognized in earnings		(0.3	)		—			—
Net realized gains from sales and other		0.6			7.7			9.0
Total net realized investment gains		0.3			7.7			9.0
Other income		—			—			0.6
Total revenues		12.5			24.2			24.8
Expenses
Interest expense		35.7			31.8			40.6
Employee benefit related expenses		6.9			16.4			1.5
Loss (gain) from retirement of debt		2.0			(34.5	)		—
Other operating expenses		3.9			6.9			5.7
Total expenses		48.5			20.6			47.8
Net (loss) income before income taxes and equity in net income of unconsolidated subsidiaries		(36.0	)		3.6			(23.0	)
Income tax benefit:
Federal		25.1			7.4			17.0
State		—			—			0.1
Equity in income of unconsolidated subsidiaries		163.8			176.5			92.1
Income from continuing operations		152.9			187.5			86.2
Discontinued operations:
Income from operations of discontinued variable life insurance and annuity business, net of taxes (including gain on disposal of $1.3, $4.9 and $8.7 in 2010, 2009 and 2008)		1.3			4.9			12.2
Gain (loss) from discontinued FAFLIC business, net of taxes		0.5			4.8			(77.3	)
Other discontinued operations		0.1			—			(0.5	)
Net income	$	154.8		$	197.2		$	20.6

The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.

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SCHEDULE II (CONTINUED)

THE HANOVER INSURANCE GROUP, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PARENT COMPANY ONLY

BALANCE SHEETS

December 31	2010			2009
(In millions, except per share data)
Assets
Fixed maturities – at fair value (amortized cost of $372.7 and $287.6)	$	380.6		$	289.9
Equity securities – at fair value (cost of $1.0)		1.0			—
Cash and cash equivalents		66.6			3.2
Investment in unconsolidated subsidiaries		2,477.3			2,333.4
Net receivable from subsidiaries		12.6			7.8
Deferred federal income tax asset		—			32.4
Other assets		19.1			14.0
Total assets	$	2,957.2		$	2,680.7
Liabilities
Expenses and state taxes payable	$	29.1		$	28.0
Deferred federal income tax liability		6.8			—
Interest payable		10.9			7.0
Debt		449.9			287.1
Total liabilities		496.7			322.1
Shareholders’ Equity
Preferred stock, par value $0.01 per share, 20.0 million shares authorized, none issued		—			—
Common stock, par value $0.01 per share, 300.0 million shares authorized, 60.5 million shares issued		0.6			0.6
Additional paid-in capital		1,796.5			1,808.5
Accumulated other comprehensive income		136.7			28.8
Retained earnings		1,246.8			1,141.1
Treasury stock at cost (15.6 million and 13.0 million shares)		(720.1	)		(620.4	)
Total shareholders’ equity		2,460.5			2,358.6
Total liabilities and shareholders’ equity	$	2,957.2		$	2,680.7

The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.

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SCHEDULE II (CONTINUED)

THE HANOVER INSURANCE GROUP, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PARENT COMPANY ONLY

STATEMENTS OF CASH FLOWS

For the Years Ended December 31	2010			2009			2008
(In millions)
Cash flows from operating activities
Net income	$	154.8		$	197.2		$	20.6
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Gain) loss on disposal of FAFLIC		(0.5	)		(4.8	)		77.3
Gain on disposal of variable life insurance and annuity business		(1.3	)		(4.9	)		(12.2	)
Loss (gain) from retirement of debt		2.0			(34.5	)		—
Equity in net income of unconsolidated subsidiaries		(163.8	)		(176.5	)		(92.1	)
Net realized investment gains		(0.3	)		(7.7	)		(9.0	)
(Contributions paid to) dividends received from unconsolidated subsidiaries (1)		(0.6	)		(83.7	)		117.9
Deferred federal income tax expense (benefit)		104.3			5.6			(1.5	)
Change in expenses and taxes payable		(8.2	)		(41.4	)		13.9
Change in net payable from subsidiaries		8.7			7.1			20.0
Other, net		(0.7	)		2.7			(1.1	)
Net cash provided by (used in) operating activities		94.4			(140.9	)		133.8
Cash flows from investing activities
Proceeds from disposals and maturities of available-for-sale fixed maturities		177.3			469.3			295.0
Purchase of available-for-sale fixed maturities		(167.4	)		(278.4	)		(217.4	)
Purchase of equity securities		(1.0	)		—			—
Net cash used for business acquisitions		(29.5	)		1.5			(112.8	)
Proceeds from sale of variable life insurance and annuity business, net		—			—			13.2
Proceeds from sale of FAFLIC		—			105.8			—
Net cash provided by the sale of AIX Holdings, Inc. to Hanover Insurance		—			64.9			—
Net cash provided by the sale of assets to Hanover Insurance		—			38.9			—
Other investing activities		—			—			(2.8	)
Net cash (used in) provided by investing activities		(20.6	)		402.0			(24.8	)
Cash flow from financing activities
Proceeds from debt borrowings		198.0			—			—
Repurchases of debt		(38.5	)		(125.9	)		—
Dividends paid to shareholders		(47.2	)		(37.5	)		(23.0	)
Treasury stock purchased at cost		(134.7	)		(148.1	)		(58.5	)
Exercise of options		12.0			3.1			8.2
Other financing activities		—			0.1			0.3
Net cash used in financing activities		(10.4	)		(308.3	)		(73.0	)
Net change in cash and cash equivalents		63.4			(47.2	)		36.0
Cash and cash equivalents, beginning of year		3.2			50.4			14.4
Cash and cash equivalents, end of year	$	66.6		$	3.2			50.4

⁽¹⁾  Amounts reflect cash payments made to the parent company for dividends. Investment assets of $69.4 million, $136.1 million and $65.1 million were also transferred to the parent company in 2010, 2009 and 2008, respectively, to settle dividend balances.

The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.

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SCHEDULE III

THE HANOVER INSURANCE GROUP, INC.

SUPPLEMENTARY INSURANCE INFORMATION

DECEMBER 31, 2010

(In millions)

Segments	Deferred policy acquisition costs		Future policy benefits, losses, claims and loss expenses		Unearned premiums		Other policy claims and benefits payable		Premium revenue		Net investment income		Benefits, claims, losses and settlement expenses		Amortization of deferred policy acquisition costs		Other operating expenses			Premiums written
Property and Casualty	$	345.3	$	3,275.8	$	1,520.3	$	1.9	$	2,841.0	$	247.2	$	1,856.3	$	669.0	$	374.1		$	3,048.0
Interest on Debt		—		—		—		—		—		—		—		—		44.3			—
Eliminations		—		—		—		—		—		—		—		—		(4.6	)		—
Total	$	345.3	$	3,275.8	$	1,520.3	$	1.9	$	2,841.0	$	247.2	$	1,856.3	$	669.0	$	413.8		$	3,048.0

DECEMBER 31, 2009

(In millions)

Segments (1)	Deferred policy acquisition costs		Future policy benefits, losses, claims and loss expenses		Unearned premiums		Other policy claims and benefits payable		Premium revenue		Net investment income		Benefits, claims, losses and settlement expenses		Amortization of deferred policy acquisition costs		Other operating expenses			Premiums written
Property and Casualty	$	286.3	$	3,152.1	$	1,300.5	$	1.8	$	2,546.4	$	251.7	$	1,639.2	$	581.3	$	346.1		$	2,608.7
Interest on Debt		—		—		—		—		—		0.4		—		—		35.5			—
Eliminations		—		—		—		—		—		—		—		—		(4.4	)		—
Total	$	286.3	$	3,152.1	$	1,300.5	$	1.8	$	2,546.4	$	252.1	$	1,639.2	$	581.3	$	377.2		$	2,608.7

DECEMBER 31, 2008

(In millions)

Segments (1)	Deferred policy acquisition costs		Future policy benefits, losses, claims and loss expenses		Unearned premiums		Other policy claims and benefits payable		Premium revenue		Net investment income		Benefits, claims, losses and settlement expenses		Amortization of deferred policy acquisition costs		Other operating expenses			Premiums written
Property and Casualty	$	264.8	$	3,201.3	$	1,246.3	$	1.8	$	2,484.9	$	258.0	$	1,626.2	$	556.2	$	299.2		$	2,518.0
Interest on Debt		—		—		—		—		—		0.7		—		—		40.6			—
Eliminations		—		—		—		—		—		—		—		—		(6.2	)		—
Total	$	264.8	$	3,201.3	$	1,246.3	$	1.8	$	2,484.9	$	258.7	$	1,626.2	$	556.2	$	333.6		$	2,518.0

⁽¹⁾  Results of our former Life Companies segment have been reclassified to discontinued operations due to the sale of FAFLIC on January 2, 2009. Additionally, the corresponding assets and liabilities of this business are presented as discontinued operations in our Consolidated Balance Sheets.

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SCHEDULE IV

THE HANOVER INSURANCE GROUP, INC.

REINSURANCE

DECEMBER 31

(In millions)

	Gross amount		Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
2010 (1)
Premiums:
Property and casualty insurance	$	2,970.6	$	304.4	$	174.8	$	2,841.0		6.15	%
2009 (2)
Premiums:
Property and casualty insurance	$	2,824.3	$	291.7	$	13.8	$	2,546.4		0.54	%
2008 (2)
Premiums:
Property and casualty insurance	$	2,700.0	$	241.9	$	26.8	$	2,484.9		1.08	%

(1) The increase in assumed reinsurance activity in 2010 primarily related to the OneBeacon renewal rights transaction.

(2) Premiums related to our former life insurance business have been reclassified to Discontinued Operations due to the sale of FAFLIC on January 2, 2009.

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SCHEDULE V

THE HANOVER INSURANCE GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS

DECEMBER 31

(In millions)

			Additions
Description	Balance at beginning of period		Charged to costs and expenses		Charged to other accounts		Deductions		Balance at end of period
2010
Mortgage loans	$	0.6	$	—	$	—	$	0.4	$	0.2
Allowance for doubtful accounts		3.9		7.8		—		8.1		3.6
	$	4.5	$	7.8	$	—	$	8.5	$	3.8
2009
Mortgage loans	$	1.0	$	—	$	—	$	0.4	$	0.6
Allowance for doubtful accounts		5.0		7.4		—		8.5		3.9
	$	6.0	$	7.4	$	—	$	8.9	$	4.5
2008
Mortgage loans	$	1.0	$	—	$	—	$	—	$	1.0
Allowance for doubtful accounts		9.2		5.6		—		9.8		5.0
	$	10.2	$	5.6	$	—	$	9.8	$	6.0

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SCHEDULE VI

THE HANOVER INSURANCE GROUP, INC.

SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

(In millions)

Affiliation with Registrant	Deferred policy acquisition costs		Reserves for losses and loss adjustment expenses(2)		Discount, if any, deducted from previous column(1)		Unearned premiums(2)		Net premiums earned		Net investment income
Consolidated Property and Casualty Subsidiaries
2010	$	345.3	$	3,275.8	$	—	$	1,520.3	$	2,841.0	$	247.2
2009	$	286.3	$	3,152.1	$	—	$	1,300.5	$	2,546.4	$	251.7
2008	$	264.8	$	3,201.3	$	—	$	1,246.3	$	2,484.9	$	258.0

	Losses and loss adjustment expenses incurred related to					Amortization of deferred policy acquisition expenses		Paid losses and loss adjustment expenses		Net premiums written
	Current year		Prior years
2010	$	1,966.4	$	(111.1	)	$	669.0	$	1,816.4	$	3,048.0
2009	$	1,793.5	$	(155.3	)	$	581.3	$	1,759.4	$	2,608.7
2008	$	1,784.6	$	(159.0	)	$	556.2	$	1,712.3	$	2,518.0

⁽¹⁾  The Company does not use discounting techniques.

⁽²⁾  Reserves for losses and loss adjustment expenses are shown gross of $1,115.5 million, $1,060.2 million and $988.2 million of reinsurance recoverable on unpaid losses in 2010, 2009 and 2008, respectively. Unearned premiums are shown gross of prepaid premiums of $77.0 million, $70.4 million and $78.3 million in 2010, 2009 and 2008, respectively.

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EX-10.30

Exhibit 10.30

THE HANOVER INSURANCE GROUP

AMENDED AND RESTATED

NON-QUALIFIED RETIREMENT SAVINGS PLAN

(As amended and restated to reflect all amendments indicated on Schedule A)

ARTICLE I

NAME, PURPOSE AND EFFECTIVE DATE OF PLAN

1.01 Name and Purpose of Plan. This Plan shall be known as The Hanover Insurance Group Amended and Restated Non-Qualified Retirement Savings Plan (the “Plan”).

This Plan was initially adopted by First Allmerica Financial Life Insurance Company (“First Allmerica”). First Allmerica, formerly known as State Mutual Life Assurance Company of America, had adopted this deferred compensation plan for the benefit of certain highly compensated employees to help ensure that First Allmerica’s compensation and benefits programs for top management attract, retain and motivate qualified personnel.

As of January 1, 2008, The Hanover Insurance Company (“Hanover”) agreed to assume (i) the sponsorship, and (ii) all liabilities and obligations, of the Plan.

This Plan is intended to be a non-qualified and unfunded plan, maintained solely for the purpose of providing deferred compensation benefits to a select group of management or highly compensated employees.

1.02 Plan Effective Date. The original effective date of this Plan is January 1, 2005. Except as otherwise indicated, the effective date of this restatement is January 1, 2008. The Plan has been amended and restated to reflect all amendments indicated on Schedule A.

1.03 Section 409A Compliance. Compensation deferrals under this Plan as in effect prior to January 1, 2008 were made and administered in good faith in accordance with the requirements of Code Section 409A. Such deferred compensation and earnings thereon have been credited to the appropriate Participant Accounts in accordance with Article IV and are subject to the terms of this Plan.

The provisions of this Plan and the payments provided hereunder are intended to comply with the requirements of Code Section 409A and the Treasury regulations and other applicable guidance issued by the Treasury Department and or the Internal Revenue Service thereunder, and shall be interpreted and administered consistent with such intent.

The Company makes no representations to any Participant (or Beneficiary) with respect to the tax treatment of any amount paid or payable pursuant to the Plan. While the Plan is intended to be interpreted and operated to the extent possible so that any such amounts shall either be exempt from the requirements of Code Section 409A or shall comply with such requirements, in no event shall the Company be liable to any Participant (or Beneficiary) for or with respect to any taxes, penalties and/or interest which may be imposed upon any such amounts pursuant to Code Section 409A or any other federal or state tax law. To the extent that any such amount should be subject to Code Section 409A (or any other federal or state tax law), the Participant (or Beneficiary) to which the amount is paid or payable shall bear the entire risk of any such taxes, penalties and or interest.

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ARTICLE II

DEFINITIONS

As used in this Plan, the following words and phrases shall have the meanings set forth herein unless a different meaning is clearly required by the context.

2.01 “401(a)(17) Limit” means the compensation limit in effect for the Defined Contribution Plan established pursuant to Code Section 401(a)(17) ($245,000 for 2011).

2.02 “Accrued Benefit” means the sum of the balances in a Participant’s Employee Contribution Account, Employer Contribution Account and Additional Employer Contribution Account.

2.03 “Affiliate” means any corporation which is included in a controlled group of corporations (within the meaning of Code Section 414(b)) which includes the Company and any trade or business (whether or not incorporated) which is under common control with the Company (within the meaning of Code Section 414(c)).

2.04 “Annualized Base Salary” means the total Base Salary anticipated to be paid by the Company to an Employee during a twelve-month period, excluding, without limitation, any anticipated compensation increases and any anticipated bonuses and non-cash compensation; provided, however, that Annualized Base Salary shall be determined without reduction for (i) any anticipated Code Section 401(k) salary reduction contributions to be contributed on the Employee’s behalf for the Plan Year to the Defined Contribution Plan, (ii) the amount of any anticipated salary reduction contributions to be contributed on the Employee’s behalf for the Plan Year to any Code Section 125 plan sponsored by the Company, (iii) the amount of any anticipated Base Salary to be deferred pursuant to the terms of this Plan, and (iv) at the Plan Administrator’s discretion, any anticipated amount of such other compensation deferrals by an Employee during a given Plan Year pursuant to any other Company-sponsored deferral plan.

For an Employee employed by the Company on a December 1, the Employee’s Annualized Base Salary shall be determined by the Plan Administrator for the immediately succeeding Plan Year. For an Employee who first completes an Hour of Service after a December 1, the Employee’s initial Annualized Base Salary shall be determined by the Plan Administrator as of the date the Employee first completes an Hour of Service, with subsequent Annualized Base Salary amounts being determined by the Plan Administrator for each such Employee employed by the Company on a December 1 as of such date for the immediately succeeding Plan Year.

2.05 “Base Salary” means the total base salary paid to an Employee by the Company during a Plan Year, excluding, without limitation, bonuses and non-cash compensation; provided, however, that Base Salary shall be determined without reduction for (i) any Code Section 401(k) salary reduction contributions contributed on the Employee’s behalf for the Plan Year to the Defined Contribution Plan, (ii) the amount of any salary reduction contributions contributed on the Employee’s behalf for the Plan Year to any Code Section 125 plan sponsored by the Company, (iii) the amount of any Base Salary deferred pursuant to the terms of this Plan, and (iv) at the Plan Administrator’s discretion, the amount of such other compensation as may be deferred by an Employee during a given Plan Year pursuant to any other Company-sponsored deferral plan.

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2.06 “Base Salary Deferrals” means deferrals of Base Salary made by an Eligible Employee in accordance with a timely filed Election Form pursuant to Section 3.02.

2.07 “Beneficiary” means one or more persons, trust, organization or estate designated by the Participant to receive Plan benefits payable on or after the death of a Participant pursuant to Section 5.08.

2.08 “Code” means the Internal Revenue Code of 1986, as amended from time to time.

2.09 “Company” means The Hanover Insurance Company (herein sometimes referred to as the “Employer” or “Hanover”). Any reference to the Company or the Employer prior to January 1, 2008 means First Allmerica, subject, however, to the fact that as of January 1, 2008 Hanover assumed all obligations and liabilities (both pre and post-January 1, 2008) of the Plan.

2.10 “Defined Contribution Plan” means The Hanover Insurance Group Retirement Savings Plan, a qualified retirement plan, as in effect from time to time.

2.11 “Elected Payment Date” means the date specified on a Participant’s Election Form indicating when a Base Salary Deferral and earnings thereon will be paid or commence to be paid to the Participant. Notwithstanding the foregoing or any language to the contrary set forth on any Participant’s Election Form filed on or before December 31, 2006, to the extent an Election Form indicates a payment is to be made or commence upon “retirement”, the term “retirement” shall mean Termination of Employment by the Participant on or after reaching Normal Retirement Age, as defined herein.

2.12 Election Form means the written form approved by the Plan Administrator for the purposes of making a Base Salary Deferral.

2.13 “Eligible Compensation”

(a) For Plan Years prior to January 1, 2008, “Eligible Compensation” shall equal (subject to Subsections 2.13(d) and 2.13(e)): the total salary, bonuses and other taxable remuneration paid to an Employee by the Company during a Plan Year (as reported on the Employee’s W-2 for the Plan Year) minus the 401(a)(17) Limit; provided, however, with respect to the President and Chief Executive Officer of The Hanover Insurance Group, Inc., commencing on and after January 1, 2007, in no event shall Eligible Compensation (subject to Subsections 2.13(d) and 2.13(e)) exceed, in the aggregate, the Eligible Compensation Cap.

(b) For Plan Years commencing on or after January 1, 2008, “Eligible Compensation” shall equal (subject to Subsections
2.13(d) and 2.13(e) below): Base Salary plus Incentive Compensation (not to exceed target), if any, minus the 401(a)(17) Limit, but in no event to exceed the Eligible Compensation Cap.

(c) “Eligible Compensation” shall also include any such other compensation earned or paid during a Plan Year as determined, from time to time, by the Plan Administrator.

(d) Notwithstanding the foregoing, Eligible Compensation shall be determined without reduction for (i) any Code Section 401(k) salary reduction contributions contributed on the Employee’s behalf for the Plan Year to the Defined Contribution Plan, (ii) the amount of any salary reduction contributions contributed on the Employee’s behalf for the Plan Year to any Code Section 125 plan sponsored by the Company, (iii) the amount of any Base Salary deferred pursuant to the terms of this Plan, (iv) Incentive Compensation deferred and converted

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pursuant to The Hanover Insurance Group, Inc. IC Deferral and Conversion Program, and (v) at the Plan Administrator’s discretion, the amount of such other compensation as may be deferred by an Employee during a given Plan Year pursuant to any other Company-sponsored deferral plan.

(e) Notwithstanding the above, Eligible Compensation shall not include:

(i) unless otherwise determined by the Plan Administrator, compensation paid to Employees pursuant to The Hanover Insurance Group, Inc. Amended Long-Term Stock Incentive Plan and/or The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan or pursuant to any similar or successor executive incentive compensation plan, including, without limitation, any cash-based long-term incentive compensation plan or program;

(ii) Employer contributions to a deferred compensation plan or arrangement (other than salary reduction contributions to a Section 401(k) or 125 plan or Base Salary Deferrals pursuant to the terms of this Plan, or otherwise, as described above) either for the Plan Year of deferral or for the Year included in the Employee’s gross income;

(iii) unless otherwise determined by the Plan Administrator, any income which is received by or on behalf of an Employee in connection with the grant, receipt, settlement, exercise, lapse of risk of forfeiture or restriction on transferability, or disposition of any stock option, stock award, stock grant, stock appreciation right or similar right or award granted under any plan, now or hereafter in effect, of the Company or any successor to the Company, its parent, any such successor’s parent, its subsidiaries or affiliates, or any stock or securities underlying any such option, award, grant or right;

(iv) severance payments paid in a lump sum;

(v) Code Section 79 imputed income, long term disability payments and workers’ compensation payments;

(vi) taxable moving expense allowances or taxable tuition or other educational reimbursements;

(vii) non-cash taxable benefits provided to executives, including the taxable value of Company-paid club memberships, chauffeur services, Company-provided automobiles and financial planning benefits; and

(viii) other taxable amounts received other than cash compensation for services rendered, as determined by the Plan Administrator.

2.14 “Eligible Compensation Cap” means $1,000,000.00 minus the 401(a)(17) Limit.

2.15 “Employee” means a full-time salaried employee of the Company.

2.16 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

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2.17 “Hour of Service” means:

(a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Company. For purposes of the Plan an Employee shall be credited with 45 Hours of Service for each complete or partial week he or she would be credited with at least one Hour of Service under this Section.

(b) Each hour for which an Employee is paid, or entitled to payment, by the Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence:

(i) No more than 1000 hours shall be credited to an Employee under this Subsection (b) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period);

(ii) No hours shall be credited under this Subsection (b) for any payments made or due under a plan maintained solely for the purpose of complying with any applicable worker’s compensation, unemployment compensation or disability insurance laws; and

(iii) No hours shall be credited under this Subsection (b) for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee.

For purposes of this Subsection (b) a payment shall be deemed to be made by or due from the Company regardless of whether such payment is made by or due from the Company directly, or indirectly, through, among others, a trust fund or insurer, to which the Company contributes or pays premiums.

(c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Company. The same Hours of Service shall not be both credited under Subsections (a) or (b), as the case may be, and under this Subsection. No more than 501 Hours of Service shall be credited under this Subsection for a period of time during which an Employee did not or would not have performed duties.

(d) Special rules for determining Hours of Service under Subsection (b) or (c) for reasons other than the performance of duties.

In the case of a payment which is made or due which results in the crediting of Hours of Service under Subsection (b) or in the case of an award or agreement for back pay under Subsection (c), to the extent that such an award or agreement is made with respect to a period during which an Employee performs no duties, the number of Hours of Service to be credited shall be determined as follows:

(i) In the case of a payment made or due which is calculated on the basis of units of time (such as days or weeks), the number of Hours of Service to be credited to Employees shall be determined as provided in Subsection (a).

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(ii) Except as provided in Subsection (d)(iii), in the case of a payment made or due which is not calculated on the basis of units of time, the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employee’s most recent hourly rate of compensation (as determined below) before the period during which no duties are performed.

A. In the case of Employees whose compensation is determined on the basis of a fixed rate for specified periods of time (other than hours) such as days or weeks, the hourly rate of compensation shall be the Employee’s most recent rate of compensation for a specified period of time (other than an hour), divided by the number of hours regularly scheduled for the performance of duties during such period of time.

B. In the case of Employees whose compensation is not determined on the basis of a fixed rate for specified periods of time, the Employee’s hourly rate of compensation shall be the lowest hourly rate of compensation paid to Employees in the same job classification as that of the Employee or, if no Employees in the same job classification have an hourly rate, the minimum wage as established from time to time under Section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended.

(iii) Rule against double credit. An Employee shall not be credited on account of a period during which no duties are performed with more hours than such Employee would have been credited but for such absence.

(e) Crediting of Hours of Service to computation periods.

(i) Hours of Service described in Subsection (a) shall be credited to the Employee for the computation period or periods in which the duties are performed.

(ii) Hours of Service described in Subsection (b) shall be credited as follows:

A. Hours of Service credited to an Employee on account of a payment which is calculated on the basis of units of time (such as days or weeks) shall be credited to the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates.

B. Hours of Service credited to an Employee by reason of a payment which is not calculated on the basis of units of time shall be credited to the computation period in which the period during which no duties are performed occurs, or if the period during which no duties are performed extends beyond one computation period, such Hours of Service shall be allocated between not more than the first two computation periods in accordance with reasonable rules established

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by the Company, which rules shall be consistently applied with respect to all Employees within the same job classification, reasonably defined.

(iii) Hours of Service described in Subsection (c) shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement or payment is made.

(f) Rules for Non-Paid Leaves of Absence. For purposes of the Plan, an Employee will also be credited with Hours of Service during any non-paid leave of absence granted by the Company. The number of Hours of Service to be credited under this Subsection (f) shall be determined as provided in Subsection (a); provided, however, that no more than the number of Hours of Service in one regularly scheduled work year of the Company will be credited for each non-paid leave of absence. Hours of Service described in this Subsection (f) shall be credited to the Employee for the computation period or periods during which the leave of absence occurs.

2.18 “Incentive Compensation” means the compensation paid to an Employee (not to exceed target) by the Company during a Plan Year pursuant to the Company’s annual non-equity short-term incentive compensation program which is established pursuant to the Company’s shareholder approved Short-Term Incentive Compensation Plan or pursuant to any similar or successor non-equity short-term incentive compensation plan. A Participant’s “target” Incentive Compensation means the percentage of annual salary that the program establishes for each Participant as a bonus target.

2.19 “Normal Retirement Age” means age 65.

2.20 “Participant” means an Employee who satisfies the conditions for participation set forth in Subsections 3.01(a), 3.01(b) or 3.01(c).

2.21 “Plan Administrator” means one or more persons appointed from time to time by the Company’s President to be responsible for the general operation and administration of the Plan and for carrying out its provisions as set forth in Subsection 6.01.

2.22 “Plan Year” means a calendar year.

2.23 “Termination of Employment” means, with respect to a Participant, the date on which the Participant ceases to be employed by the Company, provided, however, that such cessation constitutes a separation from service from the Company and its Affiliates that meets the requirements of Treasury Regulation Section 1.409A-1(h).

A Participant’s employment by the Company or an Affiliate shall be treated as continuing while the participant is on military leave, sick leave, or other bona fide leave of absence, if the period of such leave does not exceed six months, or if longer, so long as the Participant retains a right to reemployment with the Company under an applicable statute or by contract. If the period of leave exceeds six months and the Participant does not retain a right to reemployment under an applicable statute or by contract, employment is deemed to terminate on the first date immediately following such six-month period. With respect to leave for disability, employment will be treated as continuing for a period of up to 29 months, unless otherwise terminated by the employer or the employee, regardless of whether the employee retains a contractual right to reemployment. For this

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purpose, disability leave refers to leave due to the employee’s inability to perform the duties of his or her position of employment or any substantially similar position of employment by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months.

2.24 “Year of Service” means each computation period during which an Employee completes at least 1,000 Hours of Service with the Company, commencing on the date an Employee first completes an Hour of Service and each twelve-month period commencing on the anniversary of such date.

ARTICLE III

ELIGIBILITY, PARTICIPATION AND SALARY DEFERRALS

3.01 (a) Eligibility to Make Base Salary Deferrals. Except as provided in this Section, an Employee shall be eligible to make Base Salary Deferrals for a Plan Year, if the Employee:

(i) is not on a leave of absence from the Company (paid or unpaid) on the December 1^st date immediately preceding the Plan Year for which the Base Salary Deferral Election as set forth in Section 3.02 is to be given effect and is otherwise employed on the December 31^st date immediately preceding such Plan Year;

(ii) has an Annualized Base Salary for the Plan Year (calculated as described in Section 2.04 of the Plan) equal to or in excess of the 401(a)(17) Limit; and

(iii) timely submits an executed Election Form as defined in Section 3.02 to the Plan Administrator.

Notwithstanding (iii) above, for the 2005 Plan Year only, an otherwise eligible Employee employed by the Company on December 1, 2004, may submit an executed Election Form to the Plan Administrator on or prior to January 31, 2005 in order to be eligible to make deferrals of Base Salary paid on or after the effective date of the election.

Notwithstanding the above, if an Employee is not employed by the Company on the December 31^st date immediately preceding the Plan Year for which the Base Salary Deferral Election as set forth in Section 3.02 is to be given effect, the Employee shall be eligible to make Base Salary Deferrals for a Plan Year, if the Employee:

(x) has an Annualized Base Salary for the Plan Year (calculated as described in Section 2.04 of the Plan) equal to or in excess of the 401(a)(17) Limit; and

(y) timely submits an executed Election Form defined in Section 3.02 to the Plan Administrator.

A separate Election Form must be submitted for each Plan Year the eligible Employee intends to make Base Salary Deferrals hereunder.

(b) Eligibility for Company-Paid Contribution. To be eligible to receive a Company-paid contribution on Eligible Compensation for a Plan Year to be credited to an Employer Contribution Account to be established for each such eligible Employee, an employee must meet the following requirements:

(i) be an Employee;

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(ii) have Eligible Compensation for the Plan Year (as described in Section 2.13 of the Plan); and

(iii) be employed by the Company on the last day of the Plan Year or have retired from the Company during the Plan Year or died during the Plan Year while actively employed by the Company.

(c) Eligibility for Company-Paid Additional Employer Contribution. To be eligible to receive a Company-paid additional employer contribution on Eligible Compensation for a Plan Year, to be credited to an Additional Employer Contribution Account to be established for each such eligible Employee, an employee must meet the following requirements:

(i) be an Employee;

(ii) have Eligible Compensation for the Plan Year (as described in Section 2.13 of the Plan);

(iii) have contributed to the Defined Contribution Plan for the Plan Year the maximum amount permitted to be deferred as a non-catch up salary reduction contribution for such Plan Year; and

(iv) for Plan Years commencing on and after January 1, 2008, be employed by the Company on the last day of the Plan Year or have retired from the Company during the Plan Year or died during the Plan Year while actively employed by the Company.

Notwithstanding (iii) above, otherwise eligible Employees who first complete an Hour of Service during a Plan Year who have contributed during the Plan Year to a qualified 401(k) plan sponsored by their former employer(s) may furnish evidence satisfactory to the Plan Administrator of their contributions to such prior plan(s). So long as the amount contributed by the Employee to such prior plan(s) plus the amount contributed by the Company as a salary reduction contribution on behalf of the Employee to the Defined Contribution Plan equals the maximum amount permitted to be deferred as a non-catchup salary reduction contribution for such Plan Year, as described in Code Section 402(g), such Employee shall be deemed to have satisfied requirement (iii) above for such initial Plan Year.

(d) An otherwise eligible Employee shall be eligible to make Base Salary Deferrals provided the Employee satisfies the requirements of Subsections 3.01(a) and Section 3.02 for the applicable Plan Year. An otherwise eligible Employee shall automatically be eligible to receive a Company-paid employer contribution and/or a Company-paid additional employer contribution for a Plan Year provided the Employee satisfies, as applicable, the requirements of Subsections 3.01(b) and/or (c) for the applicable Plan Year.

3.02 Base Salary Deferral Elections.

For Plan Years commencing on or after January 1, 2008, Base Salary Deferrals may only be

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made for a Plan Year if and to the extent expressly permitted by the Company. If permitted by the Company, an eligible Employee as described in Subsection 3.01(a) (an “Eligible Employee”) may make Base Salary Deferrals for a Plan Year by submitting a written form approved by the Plan Administrator for this purpose (an “Election Form”). The Election Form shall indicate: (x) what percentage (subject to the limitations set forth in Section 4.01(a)) shall be withheld from his or her Base Salary for the Plan Year (in substantially equal amounts per pay period, or on such other basis as shall be agreed to by the Plan Administrator) and credited to his or her Employee Contribution Account; (y) the Elected Payment Date, and (z) the form of the distribution (a lump-sum or annual installments over a period of up to ten (10) years as stated in Section 5.05). If an Eligible Employee fails to specify an Elected Payment Date and/or one of the payment forms specified in Section 5.05, or elects the annual installment payment option, but does not specify the period over which such annual installments will be paid, any amount credited to his or her Employee Contribution Account with respect to such Election Form shall be paid in such form and at such time as provided for in Section 5.04 hereof.

Each Base Salary Deferral Election for the Plan Year to which the election applies shall be made by the submission of a written election as follows:

(i) By not later than the December 31^st date immediately preceding the Plan Year for which the Base Salary Deferral Election is to be given effect, each Eligible Employee employed by the Company on such date shall submit a properly completed and executed Election Form which will be given effect with respect to Base Salary earned by such Employee for the subsequent Plan Year.

(ii) Each Eligible Employee who is employed by the Company after such December 31^st date may submit an Election Form no later than thirty (30) days after the date the Eligible Employee first commences employment with the Company or an Affiliate (the “Initial Election Period”), which Election Form will be given effect during such Plan Year with respect to Base Salary earned by the Eligible Employee after the submission of the Election Form.

(iii) Any Base Salary Deferral election made pursuant to subparagraph (i) and/or (ii) above shall be irrevocable (x) on the last day of the calendar year immediately preceding the Plan Year as to which the election applies, or (y) on the last day of the Initial Election Period, as applicable, and shall remain in effect throughout the Plan Year to which the election applies. Notwithstanding the foregoing, any such deferral election shall not apply to any Base Salary earned by the Participant after the date on which the Participant ceases to be an Eligible Employee for the purposes of Section 3.04.

3.03 Participation. Subject to Section 3.04, once an eligible Employee becomes a Participant in the Plan, he or she shall remain a Participant until all benefits to which he or she is entitled under the Plan have been paid.

3.04 Loss of Employee’s Select Status. Notwithstanding any other provision of this Plan, if at any time the Plan Administrator determines that any Participant may not be considered by the Department of Labor or a court of competent jurisdiction to be a member of a select group of the Company’s management or highly compensated employees (as those terms are used in Section 201(2) of ERISA

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and related provisions), or that a Participant or Beneficiary will recognize income for state or federal income tax purposes with respect to Plan benefits not then payable, the Plan Administrator shall communicate such belief to the Company and shall follow the Company’s direction regarding any ongoing participation or future benefit eligibility of that individual. The Company shall then consider what measures are appropriate to preserve the exempt status of the Plan under ERISA as its principal objective in rectifying the situation.

ARTICLE IV

PARTICIPANT ACCOUNTS AND

PLAN BENEFITS

4.01 Establishment of Accounts. The Plan Administrator shall establish and maintain a memorandum Employee Contribution Account, an Employer Contribution Account and an Additional Employer Contribution Account, when appropriate, to account for each Participant’s Accrued Benefit. Amounts shall be credited to Participant Accounts in accordance with this Section 4.01 for each Plan Year. Additionally, investment earnings shall be credited to Participant Accounts pursuant to Section 4.02. The following amounts shall be credited to a Participant’s Accounts for each Plan Year:

(a) Employee Contribution Account. If permitted by the Company, that amount, if any, which an Eligible Employee elects to defer for a Plan Year from his or her Base Salary as an eligible salary reduction deferral pursuant to Subsection 3.01(a) of the Plan; provided, however, that:

(i) Base Salary Deferrals for a Plan Year must be equal to a percentage of Base Salary otherwise payable to a Participant (e.g., 1%, 2% or 12 ¹/2% of Base Salary otherwise payable);

(ii) An eligible Employee may not elect to defer more than 12 ¹/2% of Base Salary otherwise payable to the Employee during the Plan Year, or such larger percentage as may be approved by the Commissioner of Insurance for the Commonwealth of Massachusetts pursuant to Section 35 of Chapter 175 of the Massachusetts General Laws; and

(iii) Base Salary Deferrals shall be credited to a Participant’s Employee Contribution Account within 31 days of the date such amounts would have been paid to the Participant in the absence of the Participant’s Salary Reduction Deferral election.

(b) Employer Contribution Account. That amount, if any, which an eligible Employee is entitled to receive for each Plan Year pursuant to Subsection 3.01(b) of the Plan.

For Plan Years commencing on or after January 1, 2010, no contribution shall be made to the Employer Contribution Accounts of eligible Employees unless and until such award is expressly approved by the Company’s Board of Directors. Such awards, if any, will be made at such time, in such amounts, and under such conditions as are established by the Company’s Board of Directors in its sole discretion.

Unless otherwise voted by the Company’s Board of Directors, for Plan Years commencing on or after January 1, 2008 and before January 1, 2010, eligible Employees employed on the last day of a Plan Year shall be entitled to receive a Company-paid contribution equal to 2% of Eligible Compensation for the Plan Year (as described in Section 2.13 of the Plan).

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For Plan Years beginning before January 1, 2008, eligible Employees employed on the last day of a Plan Year shall be entitled to receive a Company-paid contribution equal to 3% of Eligible Compensation for the Plan Year (as described in Section 2.13 of the Plan).

Contributions pursuant to the preceding two paragraphs of this Subsection 4.01(b) shall be credited to a Participant’s Employer Contribution Account on or before March 15 of the calendar year following the Plan Year for which the contribution is to be credited.

(c) Additional Employer Contribution Account. That amount, if any, which an eligible Employee is eligible to receive for each Plan Year pursuant to Subsection 3.01(c) of the Plan.

Until otherwise voted by the Company’s Board of Directors, for Plan Years commencing on or after January 1, 2009, eligible Employees employed on the last day of a Plan Year shall be entitled to receive a Company-paid contribution equal to 6% of Eligible Compensation for the Plan Year (as described in Section 2.13 of the Plan).

For Plan Years beginning before January 1, 2009, eligible Employees employed on the last day of a Plan Year shall be entitled to receive a Company-paid contribution equal to 5% of Eligible Compensation for the Plan Year (as described in Section 2.13 of the Plan).

Contributions shall be credited to a Participant’s Additional Employer Contribution Account on or before March 15 of the calendar year following the Plan Year for which the contribution is to be credited.

4.02 Investment of Participant Accounts. The Company may from time to time designate one or more investments in which each Participant’s Accounts shall be deemed to be invested. Initially, and until changed by the Company, Participant Accounts established under this Plan shall be credited with interest at the Plan GATT Interest Rate in effect for each Plan Year. For purposes, of this Plan, the Plan GATT Interest Rate for a Plan Year means the annual rate of interest in effect under Code Section 417(e)(3) for the second month immediately preceding the first day of the Plan Year (e.g., November 2004 for the 2005 Plan Year). The deemed investment return shall be credited to a Participant’s Accounts no later than the close of each calendar month, until his or her entire vested Accrued Benefit has been distributed. Any amount(s) withdrawn from a Participant’s Accounts before the close of a given calendar month shall be credited with the deemed investment return for the amount of time during the calendar month that said amounts were credited to the Participant’s Accounts. Nothing in this Section shall be construed to require the Company to acquire or provide any of the investments selected by the Company. Any investments made by the Company shall be made solely in the name of the Company and shall remain the property of the Company.

ARTICLE V

VESTING AND TIME AND FORM OF PAYMENT

5.01 Vesting of Accrued Benefit. Each Participant’s Employee Contribution Account shall be 100% vested and nonforfeitable at all times.

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Each Participant who first completed an Hour of Service prior to January 1, 2005 shall also have a 100% vested and nonforfeitable interest in his or her Employer Contribution and Additional Employer Contribution Accounts.

Each Participant who first completes an Hour of Service on or after January 1, 2005 shall have a vested and nonforfeitable interest in his or her Employer Contribution and Additional Employer Contribution Accounts, to be determined from the following vesting schedule:

Completed Years of Service	Vesting Percentage
Less than 1		0	%
1		50	%
2		100	%

Notwithstanding the foregoing, a Participant’s Accrued Benefit shall become 100% vested and nonforfeitable if a Participant dies while actively employed by the Company or, if earlier, upon attainment of a Participant’s Normal Retirement Age while actively employed by the Company.

5.02 Eligibility for Plan Benefits. Any Participant (or the Beneficiary of any deceased Participant) who terminates employment with the Company or who retires or dies while actively employed by the Company shall be entitled to receive a benefit from this Plan according and subject to the provisions of this Article.

5.03 Benefit Amount. The benefit payable to any Participant or his Beneficiary who becomes entitled to a benefit from this Plan shall constitute the balance of the vested portion of the Participant’s Accrued Benefit, determined as of the close of the last calendar month before his or her benefit is due to commence, subject to adjustment for contributions and investment experience credited thereafter until all Plan benefits have been paid.

5.04 Distribution of a Participant’s Vested Accrued Benefit.

(a) Except as provided in Subsection 5.04(b) below and in Section 5.05 and 5.07, a Participant’s vested Accrued Benefit shall be paid to the Participant (or, in the case of the Participant’s death, to his or her Beneficiary) in a single lump sum cash payment upon the date that is not later than (30) days following the date that is six months after the date of such Participant’s Termination of Employment (or, if earlier than the end of such 6-month period, the date of the Participant’s death).

(b) If, pursuant to Subsection 5.04(a) above, all or a portion of the Participant’s vested Accrued Benefit is payable to the Participant’s Beneficiary due to the Participant’s death, then such payment shall be made to the Participant’s Beneficiary by not later than 60 days after the date of the Participant’s date of death in a single lump sum cash payment.

5.05 Distribution of Base Salary Deferrals.

(a) Except as provided for in Subsections 5.05(b) below and in Section 5.07, the portion of a Participant’s vested Accrued Benefit that is attributable each Base Salary Deferral plus earnings thereon through the Elected Payment Date shall be paid or commence to be paid to the Participant on the applicable Elected Payment Date in one of the following payment forms as specified by the Participant on the Election Form related to such Base Salary Deferral:

(i) in a single lump sum cash payment; or

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(ii) in substantially equal annual cash installments over a period of not more than 10 years with the first such installment payable by not later than the 30^th day following the Elected Payment Date and annually thereafter for the selected number of years;

provided that, if the Participant fails to specify the Elected Payment Date, the payment form or elects the installment payment form, but does not specify the frequency with which such payments will be made or the period over which such installments will be paid, then such portion of the Participant’s vested Accrued Benefit shall be paid as provided for in Section 5.04 hereof. Each such cash installment payment specified in subparagraph (ii) above shall consist of the portion of a Participant’s vested Accrued Benefit that is attributable to the Base Salary Deferral plus earnings thereon with respect to the Participant’s written deferral election accrued through the Elected Payment Date and the applicable anniversaries thereof, divided by the remaining number of years during which the amounts are to be distributed.

Notwithstanding the foregoing, if any payments are to be made or are to commence upon a Participant’s Termination of Employment and if immediately prior to such termination the Participant is a “Specified Employee” within the meaning of Code Section 409A(a)(2)(B), then no such payments shall be made or commence before the date that is six months after the date of such termination (or, if earlier than the end of such six month period, the date of Participant’s death). The accumulated postponed amount shall be paid to the Participant in a lump sum cash payment by not later than the 10^th day after the end of the six month period (or in a lump sum cash payment to the Participant’s Beneficiary by not later than 60 days after the date of the Participant’s date of death or on the next business day if such date is a non-business day), provided however, that the Participant or Beneficiary may not, directly or indirectly, designate the year of payment.

(b) In the event of the Participant’s death, either before any distribution has commenced with respect to the portion of a Participant’s vested Accrued Benefit that is attributable a Base Salary Deferral or thereafter when distributions with respect to a Base Salary Deferral have commenced, but have not been fully disbursed, the portion of a Participant’s vested Accrued Benefit that is attributable such Base Salary Deferral plus earnings thereon (through the payment date amount) shall be distributed to the Participant’s Beneficiary upon the Participant’s death in a single lump sum cash payment by not later than 60 days after the date of the Participant’s date of death or on the next business day if such date is a non-business day. If the Participant has not designated a Beneficiary as provided for in Subsection 5.08 or the Participant’s designated Beneficiary(ies) do not survive the Participant, then any portion of a Participant’s vested Accrued Benefit that is otherwise distributable under Subsection 5.05(a) above shall be paid in a single lump sum cash payment to the Participant’s estate by not later than 60 days after the date of the Participant’s date of death or on the next business day if such date is a non-business day.

5.06 When A Payment Is Treated As Made. In accordance with Section 1.409A-3(d) of the Treasury Regulations, all distributions under this Plan will be treated as made on the designated payment date if the payment is made at such date or a later date within the same calendar year, or if later, by the 15^th day of the third month following the date designated in the Plan provided, however, that the Participant or Beneficiary may not, directly or indirectly, designate the year of payment.

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5.07 Acceleration Permitted Only In Specified Circumstances. The timing of a distribution of a Participant’s Accrued Benefit shall not be accelerated, except in accordance with Treasury Regulation Section 1.409A-3(j)(4)(ii) (domestic relations order); Treasury Regulation Section 1.409A-3(j)(4)(iii) (conflicts of interest); Treasury Regulation Section 1.409A-3(j)(4)(v) (limited cashouts); Treasury Regulation Section 1.409A-3(j)(4)(vi) (payment of employment taxes); Treasury Regulation Section 1.409A-3(j)(4)(vii) (payment upon income inclusion under Section 409A); Treasury Regulation Section 1.409A-3(j)(4)(ix) (plan terminations and liquidation); Treasury Regulation Section 1.409A-3(j)(4)(xi) (payment of state, local or foreign taxes); Treasury Regulation Section (j)(4)(xiii) (certain offsets); Treasury Regulation Section 1.409A-3(i)(4)(xiv) (bona fide disputes).

5.08 Designation of Beneficiary. Each Participant may, at any time, designate one or more Beneficiaries to receive amounts credited to the Participant’s Accounts in the event of the Participant’s death. A Participant may make an initial Beneficiary designation, or change an existing Beneficiary designation without the consent of the previously designated Beneficiary, by completing and signing a Beneficiary Designation Form and submitting it to the Plan Administrator before the Participant’s death. Upon receipt by the Plan Administrator of a Participant’s Beneficiary Designation Form, all Beneficiary designations previously filed by that Participant shall automatically be canceled. If a Participant does not designate a Beneficiary or if his or her Beneficiary or any contingent Beneficiaries do not survive the Participant, the estate of the Participant shall be deemed to be his or her designated Beneficiary.

ARTICLE VI

PLAN ADMINISTRATION

6.01 Plan Administrator. The Plan Administrator shall be responsible for the general operation and administration of the Plan and for carrying out its provisions. The Plan Administrator shall consist of one or more persons appointed from time to time by the Company’s President, provided, however, that no person who is a Plan Participant may be appointed or remain as a Plan Administrator. Each such person who is appointed shall serve at the pleasure of the Company’s President.

In the administration of this Plan, the Plan Administrator may, from time to time, employ agents and delegate to them such administrative duties he/she/they deem(s) fit and from time to time consult with counsel who may be counsel to the Company.

6.02 Powers of Administration. In addition to duties and powers conferred on him, her or they elsewhere in the Plan, the Plan Administrator shall have full authority to interpret the Plan, to decide all questions of eligibility to participate and to receive benefits under the Plan, to direct the Company to pay benefits and Plan administration expenses, to retain clerical, legal, actuarial and other professional assistance as needed, to adopt rules for operating the Plan, to notify eligible individuals of their rights under the Plan, to keep records of each Participant’s interest under the Plan, and to adopt a benefit claim and review procedure consistent with that required by ERISA. The Plan Administrator shall be entitled to rely conclusively upon all calculations, opinions, reports and data furnished with respect to the Plan by the Company or by any actuary, accountant, counsel or other person employed or engaged by the Company. The Plan Administrator’s actions and decisions shall be final and binding, unless arbitrary or capricious.

Notwithstanding any provision of the Plan to the contrary, the Plan Administrator shall have total

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discretion to fulfill his, her or their duties and responsibilities as he, she or they see(s) fit on a uniform and consistent basis and as he/she/they believe(s) a prudent person acting in a like capacity and familiar with such matters would do.

6.03 Books and Records. The Plan Administrator shall keep such books of account, records and other data as may be necessary for the proper administration of the Plan.

6.04 Costs and Expenses of Administration. All expenses and costs of administering the Plan shall be paid by the Company.

ARTICLE VII

AMENDMENT AND TERMINATION

7.01 Amendment and Termination. The Company reserves the right to amend the Plan in any respect, retroactively or prospectively, at any time and from time to time by a written instrument stating such intent and adopted by the Company’s Board of Directors. The Company also reserves the right to terminate the Plan at any time pursuant to a resolution of the Company’s Board of Directors.

7.02 Effect of Amendment or Termination. No amendment or termination of the Plan shall deprive any Participant or Beneficiary of any portion of a Plan benefit to which he or she was entitled when payment of such benefit commenced, if payment commenced prior to the effective date of such Plan amendment or termination, nor shall any Participant or Beneficiary be deprived of his or her right to receive any benefit to which he or she would be entitled if the Participant had terminated employment on the day before the effective date of such amendment or termination, subject to the conditions of Section 3.04.

ARTICLE VIII

MISCELLANEOUS

8.01 Protection of Employee Interest. To the extent permitted by law, the rights of any Participant or Beneficiary to any benefit or payment under this Plan shall not be subject to attachment or other legal process for the debts of such Participant or Beneficiary; and any such benefit or payment shall not be subject to anticipation, alienation, sale, transfer, assignment or encumbrance.

8.02 Unfunded Plan; No Fiduciary Relationship Created. This Plan is intended to be an unfunded plan. Nothing contained in this Plan, and no action taken pursuant to the provisions of this Plan, shall create or be construed to create a fiduciary relationship between the Company and any Plan Participant, Beneficiary or any other person. Plan benefits shall be paid from the general assets of the Company. The Company may establish a grantor trust to provide a source for benefit payments under this Plan. Any such grantor trust shall conform to the terms of the Internal Revenue Service model Rabbi Trust set forth in Revenue Procedure 92-64 (and as modified or superseded in the future), or shall otherwise be designed so as to preserve the Plan’s exempt status as an unfunded plan for the purposes of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. Any funds which may be invested by the Company to make provision for its obligations hereunder shall continue for all purposes to be a part of the general funds of the Company and no person other than the Company shall by virtue of the provisions of this Plan have any interest in such funds. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the rights of any unsecured general creditor of the Company.

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8.03 No Enlargement of Employee Rights. No Participant shall have any right to receive a distribution of any amounts credited or earned under the Plan except in accordance with the terms of the Plan. Establishment or maintenance of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company for any period of time.

8.04 Incapacity of Recipient. If any person entitled to a distribution under the Plan is deemed by the Plan Administrator to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Plan Administrator may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor.

8.05 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate, subject to the provisions of Section 7.02.

8.06 Unclaimed Benefit. Each Participant shall keep the Company informed of his or her current address and the current address of his or her designated Beneficiary. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three years after the date on which payment of the Participant’s benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any designated Beneficiary of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or designated Beneficiary and such benefit shall be irrevocably forfeited.

8.07 Governing Law. All rights under this Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, to the extent they are not pre-empted by the laws of the United States of America.

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Schedule A

Register of Approvals/Amendments

Adopted by FAFLIC Board:	December 22, 2004 (effective January 1, 2005)
Amended by FAFLIC Board:	December 16, 2005
Amended by FAFLIC Board:	December 21, 2006 (effective January 1, 2006)
Amended by FAFLIC Board:	June 27, 2007; (certain amendments effective January 1, 2007; other amendments effective January 1, 2008)
Amended by FAFLIC and Hanover Boards:	December 19, 2007 (effective January 1, 2008)
Amended by Hanover Board:	November 18, 2008 (effective January 1, 2008)
Amended by authorized representative pursuant to Hanover Board delegation on November 18, 2008 (409A):	December 8, 2008 (effective January 1, 2008)
Amended and restated by Hanover Board:	December 16, 2010 (effective January 1, 2010)

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EX-10.31

Exhibit 10.31

January 20, 2011

David Greenfield

Re: The Hanover Insurance Group, Inc. Amended and Restated Employment Continuity Plan (the “Plan”)

Dear David:

Subject to your acceptance of the terms contained in this letter, the Compensation Committee has designated you a Executive Tier Participant in the Plan with an 3X Multiplier. Except as set forth below, your participation in the Plan shall be governed by the terms and conditions of the Plan, as the same may be amended from time to time by the Board or the Compensation Committee.

You hereby acknowledge and agree that Sections 6.2, 6.3 and 6.4 of the Plan shall not apply with respect to your participation in the Plan and that the following language shall be substituted in lieu thereof:

6.2 Best Net Payment Adjustment. Payments under this Plan shall be made without regard to whether the deductibility of such payments (or any other payments or benefits to or for the benefit of Participant) would be limited or precluded by Section 280G of the Code (“Section 280G”) and without regard to whether such payments (or any other payments or benefits) would subject Participant to the federal excise tax levied on certain “excess parachute payments” under Section 4999 of the Code (the “Excise Tax”); provided, that if the total of all payments to or for the benefit of Participant, after reduction for all federal taxes (including the Excise Tax) with respect to such payments (“Participant’s total after-tax payments”), would be increased by the limitation or elimination of any payment under this Plan, amounts payable under this Plan shall be reduced to the extent, and only to the extent, necessary to maximize Participant’s total after-tax payments. Any reduction in payments required by the preceding sentence shall be applied, first, against any benefits payable under Section 5.4 of the Plan, starting with those coverages, if any, that constitute “non-qualified deferred compensation” subject to Section 409A of the Code, and only if additional reductions are necessary, against the lump sum benefit described in Section 5.3. The determination as to whether Participant’s payments and benefits include “excess parachute payments” and, if so, the amount and ordering of any reductions in payment required by the provisions of this Section shall be made at the Company’s expense by the Company’s independent registered public accounting firm immediately prior to a Change in Control, or by such other certified public accounting firm as the Committee may designate prior to a Change of Control (the “accounting firm”). In the event of any underpayment or overpayment hereunder, as determined by the accounting firm, the amount of such underpayment or overpayment shall forthwith and in all events within thirty (30) days of such determination, be paid to Participant or refunded to the Company, as the case may be, with interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code.

6.3 Reserved

6.4 Claim by Internal Revenue Service: As soon as practicable, a Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would result in the imposition of the Excise Tax. If the Company notifies the Participant in writing that it desires to contest such claim, the Participant shall cooperate in all reasonable ways with the Company in such contest and the Company shall be entitled to participate in all proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Participant harmless, on an after-tax basis, for any excise tax or income tax (including interest and penalties with respect thereto) imposed as a result of such payment of costs and expenses. Without limitation on the foregoing, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim. Participant agrees to prosecute such contest to a determination before any

administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Participant is required to extend the statute of limitations to enable the Company to contest such claim, the Participant may limit this extension solely to such contested amount. The Company’s control of the contest shall be limited to issues with respect to the imposition of the Excise Tax and the Participant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

Please indicate your agreement to be bound by the terms hereof by executing this letter in the space indicated below and returning a fully executed copy to my attention. Your consent and acknowledgment are a condition to your participation in the Plan.

The Hanover Insurance Group, Inc.
By:	/s/ Bryan D. Allen
Bryan Allen
Vice President

Consented to and acknowledged:

/s/ David Greenfield

David Greenfield

EX-10.32

Exhibit 10.32

THE HANOVER INSURANCE GROUP CASH BALANCE

PENSION PLAN

PART I

(As amended and restated generally effective January 1, 2010)

Part I

THE HANOVER INSURANCE GROUP CASH BALANCE

PENSION PLAN

PART I

TABLE OF CONTENTS

		PAGE
ARTICLE I            NAME, PURPOSE AND EFFECTIVE DATE OF PLAN			1
1.01	General Statement.		1
1.02	Name of Plan.		1
1.03	Purpose.		2
1.04	Restated Plan Effective Date.		2
ARTICLE II          DEFINITIONS			2
ARTICLE III        PARTICIPATION REQUIREMENTS			21
3.01	Participation Requirements.		21
3.02	Classification Changes.		22
3.03	Participant Cooperation, Participant Refusal.		23
ARTICLE IV        PARTICIPANT ACCOUNTS			23
4.01	Establishment of Accounts.		23
4.02	Allocations to Accounts.		23
4.03	Adjustments of Accounts.		23
4.04	Distributions.		24
ARTICLE V          EMPLOYER CONTRIBUTIONS			24
5.01	Employer Contributions.		24
5.02	Payment of Contributions to Trustee.		25
5.03	Receipt of Contributions by Trustee.		25
ARTICLE VI        RETIREMENT AND DISABILITY BENEFITS			25
6.01	Normal Retirement Benefit.		25
6.02	Early Retirement Benefit.		26
6.03	Subsidized Early Retirement Benefit.		27
6.04	Late Retirement Benefit.		30
6.05	Disability Benefit.		31
6.06	Distribution of Benefits.		32
6.07	Qualified Joint and Survivor Annuity for Married Participants.		34
6.08	Supplementary Pension Benefits.		36
6.09	Suspension of Retirement Benefits.		38
6.10	Rollovers to Other Qualified Plans.		39
ARTICLE VII      DEATH BENEFITS			41
7.01	Pre-Retirement Death Benefits.		41
7.02	Death Benefits for Certain Dependent Spouses (Applicable only to certain Employees entitled to Special Grandfathered Benefits).		44
ARTICLE VIII     BENEFITS UPON TERMINATION FROM SERVICE			46
8.01	In General.		46

Part I

8.02	Termination Benefits.	46
8.03	Forfeitures.	48
8.04	Resumption of Service.	48
8.05	Service with Affiliates.	48
8.06	Distribution of Benefits.	48
8.07	Cash Out Repayment Option.	49
8.08	Early Retirement Election.	49
8.09	Amendment to Vesting Schedule.	49

Part I

ARTICLE I

NAME, PURPOSE AND EFFECTIVE DATE OF PLAN

1.01 General Statement. The Hanover Insurance Group Cash Balance Pension Plan (the “Plan”) consists of three parts, Part I, Part II and Part III. Part I of the Plan provides a cash balance and pension benefit, which was formerly provided under a plan known as “The Allmerica Financial Cash Balance Pension Plan”. Part II of the Plan provides a pension benefit, which was formerly provided under a plan known as “The Allmerica Financial Agents’ Pension Plan”. Part III of the Plan contains provisions applicable to each of Part I and Part II.

The provisions of Part III of the Plan shall override any provision of Part I and or Part II of the Plan as provided in Part III of the Plan.

The benefits payable to eligible Participants under Part I of the Plan are governed by the terms and conditions of Part I of the Plan and Part III of the Plan. The definitions of terms as used in this Part I of the Plan are as set forth in Article II, except as otherwise provided in this Article I.

1.02 Name of Plan. The prior version of this Part I of the Plan, known as The Allmerica Financial Cash Balance Pension Plan, generally effective January 1, 1997 (“The Allmerica Cash Balance Plan”), was an amendment and restatement of the State Mutual Companies’ Pension Plan. It was adopted by First Allmerica Financial Life Insurance Company (“First Allmerica”) and its affiliates, Citizens Insurance Company (“Citizens”) and The Hanover Insurance Company (“Hanover”). Effective January 1, 1995, the State Mutual Companies Pension Plan added a cash balance benefit. Effective December 31, 1994, benefit accruals provided under the integrated unit credit benefit formula of the State Mutual Companies’ Pension Plan were frozen for all Participants, except Participants eligible for certain continuing benefit accruals. Certain other accruals and benefits under this Part I of the Plan were subsequently frozen as provided in this Part I.

Prior versions of this Part I of the Plan were sponsored by First Allmerica, formerly known as State Mutual Life Assurance Company of America, from January 1, 1941 to December 31, 2007. Effective January 1, 2008, this Part I of the Plan was adopted by Hanover, an Affiliate of First Allmerica, as the sole Employer. Effective January 1, 1992, a prior version of this Part I of the Plan was merged with The Allmerica Financial Agents’ Pension Plan (formerly known as the State Mutual Agents’ Pension Plan) (the “Agents’ Pension Plan”).

Benefits payable under the Agents’ Pension Plan are set forth in Part II of the Plan. Parts I and II of the Plan are permissively aggregated for purposes of the qualification and non-discrimination requirements applicable to the Plan under Sections 401 and 410 of the Internal Revenue Code.

Part I - 1

1.03 Purpose. The Plan has been established for the exclusive benefit of Participants and their Beneficiaries and as far as possible shall be interpreted and administered in a manner consistent with this intent and consistent with the requirements of Section 401 of the Internal Revenue Code.

Subject to Article IV of Part III of the Plan (Limitations on Benefits) and to Section 10.04 of Part III of the Plan, which relates to the return of Employer contributions under special circumstances, until such time as the Plan has been terminated and all Plan liabilities have been satisfied, under no circumstances shall any assets of the Plan, or any contributions made under the Plan, be used for, or diverted to, purposes other than for the exclusive benefit of the Participants and their Beneficiaries and to defray reasonable expenses incurred in the administration of the Plan.

1.04 Restated Plan Effective Date. The effective date of this amended and restated Part I of the Plan is January 1, 2010 (except for those provisions of this Part of the Plan which have an alternative effective date). Except to the extent otherwise specifically provided in this Part I of the Plan, (i) the provisions of this amended and restated Part I of the Plan shall apply to a Participant who is in the employ of the Employer on or after January 1, 2010. The rights and benefits of any Participant whose employment with the Employer terminated prior to January 1, 2010 shall be determined in accordance with the provisions of this Part I of the Plan as were in effect at the appropriate time or times prior to January 1, 2010; provided, however, that if the Accrued Benefit of any such Participant has not been completely distributed before January 1, 2010, then such Accrued Benefit shall be accounted for and distributed in accordance with the provisions of this version of Part I of the Plan, but only to the extent that any such provision is not inconsistent with Part III of the Plan and subject to the requirements of applicable law.

ARTICLE II

DEFINITIONS

All section and article references in this Part I are to section and article references in this Part I, except as otherwise expressly provided.

As used in Parts I, II and III of the Plan, the following words and phrases shall have the meanings set forth in this Part I, unless a different meaning is clearly required by the context or is otherwise provided in Part II and or Part III of the Plan.

2.01 “Accrued Benefit”:

(a) means, except as provided in (b) below, the sum of (i) the monthly retirement benefit payable as a single life annuity to the Participant beginning on his or her Normal Retirement Date which is the Actuarial Equivalent of the Participant’s Projected Account Balance, plus (ii) the Participant’s Grandfathered Benefit, if any.

(b) means, with respect to the minimum benefit for Non-Key Employee Participants in a Top Heavy Plan, the sum of such benefits earned by the Participant, which

Part I - 2

benefits are payable at the Participant’s Normal Retirement Date and are described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans).

2.02 “Actuarial Equivalent” means a benefit having the same value as the benefit or benefits otherwise payable. Except as otherwise provided in this Section, the present value of any benefit determined under the terms of the Part I of the Plan will be the actuarial equivalent of the no-death benefit life annuity retirement benefit specified in Section 6.01.

Actuarial Equivalent life annuity settlements of Participant Projected Account Balances or of optional life annuity Top Heavy Plan benefits will be computed utilizing (i) the Code Section 417 Mortality Table and (ii) the Code Section 417 Interest Rate for determining the amount payable to a Participant having an annuity starting date on or after January 1, 2004.

Optional life annuity settlements of Grandfathered Benefits will be computed utilizing the 1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum. Adjustment factors used to determine optional forms of Grandfathered Benefits are included in Exhibit A, attached hereto and made a part of Part I of the Plan.

Adjustment factors for optional Grandfathered Benefits not illustrated will be computed on an actuarial basis consistent with that used in computing the factors shown in Exhibit A.

The present value (including, but not limited to, for purposes of Section 7.01(a)(i)(B), Section 7.01(a)(ii)(B) and determining eligibility for cashout distributions under Section 8.02) and the amount of any cash distribution of a Grandfathered Benefit or a benefit for Non-Key Employee Participants in a Top Heavy Plan shall be determined on the basis of (i) the mortality rates specified above and an interest rate of 7% per annum, or (ii) the Code Section 417 Mortality Table and the Code Section 417 Interest Rate (or for determining the amount payable to a Participant having an annuity starting date on and after January 1, 2008, the Code Section 417 Applicable Interest Rate), whichever produces the greater benefit.

The preceding paragraphs shall not apply to the extent they would cause the Plan to fail to satisfy the requirements of Article IV of Part III of the Plan (Limitations on Benefits) or Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans).

For purposes of the Part I of the Plan, (a) the “Code Section 417 Mortality Table” means the applicable mortality table prescribed by the Secretary of the Treasury pursuant to Code section 417(e)(3), as in effect from time to time, provided, however, that notwithstanding the preceding provisions of this paragraph, for distributions commencing on or after December 31, 2002 and prior to January 1, 2008, the Code Section 417 Mortality Table means the Table set forth in Revenue Ruling 2001-62 and for purposes of determining the amount payable to a Participant with an annuity starting date on or after

Part I - 3

January 1, 2008, the Code Section 417 Mortality Table means the Table set forth in Revenue Ruling 2007-67 or such other Table as may be prescribed by the Secretary of the Treasury pursuant to Code Section 417(e)(3); (b) for periods beginning on and after January 1, 2004, the “Code Section 417 Interest Rate” means, for the Plan Year which contains the annuity starting date for the distribution, the annual rate of interest on 30-year Treasury securities in effect for the second month immediately preceding the first day of the Plan Year (e.g., November 2009 for the 2010 Plan Year), and (c) for periods beginning on and after January 1, 2008, the “Code Section 417 Applicable Interest Rate” means, for the Plan Year which contains the annuity starting date for the distribution, the applicable interest rate described by Code section 417(e) after its amendment by the Pension Protection Act of 2006, which rate more specifically shall be the adjusted first, second, and third segment rates applied under rules similar to the rules of Code section 430(h)(2)(C) for the lookback month used to determine the previously applicable interest rate on 30-year Treasury securities (e.g., November 2009 for the 2010 Plan Year) or for such other time as the Secretary of the Treasury may by regulations prescribe. For purposes of determining the Code Section 417 Applicable Interest Rate, the first, second, and third segment rates are the first, second, and third segment rates which would be determined under Code section 430(h)(2)(C) if:

(i) Code section 430(h)(2)(D) were applied by substituting the average yields for the month described in clause (ii) below for the average yields for the 24-month period described in such Code section, and

(ii) Code section 430(h)(2)(G)(i)(II) were applied by substituting “Section 417(e)(3)(A)(ii)(II) for “Section 412(b)(5)(B)(ii)(II)”, and

(iii) The applicable percentage under Code section 430(h)(2)(G) is treated as being 20% in 2008, 40% in 2009, 60% in 2010, and 80% in 2011.

2.03 (a) “Affiliate” means any incorporated Career Agent of an Employer and corporation affiliated with the Employer through the action of such corporation’s board of directors and the Employer’s Board of Directors.

(b) Affiliate also means:

(i) Any corporation or corporations which together with the Employer constitute a controlled group of corporations or an “affiliated service group”, as described in Sections 414 (b) and 414 (m) of the Internal Revenue Code as now enacted or as later amended and in regulations promulgated thereunder; and

(ii) Any partnerships or proprietorships under the common control of the Employer.

2.04 “Age” means, except for purposes of determining lump sum cash distributions and optional life annuity benefits, the age of a person at his or her last birthday. Lump sum cash distributions and optional life annuity benefits will be determined on the basis of a person’s age nearest birthday.

Part I - 4

2.05 “Allocation” means an amount equal to the percentage of a Participant’s Eligible Compensation specified below for each of the Plan Years commencing on or after January 1, 1995 and prior to January 1, 2005.

Plan Year	Percentage
1995	7%
1996	7%
1997	7%
1998	7%
1999	7%
2000	7%
2001	5%
2002	3%
2003	5%
2004	5.5%

An Employee will not receive more than one Allocation for any Plan Year with respect to the same Compensation.

2.06 “Annuity Commencement Date” means the date as of which a benefit commences under the Plan.

2.07 “Beneficiary” means the person, trust, organization or estate designated to receive Plan benefits payable on or after the death of a Participant.

2.08 “Compensation” means:

(a) For purposes of determining a Participant’s Allocation specified in Section 4.02, the total wages or salary, overtime, bonuses, and any other taxable remuneration paid to an Employee by the Employer during the Plan Year, while the Employee is a Participant, as reported on the Participant’s W-2 for the Plan Year; provided, however, that Compensation for this purpose shall be determined without reduction for (i) any Code Section 401(k) salary reduction contributions contributed on the Participant’s behalf for the Plan Year to any defined contribution plan sponsored by the Employer and (ii) the amount of any salary reduction contributions contributed on the Participant’s behalf for the Plan Year to any Code Section 125 plan sponsored by the Employer.

Part I - 5

Notwithstanding the above, Compensation for the above purpose shall not include:

(i) incentive compensation paid to Participants pursuant to the Employer’s Executive Long Term Performance Unit Plan or pursuant to any similar or successor executive compensation plan;

(ii) Employer contributions to a deferred compensation plan or arrangement (other than salary reduction contributions to a Code Section 401(k) or 125 plan, as described above) either for the year of deferral or for the year included in the Participant’s gross income;

(iii) any income which is received by or on behalf of a Participant in connection with the grant, receipt, settlement, exercise, lapse of risk of forfeiture or restriction on transferability, or disposition of any stock option, stock award, stock grant, stock appreciation right or similar right or award granted under any plan, now or hereafter in effect, of the Employer or any successor to the Employer, the Employer’s parent, any such successor’s parent, any subsidiaries or affiliates of the Employer, or any stock or securities underlying any such option, award, grant or right;

(iv) severance payments paid in a lump sum;

(v) Code Section 79 imputed income or long term disability and workers’ compensation benefit payments;

(vi) taxable moving expense allowances or taxable tuition or other educational reimbursements;

(vii) for Plan Years commencing after December 31, 1998, compensation paid in the form of commissions;

(viii) non-cash taxable benefits provided to executives, including the taxable value of Employer-paid club memberships, chauffeur services and Employer-provided automobiles; and

(ix) other taxable amounts received other than cash compensation for services rendered, as determined by the Plan Administrator.

(b) For purposes of Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) and for purposes of Article IV of Part III of the Plan (Limitations on Benefits), the term “Compensation” means a Participant’s wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and

Part I - 6

reimbursements or other expense allowances under a non-accountable plan (as described in Section 1.62-2(c) of the Regulations), and excluding the following:

(i) Employer contributions to a plan of deferred compensation which are not includible in the Employee’s gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation;

(ii) amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by an Employee becomes freely transferable or is no longer subject to a substantial risk of forfeiture;

(iii) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and

(iv) other amounts which receive special tax benefits.

For Plan Years commencing after December 31, 1997, Compensation for purposes of the Part I of the Plan shall also include Employee elective deferrals under Code Section 402(g)(3), and amounts contributed or deferred by the Employer at the election of the Employee and not includible in the gross income of the Employee, by reason of Code Sections 125, 132(f)(4), 402(e)(3) and 402(h)(1)(B).

Additionally, amounts under Code Section 125 include any amounts not available to a Participant in cash in lieu of group health coverage because the Participant is unable to certify that he or she has other health coverage (deemed Code Section 125 compensation). Such an amount will be treated as an amount under Code Section 125 only if the Employer does not request or collect information regarding the Participant’s other health coverage as part of the enrollment process for the health plan.

(c) Notwithstanding (a) and (b) above, for Plan Years beginning on or after January 1, 1994 and prior to January 1, 2002, the annual Compensation of each Participant taken into account for determining all benefits provided under Part I of the Plan for any determination period shall not exceed $150,000. This limitation shall be adjusted for inflation by the Secretary under Code Section 401(a)(17)(B) in multiples of $10,000 by applying an inflation adjustment factor and rounding the result down to the next multiple of $10,000 (increases of less than $10,000 are disregarded). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined beginning in such calendar year.

If Compensation is being determined for a Plan Year that contains fewer than 12 calendar months, then the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12.

Part I - 7

If Compensation for any prior determination period is taken into account in determining a Participant’s benefits for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual compensation limit in effect for that prior period. For this purpose, in determining benefits in Plan Years beginning on or after January 1, 1989, the annual Compensation limit in effect for determination periods beginning before that date is $200,000. In addition, in determining benefits in Plan Years beginning on or after January 1, 1994, the annual Compensation limit in effect for determination periods beginning before that date is $150,000.

(d) Notwithstanding (a) and (b) above, the annual Compensation of each Participant taken into account in determining benefit accruals in any Plan Year beginning after December 31, 2001, shall not exceed $200,000. Annual compensation means Compensation during the Plan Year or such other consecutive 12-month period over which Compensation is otherwise determined under the Part I of the Plan (the “determination period”). For purposes of determining benefit accruals in a Plan Year beginning after December 31, 2001, the annual Compensation for any prior determination period shall be limited to $200,000.

The $200,000 limit on annual Compensation for determination periods beginning after December 31, 2001 shall be adjusted for cost-of-living increases in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to annual Compensation for the determination period that begins with or within such calendar year.

2.09 “Credited Service” means and includes all Hours of Service (except excluded Hours described in Subsection 2.23(b), (c), (g) and (h)) completed with the Employer as an eligible Employee on and after the date an Employee becomes a Participant in Part I of the Plan.

For purposes of the Part I of the Plan, a Participant shall receive a Year of Credited Service for each Plan Year in which he or she completes at least 1,000 Hours of Credited Service; provided that for the Plan Year in which an Employee initially becomes a Participant in Part I of the Plan, such Participant shall receive a Year of Credited Service if he or she completes at least 1,000 Hours of Service in the Plan Year.

A Participant who is absent because of sickness or injury shall receive Credited Service for the period described in Subsections 2.23(b) or (g). Except as provided in Section 6.05, if any such absence continues beyond such period, the Participant shall receive no further Credited Service.

Notwithstanding the rules for determining Credited Service described above:

(i) Eligible Re-employed Pensioners of First Allmerica, Citizens, Hanover and General Agents of First Allmerica (as each is described in Section 6.09) shall receive no further Credited Service for periods of re-employment following their retirement unless they complete at least 1,000 Hours of Service in a Plan Year.

Part I - 8

(ii) If during a Plan Year a Participant is employed by the Employer as a member of an eligible class of Employees and is also employed by an Affiliate, employed as a member of an ineligible class of Employees or employed as a Career Agent or General Agent of First Allmerica, he or she shall receive Credited Service under this Part I of the Plan only for Hours of Service completed while employed as a member of an eligible class of Employees.

(iii) For purposes only of determining eligibility for early retirement and eligibility for the Rule of 85 and Rule of 95 subsidized Early Retirement Benefits described in Section 6.02, but not for purposes of computing the amount of benefits payable, Credited Service shall include Hours of Service completed with Craftsman Insurance Company and the Hanover Life Insurance Company, both former affiliates of Hanover, and as a Career Agent or General Agent of First Allmerica.

2.10 “Determination Date” means the date as of which a Participant’s Accrued Benefit is calculated.

2.11 “Eligible Compensation” means the Compensation taken into account for purposes of determining a Participant’s Allocation for a Plan Year pursuant to Section 4.02 of the Part I of the Plan. If a Participant is a Participant in Part I of the Plan on the first day of any Plan Year, such Participant’s Eligible Compensation shall be his or her Compensation for such Plan Year paid while the Participant is employed as a member of an eligible class of Employees. If an Employee becomes a Participant in Part I of the Plan on any day after the first day of a Plan Year, such Participant’s Eligible Compensation shall be his or her Compensation for such Plan Year paid on and after the date he or she becomes a Participant and while the Participant is employed as a member of an eligible class of Employees.

2.12 “Eligibility Computation Period” means a period of twelve consecutive months commencing on an Employee’s Employment Commencement Date or, if an Employee does not complete at least 1,000 Hours of Service during such initial period, such Employee’s Eligibility Computation Period means the Plan Year commencing with the first Plan Year following the Employee’s Employment Commencement Date and, if necessary, each succeeding Plan Year.

2.13 “Employee” means any employee who is employed by the Employer.

2.14 “Employer” means The Hanover Insurance Company.

2.15 “Employment Commencement Date” means the date on which an Employee first performs an Hour of Service or, in the case of an Employee who has a One-Year Break in Service, the date on which he or she first performs an Hour of Service after such Break.

2.16 “Fiduciary” means any person who (i) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or

Part I - 9

control respecting management or disposition of its assets; (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so; or (iii) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Plan Administrator.

2.17 “First Allmerica” means First Allmerica Financial Life Insurance Company.

2.18 “Five Percent Owner” means, in the case of a corporation, any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent of the outstanding stock of the Employer or stock possessing more than five percent of the total combined voting power of all stock of the Employer. In the case of an Employer that is not a corporation; “Five Percent Owner” means any person who owns or under applicable regulations is considered as owning more than five percent of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), and (m) shall be treated as separate employers.

2.19 “Former Participant” means a person who had been an active Participant in Part I or Part II of the Plan (as applicable), but who has ceased to accrue further Credited Service for any reason.

2.20 “Grandfathered Benefit” means either the Basic Grandfathered Benefit or the Special Grandfathered Benefit, as defined below.

(a) “Basic Grandfathered Benefit” means the monthly retirement benefit payable as a single life annuity to an actively employed Participant on his or her Normal Retirement Date, calculated in accordance with the benefit formula set forth in Section 6.01 of Part I of the Plan, as in effect on December 31, 1994. Such benefit shall be calculated based on the Participant’s Average Monthly Compensation and Credited Service, determined as of December 31, 1994, based on the provisions of Part I of the Plan as in effect on such date.

(b) “Special Grandfathered Benefit” means the monthly retirement benefit payable as a single life annuity to an actively employed Participant on his or her Normal Retirement Date, calculated in accordance with the benefit formula set forth in Section 6.01 of Part I of the Plan, as in effect on December 31, 1994. Such benefit shall be based on the Participant’s Average Monthly Compensation and Credited Service calculated as of the date of determination, both being determined in accordance with the provisions of Part I of the Plan as in effect on December 31, 1994. The Special Grandfathered Benefit is available only to Participants who were actively employed by the Employer or by an Affiliate and accruing Credited Service on December 31, 1994, whose age on December 31, 1994, when added to two times their Credited Service as of such date (determined in accordance with the provisions of Part I of the Plan as in effect on December 31, 1994), total at least 85.

Part I - 10

For purposes of this Section “actively employed” means that the Participant was performing work duties for the Employer or an Affiliate on December 31, 1994 or was then absent by reason of a scheduled day off, paid vacation day, personal day, or sick day or was then absent due to an Employer-approved leave of absence. Additionally, a Participant shall be deemed to have been actively employed on December 31, 1994 if on such date the Participant was then employed by the Employer or by an Affiliate and was then receiving disability benefits under his or her Employer’s long-term disability benefit plan.

Notwithstanding the above, each Section 401(a)(17) Employee’s Special Grandfathered Benefit under this Part I of the Plan will be the greater of the Special Grandfathered Benefit determined for the Employee under (i) or (ii) below:

(i) the Employee’s Special Grandfathered Benefit, calculated as described above, based on the Employee’s total Years of Credited Service as of the date of determination; or

(ii) the sum of:

(A) the Employee’s Plan Accrued Benefit as of December 31, 1993, frozen in accordance with
Section 1.401(a)(4)-13 of the Treasury Regulations, and

(B) the Employee’s Special Grandfathered Benefit determined under the benefit formula applicable for the 1994 Plan Year, as applied to the Employee’s Years of Credited Service (calculated as of the date of determination in accordance with the provisions of Part I of the Plan as in effect on December 31, 1994) for Plan Years beginning on or after January 1, 1994 and prior to January 1, 2005.

A “Section 401(a)(17) Employee” means an Employee whose Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994, is based on Compensation for a Year beginning prior to the first day of the first Plan Year beginning on or after January 1, 1994, that exceeded $150,000.

Notwithstanding anything in Part I of the Plan to the contrary, if an Employee who is accruing additional Special Grandfathered Benefits ceases to be eligible to accrue further benefits under Part I of the Plan because of termination of employment, retirement, transfer to an ineligible class of Employees, or for any other reason, such Employee shall not be eligible to accrue any additional Special Grandfathered Benefits upon resumption of service as an otherwise eligible Employee of the Employer.

Notwithstanding anything in Part I of the Plan to the contrary, no additional Special Grandfathered Benefits shall accrue for periods after December 31, 2004. Except as provided in the following paragraph, the amount of a Participant’s

Part I - 11

Special Grandfathered Benefit shall be frozen as of December 31, 2004, with such frozen Special Grandfathered Benefit being calculated based on the Participant’s Average Monthly Compensation and Credited Service as of the earlier of December 31, 2004 or the date the Participant ceases to be eligible to accrue additional Special Grandfathered Benefits determined in accordance with the provisions of Part I of the Plan as in effect on such date.

If a Participant was eligible to accrue additional Special Grandfathered Benefits as of December 31, 2004 under the provisions of Part I of the Plan in effect on December 31, 2004, the amount of the Participant’s frozen Special Grandfathered Benefit shall be increased to reflect increases in the cost of living after December 31, 2004 by:

(i) 5% per annum, compounded annually, for each Plan Year commencing on or after January 1, 2005 and ending on the earlier of (A) the date the Participant commences distribution of his or her Special Grandfathered Benefit or (B) the last day of the month within which the Participant would have completed 35 years of Credited Service (based on the provisions of Part I of the Plan in effect on December 31, 2004) if he or she had remained in continuous employment with the Employer through such date (the “Maximum Service Date”), and

(ii) If the Participant has not commenced receiving distribution of his or her Special Grandfathered Benefit prior to his or her Maximum Service Date, 3% per annum, compounded annually, for each Plan Year commencing after the Participant’s Maximum Service Date and ending on the date the Participant begins receiving his or her Special Grandfathered Benefit.

If the Participant commences receiving distribution of his or her Special Grandfathered Benefit as of any date other than the first day of a Plan Year, the cost of living adjustment percentage for such Plan Year shall be determined by multiplying the applicable cost of living adjustment percentage for such year by a fraction the numerator of which is the number of full or partial months from the first day of such Plan Year until the date as of which distribution of the Participant’s Special Grandfathered Benefit commences and the denominator of which is 12. If a Participant would have completed 35 years of Credited Service on a day other than the last day of the Plan Year, then the cost of living adjustment for such Plan Year shall be determined by multiplying 5% by a fraction the numerator of which is the number of full or partial months from the first day of such Plan Year until the date the Participant would have completed 35 years of Credited Service and the denominator of which is 12. The remaining months of the Plan Year after the Participant would have completed 35 years of Credited Service will be credited with a cost of living adjustment determined by multiplying 3% by a fraction the numerator of which is the remaining full months of such Plan Year and the denominator of which is 12. The foregoing cost of living adjustment provided in this Subsection 2.20(b) shall be applied to each eligible Participant’s Special Grandfathered Benefit without regard to his or her

Part I -12

employment status after December 31, 2004. A Participant will not be eligible for this cost of living adjustment if the Participant had ceased accruing additional Special Grandfathered Benefits prior to December 31, 2004 due to the Participant’s retirement, death or other termination of employment prior to December 31, 2004.

2.21 “Group Annuity Contract” means the group annuity contract or contracts issued by the Insurer through which benefits of the Plan are to be funded.

2.22 “Highly Compensated Employee” means any Employee who:

(a) was a Five Percent Owner at any time during the Plan Year or the preceding Plan Year; or

(b) for the preceding Plan Year:

(i) had Compensation from the Employer in excess of $80,000 (as adjusted pursuant to Code Section 414(q)(1)), and

(ii) for such preceding Plan Year was in the top-paid group of Employees for such preceding Year.

For purposes of this Section the “top-paid group” for a Plan Year is the top 20% of Employees ranked on the basis of Compensation paid during such Year.

In addition to the foregoing, the term “Highly Compensated Employee” shall also mean any former Employee who separated from service prior to the Plan Year, performs no service for the Employer during the Plan Year, and was an actively employed Highly Compensated Employee in the separation year or any Plan Year ending on or after the date the Employee attained Age 55.

In determining whether an Employee is a Highly Compensated Employee for Plan Years beginning in 1997, the Amendments of Code Section 414(q) stated above are treated as having been in effect for Plan Years beginning in 1996.

For purposes of this Section, Compensation means Compensation determined for purposes of Article IV of Part III of the Plan (Limitations on Benefits) but, for Plan Years beginning before January 1, 1998, without regard to Code Sections 125, 402(e)(3) and 402(h)(1)(B).

The determination of who is a Highly Compensated Employee, including the determinations of the numbers and identity of employees in the top-paid group and the Compensation that is considered will be made in accordance with Section 414(q) of the Code and regulations thereunder.

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2.23 “Hour of Service” means:

(a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. For purposes of Part I of the Plan an Employee who is exempt from the requirements of the Fair Labor Standards Act of 1938, as amended, shall be credited with 45 Hours of Service for each complete or partial week he or she would be credited with at least one Hour of Service under this Section 2.23.

(b) Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence:

(i) No more than the number of Hours in one regularly scheduled work year of the Employer shall be credited to an Employee under this Subsection (b) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period);

(ii) No hours shall be credited under this Subsection (b) for any payments made or due under a plan maintained solely for the purpose of complying with any applicable workers’ compensation, unemployment compensation or disability insurance laws; and

(iii) No hours shall be credited under this Subsection (b) for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee.

For purposes of this Subsection (b) a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund or insurer, to which the Employer contributes or pays premium.

(c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be both credited under Subsections (a) or (b), as the case may be, and under this Subsection. No more than 501 Hours shall be credited under this Subsection for a period of time during which an Employee did not or would not have performed duties.

(d) Special rules for determining Hours of Service under Subsections (b) and (c) for reasons other than the performance of duties.

In the case of a payment which is made or due which results in the crediting of Hours of Service under Subsection (b) or in the case of an award or agreement for back pay, to the extent that such an award or agreement is made with respect to a

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period during which an Employee performs no duties, the number of Hours of Service to be credited shall be determined as follows:

(i) In the case of a payment made or due which is calculated on the basis of units of time (such as hours, days, weeks or months), the number of Hours of Service to be credited for “exempt” Employees described in Subsection (a) shall be determined as provided in such Subsection. For all other Employees, the Hours of Service to be credited shall be those regularly scheduled hours in such unit of time; provided, however, that when an Employee does not have regularly scheduled hours, such Employee shall be credited with 8 Hours of Service for each workday for which he or she is entitled to be credited with Hours of Service under paragraph (b).

(ii) Except as provided in Paragraph (d)(iii), in the case of a payment made or due which is not calculated on the basis of units of time, the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employee’s most recent hourly rate of compensation (as determined below) before the period during which no duties are performed.

(A) The hourly rate of compensation of Employees paid on an hourly basis shall be the most recent hourly rate of such Employees.

(B) In the case of Employees whose compensation is determined on the basis of a fixed rate for specified periods of time (other than hours) such as days, weeks or months, the hourly rate of compensation shall be the Employee’s most recent rate of compensation for a specified period of time (other than an hour), divided by the number of hours regularly scheduled for the performance of duties during such period of time. The rule described in Paragraph (d)(i) shall also be applied under this subparagraph to Employees without a regular work schedule.

(C) In the case of Employees whose compensation is not determined on the basis of a fixed rate for specified periods of time, the Employee’s hourly rate of compensation shall be the lowest hourly rate of compensation paid to Employees in the same job classification as that of the Employee or, if no Employees in the same job classification have an hourly rate, the minimum wage as established from time to time under Section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended.

(iii) Rule against double credit. An Employee shall not be credited on account of a period during which no duties are performed with more hours than such employee would have been credited but for such absence.

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(e) Crediting of Hours of Service to computation periods.

(i) Hours of Service described in Subsection (a) shall be credited to the Employee for the computation period or periods in which the duties are performed.

(ii) Hours of Service described in Subsection (b) shall be credited as follows:

(A) Hours of Service credited to an Employee on account of a payment which is calculated on the basis of units of time (such as hours, days, weeks or months) shall be credited to the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates.

(B) Hours of Service credited to an Employee by reason of a payment which is not calculated on the basis of units of time shall be credited to the computation period in which the period during which no duties are performed occurs, or if the period during which no duties are performed extends beyond one computation period, such Hours of Service shall be allocated between not more than the first two computation periods in accordance with reasonable rules established by the Employer, which rules shall be consistently applied with respect to all Employees within the same job classification, reasonably defined.

(iii) Hours of Service described in Subsection (c) shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement or payment is made.

(f) For purposes only of determining participation and vesting under Part I of the Plan, Hours of Service shall include periods of service calculated in accordance with the rules set forth in the other Subsections of this Section 2.23:

(i) with the Employer in a job or position in which the Employee was not eligible to participate in this Part I of the Plan; or

(ii) as a Career Agent or General Agent of First Allmerica;

(iii) for periods prior to January 1, 1998, with Citizens, Hanover or as an employee of a General Agent of First Allmerica;

(iv) with Financial Profiles, Inc., or Advantage Insurance Network, Affiliates of First Allmerica, including periods of service completed prior to the date it became an Affiliate; or

(v) with an Affiliate.

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(g) Rules for Non-Paid Leaves of Absence. For purposes of Part I of the Plan, a Participant will also be credited with Hours of Service during any non-paid leave of absence granted by the Employer. Except as provided in Subsection (a) for exempt Employees, the number of Hours of Service to be credited under this Subsection (g) shall be the number of regularly scheduled working hours in each workday during the leave of absence; provided, however, that no more than the number of Hours in one regularly scheduled work year of the Employer will be credited for each non-paid leave of absence. In the case of a non-exempt Employee without a regular work schedule, the number of Hours to be credited shall be based on a 40 hour work week and an 8 hour workday. Hours of Service described in this Subsection (g) shall be credited to the Employee for the computation period or periods during which the leave of absence occurs.

Notwithstanding the foregoing, for Plan Years beginning after December 31, 1998, all Employees (exempt and non-exempt) shall be credited with 8 Hours of Service for each workday for which they are entitled to be credited with Hours of Service for a non-paid leave of absence pursuant to this Subsection (g).

(h) Rules for Maternity or Paternity Leaves of Absence. In addition to the foregoing rules and solely for purposes of determining whether a One Year Break in Service for participation and vesting purposes has occurred in a computation period, an individual who is absent for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such Hours cannot be determined, 8 Hours of Service per day of such absence. Provided, however, that:

(i) Hours shall not be credited under both this paragraph (h) and one of the other paragraphs of this Section 2.23;

(ii) no more than 501 Hours shall be credited for each maternity or paternity absence; and

(iii) if a maternity or paternity leave extends beyond one Plan Year, the Hours shall be credited to the Plan Year in which the absence begins to the extent necessary to prevent a One Year Break in Service, otherwise such Hours shall be credited to the following Plan Year.

For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the individual, (ii) by reason of a birth of a child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.

(i) Other Federal Law. Nothing in this Section 2.23 shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States or any rule or regulation issued under any such law.

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2.24 “Insurer” means First Allmerica.

2.25 “Internal Revenue Code” or “Code” means the Internal Revenue Code of 1986, as amended, and any future Internal Revenue Code or similar Internal Revenue laws.

2.26 “Key Employee”. In determining whether the Plan (in the aggregate, including Parts I, II, and III) is top-heavy for Plan Years beginning after December 31, 2001, “Key Employee” means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date is: (a) an officer of the Employer (as that term is defined within the meaning of Code Section 416 and the regulations thereunder) having an annual Compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002), a (b) Five Percent Owner, or (c) a 1-percent owner of the Employer having an annual Compensation of more than $150,000. In determining whether a Plan is top heavy for Plan Years beginning before January 1, 2002, “Key Employee” means any Employee or former Employee (including any deceased Employee) who at any time during the 5-year period ending on the determination date, is (i) an officer of the Employer (as that term is defined within the meaning of Code Section 416 and the regulations thereunder) having an annual Compensation that exceeds 50 percent of the dollar limitation under Code Section 415(b)(1)(A), (ii) an owner (or an individual considered an owner under Code Section 318) of one of the ten largest interests in the Employer if such individual’s Compensation exceeds 100 percent of the dollar limitation under Code Section 415(c)(1)(A), (ii) a Five Percent Owner, or (iv) a 1-percent owner of the Employer who has an annual Compensation of more than $150,000.

The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Internal Revenue Code and the Treasury Regulations and other guidance of general applicability issued thereunder. For purposes of determining whether a Participant is a Key Employee, the Participant’s Compensation means Compensation as defined for purposes of Article IV of Part III of the Plan (Limitations on Benefits), but for Plan Years beginning before January 1, 1998, without regard to Code Sections 125, 402(e)(3) and 402(h)(1)(B).

2.27 “Limitation Year” means a calendar year.

2.28 “Non-Highly Compensated Employee” means any employee who is not a Highly Compensated Employee.

2.29 “Non-Key Employee” means any Employee who is not a Key Employee.

2.30 “Normal Retirement Age” means Age 65.

2.31 “Normal Retirement Date” means the first day of the month in which the Participant’s Normal Retirement Age occurs.

2.32 “One Year Break in Service” means any Plan Year, or for purposes of Article III, Eligibility Computation Period, during which the Employee has not completed more than 500 Hours of Service.

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2.33 “Participant” means any eligible Employee who participates in the Plan as provided in Article III of Part I of the Plan and or Article III of Part II of the Plan as applicable; and who has not for any reason become ineligible to participate further in the Plan.

2.34 “Plan Administrator” means the Benefits Committee, which shall have fiduciary responsibility for the interpretation and administration of the Plan as provided in Article VII of Part III of the Plan (Plan Fiduciary Responsibilities). Members of the Benefits Committee shall be appointed as provided in Section 8.01 of Part III of the Plan.

2.35 “Plan Sponsor” means the Employer.

2.36 “Plan Year” means a calendar year.

2.37 “Plan Year Allocation Date” means for any Plan Year the date each Participant’s Account shall be credited with an Allocation for the Plan Year. Such date shall be the March 1 following the Plan Year with respect to which the Allocation is made.

Notwithstanding the foregoing, for Plan Years beginning after December 31, 1997 the Plan Year Allocation Date means the first business day of March following the Plan Year with respect to which the Allocation is made.

2.38 “Projected Account Balance” means:

(a) With respect to a Participant who has attained his or her Normal Retirement Date on the Determination Date, the Participant’s Account Balance as of such Determination Date; and

(b) With respect to a Participant who has not attained his or her Normal Retirement Date as of the Determination Date, the projected value of the Participant’s Account Balance as of his or her Normal Retirement Date determined as if (i) the Participant has a separation from service on the Determination Date, and (ii) the Participant’s Account Balance is credited with earnings on a daily basis based upon an annual effective rate equal to the Code Section 417 Interest Rate (as defined in Section 2.02) from the Determination Date through the Participant’s Normal Retirement Date. Notwithstanding anything in Part I of the Plan to the contrary, in determining a Participant’s Projected Account Balance, the Code Section 417 Interest Rate in effect for the Plan Year that contains the Determination Date shall be assumed to remain the same for all future Plan Years.

2.39 “Qualified Domestic Relations Order” means any judgment, decree or order (including approval of a property settlement agreement) which:

(a) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a Participant;

(b) is made pursuant to a state domestic relations law (including a community property law);

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(c) constitutes a “qualified domestic relations order” within the meaning of Section 414(p) of the Code; and

(d) is entered on or after January 1, 1985.

Effective April 6, 2007, a domestic relations order that otherwise satisfies the requirements for a qualified domestic relations order (“QDRO”) will not fail to be a QDRO: (i) solely because the order is issued after, or revises, another domestic relations order or QDRO; or (ii) solely because of the time at which the order is issued, including issuance after the annuity starting date or after the Participant’s death.

2.40 “Qualified Joint and Survivor Annuity” means an immediate annuity for the life of the Participant, with a survivor annuity for the life of the Participant’s spouse which is not less than one-half, nor greater than, the amount of the annuity payable during the joint lives of the Participant and the Participant’s spouse. The Qualified Joint and Survivor Annuity (i) for the purposes of Part I of the Plan will be the Actuarial Equivalent of the Plan’s no-death benefit life annuity normal form of benefit; and (ii) for the purposes of Part II of the Plan will be the Actuarial Equivalent of the Plan’s normal form of benefit.

2.41 “Top Heavy Plan” means for any Plan Year beginning after December 31, 1983 that any of the following conditions exists:

(i) If the top heavy ratio (as defined in Article II of Part III of the Plan) for this Plan exceeds 60 percent and this Plan is not part of any required aggregation group or permissive aggregation group of plans.

(ii) If this Plan is a part of a required aggregation group and part of a permissive aggregation group and the top heavy ratio for the group of plans exceeds 60 percent.

(iii) If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the top heavy ratio for the permissive aggregation group exceeds 60 percent.

See Article II of Part III of the Plan for requirements and additional definitions applicable to Top Heavy Plans.

2.42 “Top Heavy Plan Year” means that, for a particular Plan Year commencing after December 31, 1983, the Plan is a Top Heavy Plan.

2.43 “Trustee” means the bank, trust company or person(s) who shall be constituted the original trustee or trustees for the Plan and Trust created therefor, and also any such successor trustee or trustees. The duties and responsibilities of the Trustee are set forth in the Trust Indenture in the form annexed hereto.

2.44 “Year of Service” means, any Plan Year during which an Employee completes at least 1,000 Hours of Service; provided, however, that for purposes of determining Plan entry under Article III of Part I of the Plan, Year of Service means an Eligibility Computation

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Period during which an Employee completes at least 1,000 Hours of Service; provided, further however, that for purposes of determining Plan entry under Article III of Part II of the Plan, Year of Service shall mean any twelve consecutive month period during which he completes 1,000 Hours of Service computed from the date an Employee first performs an Hour of Service, or any anniversary thereof (or again performs an Hour of Service upon re-employment following a termination resulting in a One Year Break in Service).

ARTICLE III

PARTICIPATION REQUIREMENTS

3.01 Participation Requirements.

(a) Employee Participation. Individuals who were Participants in Part I of the Plan on December 31, 2009 shall continue to be Participants in Part I of the Plan on January 1, 2010.

Notwithstanding anything in Part I of the Plan to the contrary, for periods commencing on and after January 1, 2005, (i) no Employee who had not previously been a Participant in Part I of the Plan shall become a Participant in Part I of the Plan, and (ii) a Former Participant who is re-employed as an Employee shall be reinstated as an active Participant in Part I of the Plan but only for purposes of increasing Plan vesting on his or her frozen Accrued Benefit and for purposes of determining eligibility for early retirement under Section 6.02.

For Plan Years that commenced prior to January 1, 2005, an Employee became eligible to be a Participant on the first day of the calendar month coincident with or next following completion of one Year of Service, provided he or she was then an eligible Employee.

Eligible Employees who were actively employed and who were Participants in The Allmerica Financial Cash Balance Pension Plan as adopted by Citizens Insurance Company of America or in The Allmerica Financial Cash Balance Pension Plan as adopted by The Hanover Insurance Company, each of which were merged with and into this Part I of the Plan, became Participants in this Part I of the Plan on January 1, 1998.

Notwithstanding the foregoing: (i) an Employee who was formerly employed by Financial Profiles, Inc. shall not become eligible to become a Participant in this Part I of the Plan until January 1, 1999; and (ii) an Employee who was formerly employed by Advantage Insurance Network shall not become eligible to become a Participant in this Part I of the Plan until August 1, 1999.

Notwithstanding the foregoing, the following persons shall not be eligible to become or remain active Participants in Part I of the Plan:

(i) Employees who are or were eligible to participate in The Allmerica Financial Agents’ Retirement Plan;

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(ii) Retirees of First Allmerica or retirees of General Agents of First Allmerica who are receiving retirement benefits under this Part I of the Plan whose current period of post-retirement re-employment with First Allmerica, Citizens or Hanover began prior to January 1, 1988;

(iii) Retirees of Citizens or Hanover who are receiving retirement benefits under this Part I of the Plan whose current period of post-retirement re-employment with First Allmerica, Citizens or Hanover began prior to January 1, 1993;

(iv) Leased Employees, within the meaning of Code Sections 414(n) and (o);

(v) A contractor’s employee, i.e., a person working for a company providing goods or services (including temporary employee services) to the Employer or to an Affiliate whom the Employer does not regard to be its common law employee, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual is actually the Employer’s common law employee; or

(vi) An independent contractor, i.e., a person who is classified by the Employer as an independent contractor, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual is actually the Employer’s common law employee.

(b) Reeligibility of Former Participants. A Former Participant, who again becomes eligible to participate in Part I of the Plan, will become a Participant in Part I of the Plan on the date of his or her recommencement of service with the Employer. Any other former Employee who again becomes eligible will become a Participant on the entry date determined under the rules set forth in Subsection (a).

3.02 Classification Changes. In the event of a change in job classification, such that an Employee, although still in the employment of the Employer, no longer is an eligible Employee, he or she shall receive no further Credited Service under Part I of the Plan, and the Participant’s Accrued Benefit on the date he or she becomes ineligible shall continue to vest, become payable or be forfeited, as the case may be, in the same manner and to the same extent as if the Employee had remained an eligible Participant.

For periods commencing prior to January 1, 2005, in the event a Participant becomes ineligible to accrue further Credited Service because he or she is no longer a member of an eligible class of Employees, but has not terminated his or her employment with an Employer, such Participant shall again be eligible to accrue further Credited Service immediately upon his or her return to an eligible class of Employees.

In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall participate immediately if such Employee has satisfied the minimum service requirements of Part I of the Plan, and would have previously become a Participant had he or she been in the eligible class.

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3.03 Participant Cooperation, Participant Refusal. Each Employee who is eligible shall become a Participant on the entry date specified in Subsection 3.01(a) unless he or she notifies the Plan Administrator in writing prior to such entry date that he or she does not wish to be a Participant under this Part I of the Plan. Any such election not to participate in this Part I of the Plan shall be irrevocable. In order to waive participation in this Part I of the Plan, an Employee must agree to irrevocably waive his or her right to become a Participant in any other qualified retirement plan sponsored by the Employer. Each eligible Employee who becomes a Participant hereunder thereby agrees to be bound by all of the terms and conditions of this Part I of the Plan. Each eligible Employee, by becoming a Participant in this Part I of the Plan, agrees to cooperate fully with the Insurer, including completion and signing of such forms as are required by the Insurer under the Group Annuity Contract.

ARTICLE IV

PARTICIPANT ACCOUNTS

4.01 Establishment of Accounts. For Plan Years commencing on or after January 1, 1995, a memorandum Account shall be established under Part I of the Plan for each Participant. Such Account shall be credited with Allocations in accordance with Section 4.02 and shall be adjusted in accordance with Section 4.03 and for any distributions in accordance with Section 4.04. The resultant value determined at any time, after the operation of Sections 4.02, 4.03 and 4.04, shall be the “Participant’s Account Balance”. The memorandum Account is part of a mechanism for computing benefits under Part I of the Plan. Accordingly, there need be no relationship between Participants’ Account Balances and the amount or nature of Plan assets.

4.02 Allocations to Accounts. For each Plan Year commencing on or after January 1, 1995 and prior to January 1, 2005 during which a Participant completes a Year of Credited Service and, regardless of the number of Hours of Service credited to the Participant, for any such Plan Year during which a Participant dies or first retires, such Participant’s Account shall be credited with an Allocation for such Plan Year as of the Plan Year Allocation Date. Allocations under the Plan are part of the mechanism for computing benefits under the Plan and do not relate to actual contributions to the Plan.

Notwithstanding anything in the Plan to the contrary, no Allocations shall be credited to Participants for Plan Years beginning on or after January 1, 2005; provided, however, (i) that Allocations shall be credited to eligible Participants for the 2004 Plan Year as of the 2004 Plan Year Allocation Date and (ii) memorandum Accounts shall continue to be credited with investment experience credits after December 31, 2004, as provided in Section 4.03 of Part I of the Plan.

4.03 Adjustments of Accounts.

(a) Adjustment for Earnings for Plan Years beginning on and after January 1, 2004. For each Plan Year beginning on or after January 1, 2004, each Participant’s Account shall be credited with earnings on a daily basis based upon an annual effective rate equal to the Code Section 417 Interest Rate in effect for such Plan Year.

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(b) Adjustment for Investment Experience for Plan Years beginning on or after January 1, 1995 and before January 1, 2004. For each Plan Year beginning on or after January 1, 1995 and before January 1, 2004, Participants in Part I of the Plan shall make investment experience elections with respect to their respective Account Balances from among choices prescribed by the Plan Administrator. The specific investment choices and the time and manner of making elections may be changed from time to time. Each Participant’s Account Balance shall be adjusted to reflect investment experience in the same manner as if the Account Balance were actually invested pursuant to the Participant’s elections and as if each Allocation were actually a contribution made to the Plan on the relevant Plan Year Allocation Date.

4.04 Distributions. The Account Balance shall be decreased for any non-annuity distributions paid to the Participant or his or her Beneficiary. In the event a benefit becomes payable as an annuity in accordance with Article VI or as a survivor annuity in accordance with Article VII, the Account Balance shall be decreased by the Actuarial Equivalent of such annuity as of the Annuity Commencement Date.

ARTICLE V

EMPLOYER CONTRIBUTIONS

5.01 Employer Contributions.

(a) Employer Contributions for Plan Years beginning after December 31, 1997. The Employer shall contribute for each Plan Year during which Part I of the Plan is in effect that amount, if any, which the enrolled actuary for the Plan determines is necessary to fund the Plan under the actuarial cost method in effect for the Plan. No contributions will be required of or permitted by Employees.

(b) Employer Contributions for Plan Years beginning prior to January 1, 1998. Each Employer shall contribute for each Plan Year during which the Plan is in effect that amount, if any, which the enrolled actuary for the Plan determines is necessary to fund Part I of the Plan under the actuarial costs method in effect for Part I of the Plan. No contributions will be required of or permitted by Employees.

Except as provided below, contributions paid by each Employer and earnings thereon will be used only to fund Plan costs and benefits for its Employees and will not be used to fund Plan costs and benefits for any other Employees. Notwithstanding the foregoing:

(i) Plan contributions paid by First Allmerica and General Agents of First Allmerica and earnings thereon will be used to fund Plan costs and benefits of both First Allmerica and such General Agents.

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(ii) Plan contributions paid by First Allmerica and General Agents of First Allmerica and earnings thereon will also be used to fund costs and benefits of The Allmerica Financial Agents’ Pension Plan (Part II of the Plan), which plan was merged with this Part I of the Plan on January 1, 1992.

5.02 Payment of Contributions to Trustee. The Employer shall make payment of all contributions directly to the Trustee to be held, managed and invested in one or more Group Annuity Contracts and in other investments permitted under the Trust, but subject to Section 5.03.

5.03 Receipt of Contributions by Trustee. The Trustee shall accept and hold under the Trust such contributions of money, or other property approved by the Employer for acceptance by the Trustee, on behalf of the Employer and its Employees and Beneficiaries as it may receive from time to time from the Employer, other than cash it is instructed to remit to the Insurer for deposit with the Insurer. However, the Employer may pay contributions directly to the Insurer and such payment shall be deemed a contribution to the Trust to the same extent as if payment had been made to the Trustee. All such contributions shall be accompanied by written instructions from the Plan Administrator or its designee accounting for the manner in which they are to be credited.

ARTICLE VI

RETIREMENT AND DISABILITY BENEFITS

6.01 Normal Retirement Benefit. Subject to Section 6.07, each Participant who retires on his or her Normal Retirement Date (and each Former Participant with a vested benefit deferred to his or her Normal Retirement Date) shall be entitled to receive a monthly life annuity commencing on such Date and terminating on the last regular payment date prior to his or her death, which monthly benefit shall equal the Participant’s Accrued Benefit (or, in case of each Former Participant with a vested benefit, the Former Participant’s vested Accrued Benefit).

Notwithstanding the foregoing, the Grandfathered Benefit (if any) of each Participant shall not be less than the largest periodic Grandfathered Benefit that would have been payable to the Participant upon separation from service at or prior to Normal Retirement Age under Part I of the Plan. For purposes of comparing periodic benefits in the same form commencing prior to and at Normal Retirement Age, the greater benefit is determined by converting the benefit payable prior to Normal Retirement Age into the same form of annuity benefit payable at Normal Retirement Age and comparing the amount of such annuity payments.

Notwithstanding the foregoing, Non-Key Employees who are Participants in a Top Heavy shall be entitled to the minimum benefit described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) if such benefit is greater than the benefit provided by this Section 6.01.

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Each actively employed Participant’s Accrued Benefit shall become 100% vested and nonforfeitable when the Participant attains his or her Normal Retirement Age. An actively employed Participant may terminate employment with the Employer and retire on his or her Normal Retirement Date. Upon such date the Participant shall be entitled to receive, or to begin to receive, his or her Normal Retirement Benefit.

The Plan Administrator shall notify the Trustee (and Insurer, if appropriate) as and when the Normal Retirement Age and Normal Retirement Date of each Participant shall occur and shall also advise the Trustee (and Insurer, if appropriate) as to the manner in which retirement benefits are to be distributed to a Participant, subject to the provisions of this Article. Upon receipt of such notification and subject to the other provisions of this Article, the Trustee or Insurer shall take such action as may be necessary in order to commence payment of the Participant’s Normal Retirement Benefit.

6.02 Early Retirement Benefit. Any actively employed Participant who has completed at least fifteen Years of Service (or, if earlier, who has completed at least fifteen Years of Credited Service, with Years of Credited Service completed before 1995 being determined in accordance with the terms of Part I of the Plan as in effect on December 31, 1994) may elect to retire on the first day of any month following attainment of Age 55, in which event he or she shall receive, subject to Section 6.07 in the case of a married Participant, a monthly life annuity commencing on the date of his or her early retirement and terminating on the last regular payment date prior to his or her death. Each early retiree’s monthly life annuity will be equal to the Actuarial Equivalent of the early retiree’s Accrued Benefit, except that the portion of the Accrued Benefit attributable to the Participant’s Grandfathered Benefit, if any, shall equal the early retiree’s Grandfathered Benefit multiplied by the appropriate percentage.

Retirement Age	Percentage of Monthly Grandfathered Benefit*
65	100
64	93 1/3
63	86 2/3
62	80
61	73 1/3
60	66 2/3
59	63 1/3
58	60
57	56 2/3
56	53 1/3
55	50
*  If benefit payments commence in a month other than the month in which the Participant attains the specified Age, the percentage shall be determined by straight line interpolation.

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Provided, however, that an actively employed Participant (i) who is entitled to a Special Grandfathered Benefit, (ii) who has been continuously employed as a member of an eligible class of Employees from January 1, 1995 until the date of his or her early retirement, and (iii) whose combined Age and Years of Credited Service as of the date of determination (calculated in accordance with the provisions of Part I of the Plan in effect on December 31, 1994) total at least 85 (the “Rule of 85”) shall be entitled to receive a Special Grandfathered Benefit determined without the above actuarial reduction.

Provided, however, that an actively employed Participant (i) who is entitled to a Grandfathered Benefit, (ii) who has attained Age 62, and (iii) whose combined Age and Years of Credited Service as of the date of determination (calculated in accordance with the provisions of Part I of the Plan in effect on December 31, 1994) total at least 95 (the “Rule of 95”) shall be entitled to receive a Grandfathered Benefit determined without the above actuarial reduction.

For purposes of determining eligibility for the Rule of 85 and Rule of 95 subsidized early retirement benefits, but not for purpose of computing actual benefit amounts, Years of Credited Service shall include Hours of Service completed as a Career Agent or General Agent of First Allmerica.

If a Participant terminates employment after having completed at least fifteen Years of Service, he or she may elect to retire on the first day of any month following his or her 55th birthday and prior to his or her Normal Retirement Date. If any such Former Participant elects to retire early, he or she shall be entitled to receive a monthly retirement benefit equal to a percentage of the monthly benefit to which the Participant would have been entitled on his or her Normal Retirement Date. Such percentage shall be obtained by applying the appropriate percentage set forth in the table above to the monthly benefit payable on the Former Participant’s Normal Retirement Date.

Notwithstanding the foregoing, if this Plan is a Top Heavy Plan, and if greater than the benefit described above, each Non-Key Employee who elects early retirement shall be entitled to receive a monthly early retirement benefit equal to the appropriate percentage above of his or her Accrued Benefit described in Section 2.01(b).

6.03 Subsidized Early Retirement Benefit. Any eligible Participant who elected an immediate early retirement benefit to commence between March 1, 2003 and May 1, 2004 shall be entitled to an increased retirement benefit, computed as described below, to commence on the date of his or her actual retirement.

(a) Eligible Participants. Only Participants in Part I of the Plan who are actively employed by First Allmerica on February 1, 2003 (or are then on an Employer-approved paid leave of absence, which paid leave commenced no earlier than December 18, 2002) shall be eligible for the subsidized early retirement benefit described in this Section 6.03. In addition, in order to be eligible for such benefits, a Participant must have retired between March 1, 2003 and May 1, 2004 and met the following requirements:

(i) The Participant must be eligible for a “Special Grandfathered Benefit” (as described in Section 2.20(b) of Part I of the Plan) on the date of his or her early retirement.

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(ii) The Participant must have been continuously employed as a member of an eligible class of Employees from January 1, 1995 until the date of his or her retirement.

(iii) The Participant must not have attained Age 65 on the date of his or her retirement.

(iv) The Participant must not be eligible for the Rule of 85 subsidized early retirement benefit (as described in Section 6.02 of Part I of the Plan) on the date of his or her retirement.

(v) The Participant’s job or position with First Allmerica must have been or will be eliminated by May 1, 2003 as a result of the reorganization of the Allmerica Financial Services Division of First Allmerica.

(vi) The Participant must be actively at work on the last business day preceding the date of his or her early retirement or then be on vacation, be on an Employer-approved paid leave of absence or be absent due to sickness or injury.

(vii) The Participant must execute an appropriate release satisfactory to First Allmerica releasing the company (and its subsidiaries and affiliates and its and their officers, directors and employees) from all liability arising out of or relating to his or her employment with First Allmerica or with any of its predecessors, subsidiaries or affiliates.

(b) Qualified Early Retirement Benefit. Those eligible Participants as described in Section (a) who retired between March 1, 2003 and May 1, 2004 shall be entitled to a subsidized early retirement benefit, to be computed as follows:

(i) Subsidized Plan Early Retirement Benefit. Those eligible Participants electing early retirement under Part I of the Plan shall be entitled to an increased retirement benefit commencing on their date of actual retirement, to be computed as follows:

The Participant’s early retirement benefit shall be computed as provided in Section 6.02 of Part I of the Plan, except as provided below:

Any eligible Participant may elect to retire on the first day of any month between March 1, 2003 and May 1, 2004, in which event he or she shall receive, subject to Section 6.07 of Part I of the Plan in the case of a married Participant, a monthly life annuity commencing on the date of his or her early retirement and terminating on the last regular payment date prior to his or her death. An eligible Participant may also choose one of

Part I - 28

the distribution options set forth in Section 6.06 of Part I of the Plan, with spousal consent if the Participant is married. In the case of a Participant who chooses a monthly life annuity, such benefit will be equal to the sum of (A) and (B) below:

(A) A monthly life annuity benefit that is the Actuarial Equivalent (as described in Section 2.02 of Part I of the Plan) of the Participant’s Account Balance (as described in Section 4.01 of Part I of the Plan), plus

(B) A monthly life annuity benefit which is equal to a percentage of the Participant’s Special Grandfathered Benefit, accrued to the date of actual retirement, based on the Participant’s Age, Average Monthly Compensation and Credited Service (such Average Monthly Compensation and Credited Service being calculated in accordance with the provisions of Part I of the Plan in effect on December 31, 1994), each determined as of the date of the Participant’s early retirement. Such percentage shall be equal to the appropriate percentage determined from the Schedule below of the Special Grandfathered Benefit that would have been payable had the Participant’s date of initial eligibility for the Rule of 85 subsidized early retirement benefit (as described in Section 6.02 of Part I of the Plan) been his or her Normal Retirement Date, based on the assumption that his or her continuous employment had continued until such date, but with the actual benefit being based on the Participant’s Special Grandfathered Benefit actually accrued as of the date of early retirement.

Retirement Age*	Percentage of Special Monthly Grand-Fathered Benefit**
55	1.0000
54	0.9333
53	0.8667
52	0.8000
51	0.7333
50	0.6667
49	0.6333
48	0.6000
47	0.5667
46	0.5333
45	0.500
*  This Schedule assumes the Participant would have been eligible for the Rule of 85 subsidized early retirement benefit at Age 55. If a Participant would have been eligible for the Rule of 85 at a date later than Age 55, the

Part I - 29

appropriate percentage shall be determined by the Plan actuary using the same assumptions used in constructing the above Schedule.

**     If a benefit commences in a month other than the month in which the Participant attains the specified Age, the percentage shall be determined by straight line interpretation.

Example. Assume an eligible Participant will attain Age 52 on January 1, 2004 and will have completed 32 Years of Credited Service on such date. Assume further that as of such date the Participant has accrued a Special Grandfathered Benefit, payable as a single life annuity, of $1,000 per month. Thus, the Participant will initially be eligible for the Rule of 85 subsidized early retirement benefit on January 1, 2007, the date the Participant will attain Age 55. Under the terms of Section 6.03, the Participant may elect to retire on January 1, 2004 and begin to receive an immediate early retirement benefit. If a single life annuity benefit is chosen, such life annuity benefit will be equal to $800 per month ($1,000 x 0.8000 = $800).

(ii) Cost-of-Living (“COL”) Adjustments. Notwithstanding anything in Section 6.08 of Part I of the Plan to the contrary, Participants (and the Beneficiaries of Participants) who elect to retire pursuant to this Section 6.03 shall be eligible to receive COL benefits, subject to the other rules and requirements set forth in Section 6.08 of Part I of the Plan. Notwithstanding anything in Section 6.08 of Part I of the Plan to the contrary, the early retirement monthly annuity benefits described in this Section 6.03 shall be a part of a Participant’s basic plan benefit and shall be included in determining any COL adjustment to which the Participant may become entitled pursuant to Section 6.08 of Part I of the Plan.

6.04 Late Retirement Benefit. If a Participant shall continue in active service beyond his or her Normal Retirement Date, he or she shall continue to participate under Part I of the Plan and Trust. For Employees in ERISA Section 203(a)(3)(B) service (as described in Subsection 6.09(a) of Part I of the Plan), who continue in active employment beyond their Normal Retirement Date, retirement benefits shall be suspended, as provided in Section 6.09 of Part I of the Plan. Except as provided in Section 6.07 of Part I of the Plan in the case of a married Participant, the monthly retirement benefit payable to a Participant retiring on a late retirement date shall be a monthly life annuity commencing on the date of his or her late retirement and terminating on the last regular payment date prior to his or her death. Each late retiree’s monthly life annuity will be equal to the late retiree’s Accrued Benefit; provided that the portion of the Accrued Benefit attributable to the Participant’s Grandfathered Benefit, if any, shall equal the Participant’s Basic Grandfathered Benefit, if any, or the Participant’s Special Grandfathered Benefit” if any.

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Notwithstanding the foregoing, if this Plan is a Top Heavy Plan, if greater than the benefit described above, each Non-Key Employee who elects late retirement shall be entitled to receive a monthly late retirement benefit equal to his or her Accrued Benefit described in Section 2.01(b).

Notwithstanding the above, monthly annuity benefits shall commence no later than a Participant’s required beginning date (as defined in Article III of Part III of the Plan). If a Participant has not retired by his or her required beginning date, monthly retirement benefits shall commence on such date and shall be computed as described in the preceding paragraph, with benefits based on the assumption that the Participant’s required beginning date was the date of late retirement.

Notwithstanding the foregoing, if late retirement benefits commence after Age 70 ¹/2, to the extent required under Code Section 401(a)(9)(C) and regulations thereunder, a Participant’s Accrued Benefit shall be actuarially increased to take into account the period after Age 70 ¹/2 in which the Participant was not receiving any benefits under the Plan, including any period during which the Employee is in Section 203(a)(3)(B) service, as described in Subsection 6.09(a) of Part I of the Plan.

6.05 Disability Benefit. Notwithstanding anything in Part I of the Plan to the contrary, if a Participant becomes Totally Disabled while employed by the Employer as an active Participant in Part I of the Plan, such Participant shall have a 100% vested and nonforfeitable right to his or her Accrued Benefit, regardless of his or her length of service.

In addition, if a Participant in Part I of the Plan who is eligible for a Special Grandfathered Benefit was Totally Disabled on December 31, 1994 and before January 1, 2005, becomes Totally Disabled while employed by the Employer as an active Participant in Part I of the Plan, it shall be assumed for purposes of this Part I of the Plan that his or her employment continues from the date of the commencement of his or her total disability to the earliest of his or her Normal Retirement Date, death, termination of employment or date that he or she is no longer Totally Disabled. Prior to January 1, 2005 and while an eligible Employee is Totally Disabled, it shall be assumed for purposes of calculating the Participant’s Special Grandfathered Benefit that the Employee continues to earn monthly one-twelfth of the Compensation paid to the Participant during the 12 complete months prior to the month in which he or she ceased active service because of his or her having become Totally Disabled.

For purposes of Part I of the Plan “Totally Disabled” means the inability to perform the duties of any occupation for which the Employee is or becomes reasonably fitted by education, training or experience; provided, however, in the case of an Employee receiving disability benefits under a long term disability plan sponsored by the Employer, until benefits have been paid under such policy for 24 months, such Employee will be considered Totally Disabled if he or she is unable to perform the duties of his or her occupation and is not working at any other occupation.

Part I - 31

6.06 Distribution of Benefits. The Plan Administrator shall direct the Trustee (or Insurer, if applicable) to commence payment of benefits provided under this Article VI of Part I of the Plan (or provided to a Former Participant pursuant to Article IX of Part I of the Plan). Plan benefits will be paid only on death, termination of service, Plan termination or retirement.

Except as otherwise provided in Section 6.07 of Part I of the Plan, the requirements of this Section shall apply to any distribution of a Participant’s interest and will take precedence over any inconsistent provisions of this Part I of the Plan.

All distributions required under the Plan shall be determined and made in accordance with the Regulations under Code Section 401(a)(9), including, to the extent applicable, the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed Regulations.

Except as provided below and in Section 6.07, a Participant’s retirement benefit shall be payable as a life annuity for the life of the Participant with no further benefits payable after the last regular payment date prior to his or her death.

At any time prior to actual retirement, a Participant, with spousal consent if the Participant is married, may elect to receive his or her retirement benefit under one or more of the following settlement options; provided, however, that a Participant may not elect to have the balance of his or her Account, described in Section 4.01, distributed under more than one annuity option, or his or her Grandfathered Benefit distributed under more than one annuity option.

(i) An annuity for the joint lives of the Participant and his or her spouse with 50% or 66  ²/3% (whichever is specified when this option is elected) of such amount payable as an annuity for life to the survivor. No further benefits are payable after the death of both the Participant and his or her spouse.

(ii) An annuity for the life of the Participant and upon his or her death 100%, 66  ²/3%, or 50% (whichever is specified when this option is elected) of the annuity amount will be continued to his or her spouse as his or her contingent annuitant. No further annuity benefits are payable after the death of both the Participant and his or her spouse.

(iii) An annuity for the life of the Participant with guaranteed installment payments for a period certain not longer than the life expectancy of the Participant.

(iv) An annuity for the life of the Participant with guaranteed installment payments for a period certain not longer than the life expectancy of the Participant and his or her spouse.

(v) Notwithstanding anything in Part I of the Plan to the contrary, a single lump sum payment in an amount equal to the Participant’s vested Account Balance on the Determination Date: provided, however, that except as provided in (vi) below, this form of payment shall not be available with respect to the portion of the Participant’s vested Accrued Benefit attributable to the

Part I - 32

Participant’s Grandfathered Benefit, if any. In the event a Participant elects to have his or her vested Account Balance on the Determination Date payable in a lump sum, the portion of his or her Accrued Benefit attributable to his or her Grandfathered Benefit, if any, shall be paid in accordance with the otherwise applicable provisions of this Article VI of Part I of the Plan.

(vi) If the present value of a Participant’s vested Grandfathered Benefit, if any, does not exceed $5,000 ($3,500 for Plan Years beginning prior to January 1, 1998), a single sum payment in an amount equal to such present value. If the present value of a Participant’s vested Grandfathered Benefit exceeds $5,000 ($3,500 for Plan Years beginning prior to January 1, 1998), only annuity options (i) through (iv) above shall be available with respect to such vested Grandfathered Benefit.

All optional forms of benefits shall be the Actuarial Equivalent (as of the date selected) of the normal retirement benefit described in Section 6.01 of Part I of the Plan or 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans), if applicable. Any spousal consent shall satisfy the requirements of Section 6.07.

Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the later of the close of the Plan Year in which:

(i) the Participant attains Normal Retirement Age; or

(ii) the Participant terminates service with the Employer.

Notwithstanding the foregoing, the failure of a Participant and spouse (or where either the Participant or the spouse has died, the survivor) to consent to a distribution when a benefit is “immediately distributable” (as described below) shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section 6.06 of Part I of the Plan (and provisions of Article III of Part III of the Plan). In no event will benefits begin to be distributed prior to the later of Age 62 or Normal Retirement Age without the consent of the Participant. The consent of the Participant’s spouse will also be required for any such distribution unless the benefit is paid in the form of a Qualified Joint and Survivor Annuity. Any spousal consent shall satisfy the requirements of Section 6.07, and no involuntary cash-outs shall be made in any amount on or after March 28, 2005.

If the Accrued Benefit is immediately distributable, the Participant and the Participant’s spouse (or where either the Participant or the spouse has died, the survivor) must consent to any distribution of such Accrued Benefit. The consent of the Participant and the Participant’s spouse shall be obtained in writing within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. The “annuity starting date” is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant and the Participant’s spouse of the right to defer any distribution until the Participant’s Accrued Benefit is no longer immediately distributable. Such notification

Part I - 33

shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Section 417(a)(3) of the Code, and shall be provided no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date.

Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the Accrued Benefit is immediately distributable. Neither the consent of the Participant nor the Participant’s spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code.

An Accrued Benefit is immediately distributable if any part of the Accrued Benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or Age 62.

Notwithstanding the above the entire interest of a Participant or a Beneficiary must be distributed in accordance with the minimum required distribution rules set forth in Article III of Part III of the Plan.

6.07 Qualified Joint and Survivor Annuity for Married Participants.

(a) General Rules. Notwithstanding anything in this Article to the contrary, unless a married Participant’s Accrued Benefit has been paid in a lump sum pursuant to Section 6.06 above, such Participant’s retirement benefit will be payable to the Participant and his or her spouse in the form of a Qualified Joint and Survivor Annuity, with the survivor to receive 100% of the benefit which had been payable during their joint lives, unless an optional form of benefit is selected pursuant to a qualified election within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. In the case of an unmarried Participant, unless the Participant elects an optional form of benefit the Participant’s retirement benefit will be paid in the form of a no-death benefit life annuity.

(b) Definitions.

(i) Qualified election: A waiver of a Qualified Joint and Survivor Annuity. Any waiver of a Qualified Joint and Survivor Annuity shall not be effective unless: (A) the Participant’s spouse consents in writing to the election; (B) the election designates a specific Beneficiary, including any class of Beneficiaries or any contingent Beneficiaries, which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent); (C) the spouse’s consent acknowledges the effect of the election; and (D) the spouse’s consent is witnessed by a Plan representative or notary public. Additionally, a Participant’s waiver of the Qualified Joint and Survivor Annuity will not be effective unless the election designates a form of

Part I - 34

benefit payment which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of a Plan representative that there is no spouse or that the spouse cannot be located, a waiver will be deemed a qualified election.

Any consent by a spouse obtained under this Subsection (or establishment that the consent of a spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Participant without any requirement of further consent by such spouse must acknowledge that the spouse has the right to limit consent to a specific Beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in Subsection (c) below.

(ii) Spouse (surviving spouse): the opposite-gender person, if any, to whom the Participant is lawfully married at the date of his death or at his annuity starting date, whichever is earlier, provided that a former spouse will be treated as the spouse or surviving spouse to the extent provided under a Qualified Domestic Relations Order.

(iii) Annuity starting date: The first day of the first period for which an amount is paid as an annuity or under any other form.

(c) Notice Requirement.

(i) In the case of a Qualified Joint and Survivor Annuity as described in Subsection (a), the Plan Administrator shall provide each Participant no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date a written explanation of: (A) the terms and conditions of a Qualified Joint and Survivor Annuity; (B) the Participant’s right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (C) the rights of a Participant’s spouse; (D) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity; and (E) the relative values of the various optional forms of benefit under the Plan. Notices given to Participants pursuant to Code Section 411(a)(11) in Plan Years beginning after December 31, 2006 shall include a description of how much larger benefits will be if the commencement of distributions is deferred.

(ii) A Participant may commence receiving a distribution in a form other than a Qualified Joint and Survivor Annuity less than 30 days after receipt of

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the written explanation described in the preceding paragraph provided: (A) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent) a form of distribution other than a Qualified Joint and Survivor Annuity; (B) the Participant is permitted to revoke any affirmative distribution election at least until the Distribution Commencement Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant; and (C) the Distribution Commencement Date is after the date the written explanation was provided to the Participant. For distributions on or after December 31, 1996, the Distribution Commencement Date may be a date prior to the date the written explanation is provided to the Participant if the distribution does not commence until at least 30 days after such written explanation is provided, subject to the waiver of the 30-day period. For the purposes of this paragraph, the “Distribution Commencement Date” is the date a Participant commences distributions from the Plan. If a Participant commences distribution with respect to a portion of his/her Account Balance, a separate Distribution Commencement Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Distribution Commencement Date is the first day of the first period for which annuity payments are made.

(d) Applicability. The provisions of this Section 6.07 shall apply to any Participant who is credited with at least one Hour of Service with the Employer on or after January 1, 1976. In addition, any living Participant or Former Participant not receiving benefits under Part I of the Plan on August 23, 1984 who would otherwise not receive the benefits prescribed by this Section 6.07 shall be given the opportunity to elect to have the provisions of this Section apply provided such Participant or Former Participant was credited with at least one Hour of Service under this Part I of the Plan or a predecessor plan on or after September 2, 1974.

The opportunity to elect a Qualified Joint and Survivor retirement option must be afforded to the appropriate Participants or Former Participants during the period commencing on August 23, 1984 and ending on the dates benefits would otherwise commence to such person.

6.08 Supplementary Pension Benefits. Effective July 1, 1986, and on each July 1 thereafter, the amount of monthly retirement benefits payable to eligible retirees (as described below) or their Beneficiaries shall be increased by a percentage determined in accordance with the following formula:

Percentage Increase = .8 (M - .07) x 100

For Plan Years beginning after December 31, 2008, for purposes of the above formula, “M” equals the annual coupon return on December 31, 2009 and on each December 31 thereafter of the Barclays Capital U.S. Government/Credit 5-10 Year Index, or its successor.

Part I - 36

For Plan Years beginning after December 31, 1997 and prior to January 1, 2009, for purposes of the above formula, “M” equaled the earnings rate for the prior Plan Year on assets representing retired life reserves for retirees of First Allmerica, Citizens and Hanover. Additionally, retired life reserve assets of the Agents’ Pension Plan (Part II of the Plan) and retired life reserve assets attributable to retirees of General Agents of First Allmerica and retirees of Beacon Insurance Company of America (“Beacon”), formerly an affiliate of Hanover, shall be aggregated and combined with the retired life reserve assets of this Part I of the Plan.

For Plan Years beginning prior to January 1, 1998, for purposes of the above formula, “M” equaled the earnings rate for the prior Plan Year on assets representing retired life reserves for retirees of each Employer. The formula shall be applied separately and retired life reserves shall be determined separately for each Employer; provided, however, (i) that for retirees of First Allmerica and its General Agents who have adopted this Part I of the Plan, retired life reserve assets shall be aggregated and combined with the retired life reserve assets of The First Allmerica Agents’ Pension Plan (Part II of the Plan) and (ii) for Plan Years beginning after December 31, 1992, the retired life reserve assets of Beacon shall be combined with the retired life reserve assets of Hanover.

For the Plan Years for which “M” depended on the returns of designated retired life reserve assets, the earnings rate on retired life reserve assets was to be determined by an actuary, using the “investment year block” method of crediting interest that First Allmerica used to credit interest on its Experience Rated group annuity contracts that were in force on an active basis. The resulting earnings rate(s) should neither be associated with nor construed as the investment yield (all or in part) of the pension fund.

For each Plan Year for which “M” depended on the returns of designated retired life reserve assets, the retired life reserve assets for newly qualified retirees to be added to the total retired life assets outstanding was to be determined using a 7% interest rate and the 1971 GAM mortality table.

The determination of “M” and of the overall earning rate(s) shall be final and conclusively binding for all persons.

The effective date for the payment of supplemental pension benefits paid as a result of this Section shall be each July 1, commencing with July 1, 1986. Those eligible to receive supplemental pension benefits as a result of this Section shall be those retirees of First Allmerica, Citizens, Hanover and General Agents of First Allmerica (and their Beneficiaries) who were receiving basic retirement benefits under Part I of the Plan on the July 1 increase effective date, had been retired for at least 18 months on such increase effective date, and:

(i) had elected an immediate early retirement benefit pursuant to Section 6.02 (or its successor, if any)

Part I - 37

(ii) had terminated employment after having met the eligibility requirements for early retirement specified in Section 6.02 (or its successor, if any) and elected to defer receipt of retirement benefits: or

(iii) had retired on or after their Normal Retirement Age after having completed at least 15 years of Credited Service.

The Beneficiaries of any retiree meeting the above requirements shall be entitled to receive a supplemental pension benefit under this Section if the Beneficiaries were receiving survivor benefits under Part I of the Plan on the July 1 increase effective date.

A supplemental pension benefit determined under this Section shall be added to and become a part of the recipient’s basic benefit under Part I of the Plan and shall be payable during such period and under such option as the basic benefit under Part I of the Plan is being paid.

6.09 Suspension of Retirement Benefits.

(a) Suspension of Benefits. Except as provided below, Normal, Early or Late Retirement Benefits will be suspended for each calendar month during which an Employee or Eligible Re-employed Pensioner (a “Pensioner”) completes more than 80 Hours of Service as described in Subsection 2.23(a) and (b) with an Employer in a job or position in which the Employee or Pensioner is eligible to participate in Part I of the Plan (hereinafter Section 203(a)(3)(B) service).

For purposes of this Section 6.09 of Part I of the Plan, an “Eligible Re-employed Pensioner” means (i) a retiree of First Allmerica or a retiree of a General Agent of First Allmerica who is re-employed by First Allmerica, Citizens or Hanover on or after January 1, 1988 or (ii) a retiree of Citizens or Hanover who is re-employed by First Allmerica, Citizens or Hanover on or after January 1, 1993 and (iii) for Plan Years beginning after December 31, 1988, who had not attained Age 70; provided, that (i) benefits will not be suspended during the calendar month a Pensioner first retires from the Employer, regardless of the number of Hours of Service completed by the Pensioner during such month, and (ii) this Section shall not apply to the Top-Heavy Plan minimum benefits to which any Non-Key Employee may be entitled under the top-heavy rules of Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans).

(b) Amount Suspended. The benefit suspended shall be equal to the portion of the Employee’s or Pensioner’s monthly annuity benefit derived from Employer contributions, including any temporary early retirement supplement.

(c) Resumption of payment. If retirement benefit payments have been suspended, payments shall resume no later than the first day of the third calendar month after the calendar month in which the Employee or Pensioner ceases to be employed in ERISA Section 203(a)(3)(B) service. The initial payment upon resumption shall include the payment scheduled to occur in the calendar month when payments resume and any amounts withheld during the period between the cessation of ERISA Section 203(a)(3)(B) service and the resumption of payments.

Part I - 38

Provided, that there shall be an offset from any payments to be resumed for the amount of any retirement benefits that had been paid but which should have been withheld under the suspension rules of this Section 6.09. In no event may the offset exceed in any one month more than 25 percent of the amount that would otherwise be payable under Part I of the Plan (excluding the first payment made after resumption which may be offset without limitation). The amount to be resumed shall be the greater of the benefit amount suspended or a benefit computed as described in Sections 6.01 or 6.02 or 6.04, as appropriate, but based on the pensioner’s Age (and any joint or contingent annuitant’s Age), Credited Service and Compensation on the date of resumption.

(d) Notification. Notwithstanding anything in Part I of the Plan to the contrary, effective January 1, 2007, no retirement benefits (Early, Normal or Late) shall be withheld by the Plan unless the Employee or Pensioner is notified by personal delivery or first class mail during the first calendar month in which the Plan withholds payments that his or her benefits are suspended.

(e) Such notifications shall contain a description of the specific reasons why benefit payments are being suspended, a description of the plan provisions relating to the suspension of payments, a copy of such provisions, and a statement to the effect that applicable Department of Labor regulations may be found in Section 2530.203-3 of the Labor Regulations.

In addition, the notice shall inform the Employee or Pensioner of the Plan’s procedures for affording a review of the suspension of benefits. Requests for such reviews may be considered in accordance with the claims procedure adopted by the Plan, as described in Article VIII of Part III of the Plan.

6.10 Rollovers to Other Qualified Plans.

(a) Notwithstanding any provision of Part I of the Plan to the contrary that would otherwise limit a distributee’s election under this Article or under Articles VII and VIII of Part III of the Plan, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.

(b) Definitions.

(i) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies)

Part I - 39

of the distributee and the distributee’s designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and any other distribution(s) that is reasonably expected to total less than $200 during a year. A portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to (i) an individual retirement account or annuity described in Section 408(a) or (b) of the Internal Revenue Code; (ii) for taxable years beginning after December 31, 2001 and before January 1, 2007, to a qualified trust which is part of a defined contribution plan that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible; or (iii) for taxable years beginning after December 31, 2006, to a qualified trust or to an annuity contract described in Section 403(b) of the Internal Revenue Code, if such trust or contract provides for separate accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.

(ii) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, a Roth IRA as pursuant to in Section 408A(e) of the Code, an annuity contract described in Section 403(b) of the Code, an annuity plan described in Section 403(a) of the Code, a qualified plan described in Section 401(a) of the Code, that accepts the distributee’s eligible rollover distribution or an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity.

(iii) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving spouse and the Employee’s surviving spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse.

(iv) Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee.

Part I - 40

(c) For distributions after June 9, 2009, a non-spouse Beneficiary who is a “designated beneficiary” under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (“direct rollover”), may roll over all or any portion of his or her distribution to an individual retirement account the Beneficiary establishes for purposes of receiving the distribution. In order to do a direct rollover of the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution.

Although a non-spouse Beneficiary may roll over directly a distribution as provided above, any distribution made prior to January 1, 2010 is not subject to the direct rollover requirements of Code Section 401(a)(31) (including Code Section 401(a)(31)(B), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c)). If a non-spouse Beneficiary receives a distribution from the Plan, the distribution is not eligible for a
“60-day” rollover.

If the Participant’s named Beneficiary is a trust, the Plan may make a direct rollover to an individual retirement account on behalf of the trust, provided the trust satisfies the requirements to be a “designated beneficiary” within the meaning of Code Section 401(a)(9)(E).

A non-spouse Beneficiary may not roll over an amount which is a required minimum distribution, as determined under applicable Treasury Regulations and other Internal Revenue Service guidance. If the Participant dies before his or her required beginning date and the non-spouse Beneficiary rolls over to an IRA the maximum amount eligible for rollover, the Beneficiary may elect to use either the 5-year rule or the life expectancy rule, pursuant to Treasury Regulation Section 1.401(a)(9)-3, A-4(c), in determining the required minimum distributions from the IRA that receives the non-spouse Beneficiary’s distribution.

ARTICLE VII

DEATH BENEFITS

7.01 Pre-Retirement Death Benefits.

(a) General Rules. The provisions of this Section shall apply to any Participant or Former Participant provided that such Participant or Former Participant completes at least one Hour of Service on or after January 1, 1995.

(i) If a married Participant who has satisfied the eligibility requirements for an early retirement benefit or normal retirement benefit dies (regardless of whether the Participant is still working for the Employer) before beginning to receive such benefits, then the Participant’s surviving spouse will receive a monthly retirement benefit equal to the sum of:

(A) the portion of the Accrued Benefit attributable to the Participant’s Grandfathered Benefit, if any, that would have been payable if the Participant had retired on the day before his or her death after having elected an immediate Qualified Joint and Survivor Annuity Option with a 50% continuation of monthly benefits to be payable to the survivor; and

Part I - 41

(B) the Actuarial Equivalent annuity (payable on the Participant’s death) of the portion of the vested Accrued Benefit attributable to the Participant’s Projected Account Balance.

The amount of such benefit shall be payable monthly for the life of the spouse, with the first payment payable as of the date of the Participant’s death, unless the spouse requests a later commencement date (consistent with the provisions of the Part I of the Plan).

(ii) If a fully or partially vested married Participant dies on or before attaining eligibility for early retirement, the Participant’s surviving spouse will receive a monthly retirement benefit equal to the sum of (A) and (B) below.

(A) The portion of the Accrued Benefit attributable to the Participant’s Grandfathered Benefit, if any, which would be payable if the Participant had:

(1) separated from service on the date of death;

(2) survived to Age 55 (if younger than Age 55 on the date of death);

(3) retired at Age 55 (or retired on the day before his or her death, if older than Age 55 at the date of death) after having elected an immediate Qualified Joint and Survivor Annuity Option with a 50% continuation of monthly benefits to be payable to the survivor; and

(4) died on the day after retirement.

(B) the Actuarial Equivalent annuity (payable when the Participant would have attained age 55) of the portion of the vested Accrued Benefit attributable to the Participant’s Projected Account Balance.

A surviving spouse entitled to benefits under this paragraph (ii) will begin to receive payments on the first day of the month following the date the Participant would have attained Age 55 (or on the first day of the month following the date of death, if the Participant was Age 55 or older on the date of his or her death), unless the spouse requests an earlier or later commencement date (consistent with the provisions of Part I of the Plan).

Part I - 42

For purposes of this paragraph (ii), the “earliest retirement age” is the earliest date on which, under Part I of the Plan, the Participant could elect to receive retirement benefits attributable to his or her Grandfathered Benefit.

The surviving spouse of a Participant who is entitled to receive a pre-retirement death benefit as described in paragraph (a)(i) or (a)(ii) above, may, in lieu of receiving such benefit, elect to receive the portion of such death benefit which is the Participant’s Account Balance on the Determination Date in a single sum amount. Such single sum benefit shall be distributed as soon as practicable after the date of the Participant’s death (or at any later date, as elected by the surviving spouse, consistent with the provisions of Part I of the Plan) and shall be in an amount equal to the Account Balance as of the Determination Date. Alternatively, the surviving spouse may elect to have the Actuarial Equivalent of the pre-retirement death benefit (or the Actuarial Equivalent of the Grandfathered Benefit, if the Account Balance is to be paid as a single sum) payable commencing as of the date of the Participant’s death (or at any later date as elected by the surviving spouse, consistent with the provisions of Part I of the Plan) in any of the other optional forms of payment available under Section 6.06 of Part I of the Plan. In the event that a surviving spouse elects to have the portion of his or her benefit attributable to the Participant’s Account Balance payable in a lump sum in accordance with this paragraph, the balance of the death benefit otherwise payable under Part I of the Plan in accordance with paragraph (a)(i) or (a)(ii) above, shall consist solely of that portion of such death benefit that is attributable to the Participant’s Grandfathered Benefit, if any.

Any surviving spouse described in the preceding paragraph who elects to receive the Participant’s Account Balance in a single sum payment may also elect to receive the present value of the Participant’s Grandfathered Benefit, if any, in a single sum amount; provided, however, that this option with respect to a Grandfathered Benefit shall only be available to a surviving spouse if the present value of the Grandfathered Benefit does not exceed $5,000 ($3,500 for Plan Years beginning prior to January 1, 1998). Any such single sum benefit shall be distributed as soon as practicable after the date of the Participant’s death.

If a Participant, on or after the earlier of the first day of the Plan Year in which he or she attains age 35 or the date of his or her separation from service and prior to his or her death, elects to waive the pre-retirement death benefit which is attributable to the Participant’s Projected Account Balance and the participant’s spouse consents to the waiver in accordance with Section 6.07(b)(i) (as if the pre-retirement death benefit waiver was a waiver of a Qualified Joint and Survivor Annuity), the Participant may designate a Beneficiary other than his or her spouse to receive the portion of the Participant’s pre-retirement death benefit which is attributable to the Participant’s Projected Account Balance.

Part I - 43

Any such designation shall be in writing on a form provided by or satisfactory to the Plan Administrator, and such designation may include primary and contingent Beneficiaries. Such benefit shall be paid in the form of a lump sum as soon as practicable after the death of the Participant and shall equal the Participant’s Account Balance at the Determination Date. In the event that a portion of a Participant’s benefit under the Plan is payable to a non-spouse Beneficiary in accordance with this paragraph, the remaining portion of the death benefit attributable to such Participant shall be paid to the Participant’s surviving spouse in accordance with paragraphs (a)(i) and (a)(ii) above, as applicable. Before a Participant is permitted to waive the pre-retirement death benefit which is attributable to the Participant’s Account Balance, the Plan Administrator shall provide each Participant a written explanation with respect to the pre-retirement death benefit comparable to that described in Section 6.07(c)(i).

(b) Unmarried Participants. If any unmarried Participant dies in any of the circumstances described in paragraphs (a)(i) or (a)(ii) above with respect to married Participants, the Beneficiary (designated in accordance with the rules described in (a) above) of such Participant shall receive a death benefit in a single sum as soon as practicable after the date of the Participant’s death. The amount of such death benefit shall be equal to the Participant’s Account Balance at the Determination Date. There shall be no death benefit payable with respect to the Grandfathered Benefits of any such Participant.

7.02 Death Benefits for Certain Dependent Spouses (Applicable only to certain Employees entitled to Special Grandfathered Benefits).

(a) Eligibility. The spouse of a deceased Employee (including the spouse of any such deceased Employee who had become and continuously remained Totally Disabled [as described in Section 6.05] until death) shall be entitled to a monthly income as set forth in Subsection (b) hereof, provided:

(i) The spouse was married to, living with and was a dependent of the Employee for at least the three year period immediately preceding the death of the Employee. For purposes of this Section 7.02 dependency shall be assumed only if the average earned income of the spouse during such three year period was less than the average earned income of the Employee during the same three year period;

(ii) The Employee had attained Age 50 prior to the date of death;

(iii) The Employee was an employee of First Allmerica or a General Agent of First Allmerica prior to January 1, 1976 and had not thereafter retired or attained Age 65 and since December 31, 1975 was continuously employed with the Employer until the date of his or her death;

Part I - 44

(iv) The Employee was eligible to accrue additional Special Grandfathered Benefits (as described in Subsection 2.20(b)) on December 31, 2004 (or on the date of his or her death, if earlier); and

(v) The Employee was not a Highly Compensated Employee on the date of his or her death.

Whether or not a spouse qualifies as a “dependent spouse” shall be determined by the Plan Administrator, whose determination shall be conclusive and binding on all persons. If an Employee or spouse is totally disabled (as described in Section 6.05), the “average earned income” of the disabled person shall be determined as of the date the Total Disability commenced. The term “earned income” for a year means a person’s Compensation as defined in Section 2.08(b) paid during the year plus the sum of (i) any salary reduction contributions allocated during the year on the person’s behalf to any tax sheltered annuity qualified under Section 403(b) of the Code or to any defined contribution plan qualified under Section 401(k) of the Code maintained by the person’s employer and (ii) the amount of any salary reduction contributions contributed on the person’s behalf during the year to any Code Section 125 plan maintained by the person’s employer.

(b) Amount of Benefit. The benefit to spouses qualifying under Subsection (a) shall be a monthly income commencing as of the date of the death of the Employee, in an amount equal to (i) less (ii) below:

(i) the applicable percentage below of the Special Grandfathered Benefit which the Employee would have received at his or her Normal Retirement Date had the Employee lived and remained a Participant in Part I of the Plan until such date and had the Participant continued to earn monthly one-twelfth of the Compensation paid to the Participant during the 12 complete months prior to the month in which occurred the date of his or her death.

Number of Completed Years Over Employee’s Age 49 at Date of Employee’s Death		Percentage of Grandfathered Retirement Benefit*
	1		10%
	2		20%
	3		30%
	4		40%
	5 and over		50%; less

Part I - 45

*  If death occurs in a month other than the month in which the Participant attains the specified Age, the percentage shall be determined based on straight line interpolation.

(ii) the amount of any benefits provided to the surviving spouse pursuant to Section 7.01 attributable to the Employee’s Special Grandfathered Benefit.

ARTICLE VIII

BENEFITS UPON TERMINATION FROM SERVICE

8.01 In General. In the event that a Participant shall terminate from service with the Employer for any reason other than death, Normal, Early or Late Retirement, the interests and rights of such Participant shall be limited to those contained in this Article.

8.02 Termination Benefits. Upon any separation from service described in Section 8.01, a Participant shall be entitled to a benefit under Part I of the Plan, payable at his or her Normal Retirement Date, equal to the vesting percentage specified below of the Participant’s Accrued Benefit. The automatic form of benefit shall be a Qualified Joint and Survivor Annuity, with the survivor to receive 100% of the benefit which had been payable during their joint lives, if the Participant is married at the time of commencement of benefits, or a single life annuity if the Participant is not married at the time of commencement. With spousal consent, the Participant may elect to have his or her benefit paid in any of the optional forms described in Section 6.06. The amount of any annuity attributable to a Participant’s vested Account Balance shall be the Actuarial Equivalent of such vested Account Balance.

Vesting Percentages

(a) With respect to the portion of the Accrued Benefit attributable to such Participant’s Grandfathered Benefit, if any:

Completed Years of Service	Nonforfeitable Percentage
Less than 5	0
5 or more	100

(b) With respect to the portion of the Accrued Benefit attributable to such Participant’s Projected Account Balance:

Completed Years of Service	Nonforfeitable Percentage
Less than 2	0
2	25
3	50
4	75
5 or more	100

Part I - 46

Notwithstanding the above, if the Plan is a Top Heavy Plan, then the Plan shall meet the following vesting requirements for such Plan Year and for all subsequent Plan Years, even if the Plan is not a Top Heavy Plan for such subsequent Plan Years.

Completed Years of Service	Nonforfeitable Percentage
Less than 2	0
2	25
3	50
4	75
5 or more	100

Notwithstanding anything in Part I of the Plan to the contrary, effective on August 17, 2006, for those Participants employed by the Employer on or after such date, such Participants shall be 25% vested in their Account Balance, as defined in Section 4.01, upon completion of two (2) Years of Service and 100% vested in their Accrued Benefit, as described in Section 2.01, upon completion of three (3) Years of Service.

For purposes of this Article, Years of Service means Plan Years during which an Employee was credited with at least 1,000 Hours of Service.

Notwithstanding the foregoing, a Participant who is entitled to a deferred Normal Retirement Benefit may elect to receive his or her vested Account Balance on the Determination Date in a single lump sum. In addition, if a Participant makes an election described in the immediately preceding sentence and if the present value of the portion of the vested Accrued Benefit attributable to such Participant’s vested Grandfathered Benefit does not exceed $3,500 ($5,000 for Plan Years beginning on and after January 1, 1998), the Participant may elect to receive such portion of his or her vested Accrued Benefit attributable to the Grandfathered Benefit in a lump sum. Any such Participant may elect to receive either such lump sum at any time after separation from service and, in the case of a single lump sum distribution of his or her vested Account Balance, must receive such benefit no later than the time at which benefits attributable to the Participant’s Grandfathered Benefit, if any, commences. Any such election shall be subject to spousal consent in the case of a married Participant. Any spousal consent must satisfy the requirement of Section 6.07. In the event a Participant elects to have his or her vested Account Balance paid in a lump sum, the portion of such Participant’s vested Accrued Benefit attributable to his or her Grandfathered Benefit, if any, shall be paid in accordance with the otherwise applicable provisions of Section 6.06 (and of Article III of Part III of the Plan).

Notwithstanding anything in Part I of the Plan to the contrary, an actively employed Participant’s Accrued Benefit shall become 100% vested and non-forfeitable upon the

Part I - 47

earliest of (i) the date of such Participant’s death; (ii) the date such a Participant becomes Totally Disabled (within the meaning of Section 6.05 of Part I of the Plan); or (iii) the date such a Participant attains his or her Normal Retirement Age.

Any distributions under this Article shall be subject to the requirements of Sections 6.06 and 6.07, including the requirement that a Participant shall be eligible to receive any form of distribution provided for under Section 6.06 of Part I of the Plan at such time as he or she is eligible to receive his or her vested Account Balance in a lump sum.

8.03 Forfeitures. The non-vested portion of a Participant’s Accrued Benefit shall be treated as a forfeiture when the Participant or his or her spouse (or surviving spouse) receives a distribution of the present value of his or her vested Accrued Benefit, pursuant to Section 8.02 of Part I of the Plan and the Participant’s service attributable to such distribution shall be disregarded as provided for in Section 8.07 of Part I of the Plan. For purposes of this Section, if the present value of a Participant’s vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested Accrued Benefit.

In the case of a partially vested terminated Participant who does not receive a distribution pursuant to the above paragraph, the value of the nonvested portion of his Accrued Benefit shall be treated as a forfeiture at the end of the Plan Year in which the Participant incurs a One Year Break in Service until the Participant has completed one Year of Service after he has been re-employed.

Forfeitures will be used to reduce (i) Employer contributions for the Plan Year following the Plan Year in which the forfeiture occurs; and or (ii) the Employer’s costs under the Plan.

8.04 Resumption of Service. A Participant who terminates his or her participation in Part I of the Plan and who subsequently resumes service with the Employer will again become a Participant on the entry date determined in accordance with Section 3.01(b) of Part I of the Plan.

8.05 Service with Affiliates. As provided in Section 2.23, in determining a Participant’s vesting percentage, Hours of Service completed with an Affiliate or as a Career Agent or General Agent of First Allmerica shall be deemed to be Hours of Service completed with the Employer.

8.06 Distribution of Benefits. On the Former Participant’s Normal Retirement Date, benefits to which he or she is entitled pursuant to this Article shall be distributed in accordance with Article VI.

If a Former Participant entitled to a deferred benefit pursuant to this Article VIII dies prior to his or her Normal Retirement Date, the death benefit, if any, to which he or she is entitled shall be as is specified in Article VII.

Part I - 48

8.07 Cash Out Repayment Option.

(a) Notwithstanding anything in this Article or in Section 2.01 to the contrary, unless a repayment has been made in accordance with Subsection (b) below, in determining a partially vested Employee’s Grandfathered Benefit (or, in the case of a Top Heavy Plan, the minimum benefit for Non-Key Employees described in Subsection 2.01(b)) after a resumption of participation, periods of service with respect to which the Employee received a distribution of the present value of his or her vested Accrued Benefit shall be disregarded.

(b) In the case of the distribution of the present value of a partially vested Employee’s vested Accrued Benefit in accordance with Section 8.02, the Employee’s Accrued Benefit described in Subsections 2.01(a) and (b) (including all optional forms of benefits and subsidies relating to such benefits) shall be restored if the Employee repays the amount distributed plus interest, if applicable, compounded annually from the date of distribution at the rate of 5 percent. In determining the amount of any required repayment, interest shall be charged on the portion of any distribution attributable to a Participant’s Grandfathered Benefit, if any or, in the case of a Top Heavy Plan, on the portion of any distribution that is a minimum benefit for Non-Key Employees described in Subsection 2.01(b). No interest shall be payable with respect to the portion of a Participant’s distribution attributable to his or her Account Balance. Such repayment must be made by the Employee before the earlier of five years after the first date on which the Employee is subsequently reemployed by the Employer, or the date the Employee incurs five consecutive One Year Breaks in Service following the date of distribution.

If an Employee is deemed to receive a distribution pursuant to this Article, and the Employee resumes employment covered under this Plan before the date the Participant incurs 5 consecutive One-Year Breaks in Service, upon the reemployment of such Employee, the Employer-derived Accrued Benefit will be restored to the amount of such Accrued Benefit on the date of the deemed distribution.

8.08 Early Retirement Election. Any Participant who terminates service after having completed at least fifteen Years of Service may elect to retire on the first day of any month following his or her 55th birthday, as described in Section 6.02.

8.09 Amendment to Vesting Schedule. If the Vesting Schedule of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of a Participant’s nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each Participant with at least 3 Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have their nonforfeitable percentage computed under the Plan without regard to such amendment or change. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of:

(i) 60 days after the amendment is adopted;

Part I - 49

(ii) 60 days after the amendment becomes effective; or

(iii) 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator.

Part I - 50

EXHIBIT A – ADJUSTMENT FACTORS FOR OPTIONAL GRANDFATHERED BENEFITS

Factors for ages not illustrated on the following tables will be computed on an actuarial basis consistent with that used to compute the factors shown.

Part I - 51

JOINT AND SURVIVOR OPTION PERCENTAGES

(Applicable only if the Participant’s age, nearest birthday, on the date monthly income commences is 65).

Age Nearest Birthday of Joint Annuitant on the Date Monthly Income Commences to the Participant	Percentage of the Adjusted Grandfathered Retirement Annuity Payments which are to be Continued to the Surviving Joint Annuitant
	100%			66 2/3%			50%
50		80.3	%		87.1	%		90.9	%
51		80.7			87.5			91.3
52		81.1			87.9			91.8
53		81.5			88.4			92.2
54		82.0			88.8			92.7
55		82.4			89.3			93.2
56		82.9			89.8			93.8
57		83.3			90.3			94.3
58		83.8			90.9			94.9
59		84.3			91.4			95.5
60		84.8			92.0			96.1
61		85.3			92.7			96.8
62		85.9			93.3			97.5
63		86.4			94.0			98.3
64		86.9			94.7			99.1
65		87.5			95.4			100.0
66		88.0			96.2			100.0
67		88.6			97.0			101.9
68		89.1			97.9			102.9
69		89.6			98.7			104.0
70		90.2			99.6			105.1
		1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum.
		Life Ann/Opt.

Part I - 52

CONTINGENT ANNUITANT OPTION PERCENTAGES

(Applicable only if the Participant’s age, nearest birthday, on the date monthly income commences is 65).

Age Nearest Birthday of Contingent Annuitant on the Date Monthly Income Commences to the Participant	Percentage of the Adjusted Grandfathered Retirement Annuity Payments which are to be Continued to the Surviving Contingent Annuitant
	100%			66 2/3%			50%
50		80.3	%		85.9	%		89.0	%
51		80.7			86.2			89.3
52		81.1			86.5			89.6
53		81.5			86.9			89.8
54		82.0			87.2			90.1
55		82.4			87.5			90.4
56		82.9			87.9			90.6
57		83.3			88.2			90.9
58		83.8			88.6			91.2
59		84.3			89.0			91.5
60		84.8			89.3			91.8
61		85.3			89.7			92.1
62		85.9			90.1			92.4
63		86.4			90.5			92.7
64		86.9			90.9			93.0
65		87.5			91.3			93.3
66		88.0			91.7			93.6
67		88.6			92.1			93.9
68		89.1			92.5			94.2
69		89.6			92.9			94.5
70		90.2			93.2			94.8
		1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of  birth of 1930 and interest at the rate of 7% per annum.
		Life Ann/Opt.

Part I - 53

ANNUITY OPTION ADJUSTMENT PERCENTAGES

Percentages to be applied to the monthly benefit which would be payable to the Participant on his or her Retirement Date if no Optional Form of Annuity were in effect to determine the monthly income benefit commencing on the Participant’s Retirement Date if one of the following options is in effect.

Age Nearest Birthday on the Date Monthly Income Commences Benefit		Annuity Option for Grandfathered
		5C&C			10C&C			15C&C			20C&C
50			99.8	%		99.2	%		98.3	%		97.2	%
51			99.8			99.1			98.1			96.9
52			99.7			99.0			97.9			96.6
53			99.7			98.9			97.7			96.3
54			99.7			98.8			97.5			96.0
55			99.6			98.6			97.3			95.6
56			99.6			98.5			97.0			95.2
57			99.6			98.4			96.8			94.8
58			99.5			98.3			96.5			94.3
59			99.5			98.1			96.2			93.8
60			99.4			98.0			95.9			93.3
61			99.4			97.8			95.5			92.7
62			99.3			97.6			95.0			92.0
63			99.3			97.3			94.5			91.2
64			99.2			97.1			94.0			90.4
65			99.1			96.7			93.3			89.5
66			99.0			96.4			92.6			88.5
67			98.9			95.9			91.8			87.4
68			98.8			95.4			91.0			86.2
69			98.6			94.9			90.0			84.9
70			98.4			94.3			89.0			83.5
	1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum.
	Life Ann/Opt.

Part I - 54

THE HANOVER INSURANCE GROUP CASH BALANCE

PENSION PLAN

PART II

(As amended and restated generally effective January 1, 2010)

Part II

THE HANOVER INSURANCE GROUP CASH BALANCE

PENSION PLAN

PART II

TABLE OF CONTENTS

		PAGE
ARTICLE I            NAME, PURPOSE AND EFFECTIVE DATE OF PLAN			1
1.01	General Statement.		1
1.02	Name of Plan.		1
1.03	Purpose.		1
1.04	Restated Plan Effective Date.		2
ARTICLE II          DEFINITIONS			2
ARTICLE III        PARTICIPATION REQUIREMENTS			14
3.01	Participation Requirements.		14
3.02	Classification Changes.		14
3.03	Participant Cooperation.		14
ARTICLE IV        EMPLOYER CONTRIBUTIONS			15
4.01	Employer Contributions.		15
4.02	Plan Contributions to Trustees.		15
4.03	Receipt of Contributions by Trustee.		15
ARTICLE V         RETIREMENT AND DISABILITY BENEFITS			15
5.01	Normal Retirement Benefit.		15
5.02	Early Retirement Benefit.		16
5.03	Late Retirement Benefit.		17
5.04	Disability Benefit.		18
5.05	Distribution of Benefits.		18
5.06	Qualified Joint and Survivor Annuity for Married Participants.		20
5.07	Supplementary Pension Benefits.		23
5.08	Rollovers to Other Qualified Plans.		24
ARTICLE VI        DEATH BENEFITS			27
6.01	Pre-Retirement Spouse Benefit for Married Participants.		27
6.02	Minimum Death Benefit.		28
ARTICLE VII      BENEFITS UPON TERMINATION FROM SERVICE			29
7.01	In General.		29
7.02	Options on Termination of Participation.		29
7.03	Forfeitures.		31
7.04	Resumption of Service.		31
7.05	Distribution of Benefits.		31
7.06	Cash Out Repayment Option.		31
7.07	Early Retirement Election.		32
7.08	Amendment to Vesting Schedule.		32

Part II

ARTICLE I

NAME, PURPOSE AND EFFECTIVE DATE OF PLAN

1.01 General Statement. The Hanover Insurance Group Cash Balance Pension Plan (the “Plan”) consists of three parts, Part I, Part II and Part III. Part I of the Plan provides a cash balance and pension benefit, which was formerly provided under a plan known as “The Allmerica Financial Cash Balance Pension Plan”. Part II of the Plan provides a pension benefit, which was formerly provided under a plan known as “The Allmerica Financial Agents’ Pension Plan”. Part III of the Plan contains provisions applicable to each of Part I and Part II.

The provisions of Part III of the Plan shall override any provision of Part II of the Plan as provided in Part III of the Plan.

The benefits payable to eligible Participants under Part II of the Plan are governed by the terms and conditions of Part II of the Plan and Part III of the Plan. Terms used in this Part II of the Plan are defined in Part I of the Plan, except as otherwise specifically provided in this Part II of the Plan.

1.02 Name of Plan. The prior version of this Part II of the Plan, known as The Allmerica Financial Agents’ Pension Plan, was generally effective January 1, 1999 (except for those provisions of the Plan which had an alternative effective date). The effective date of the prior version of this Part II of the Plan (the “Prior Agents’ Plan”) was January 1, 1971. Effective January 1, 1992, the Prior Agents’ Plan was merged with and became a part of The Allmerica Financial Cash Balance Pension Plan, formerly known as The State Mutual Companies’ Pension Plan. Thus, the Prior Agents’ Pension Plan became Part II of The Hanover Insurance Group Cash Balance Pension Plan. On December 31, 2007, First Allmerica did not employ any person who was eligible to participate or was actively participating in The Allmerica Financial Agents’ Pension Plan. Effective January 1, 2008, First Allmerica transferred sponsorship of, and the liabilities and obligations associated with, The Hanover Insurance Group Cash Balance Plan (including The Allmerica Financial Agents’ Pension Plan) to Hanover, and Hanover agreed to assume sponsorship of, and the liabilities and obligations associated with, The Hanover Insurance Group Cash Balance Pension Plan as of such date.

1.03 Purpose. This Part II of the Plan has been established for the exclusive benefit of Participants and their Beneficiaries and as far as possible shall be interpreted and administered in a manner consistent with this intent and consistent with the requirements of Section 401 of the Internal Revenue Code.

Subject to Article IV of Part III of the Plan (Limitations on Benefits) and to Section 10.04 of Part III of the Plan, which relates to the return of Employer contributions under special circumstances, until such time as the Plan has been terminated and all Plan liabilities have been satisfied, under no circumstances shall any assets of the Plan, or any contributions made under the Plan, be used for, or diverted to, purposes other than for the exclusive benefit of the Participants and their Beneficiaries and to defray reasonable expenses incurred in the administration of the Plan.

Part II -1

1.04 Restated Plan Effective Date. The effective date of this amended and restated Part II of the Plan is January 1, 2010 (except for those provisions of this Part of the Plan which have an expressly stated alternative effective date). Except to the extent otherwise specifically provided in this Part II of the Plan, (i) the terms and conditions of this amended and restated Part II of the Plan shall apply only to those eligible Employees actively employed by the Employer (or to those eligible Career Agents with a Career Agent Contract in force) on or after January 1, 2010. The rights and benefits of any Participant whose employment with the Employer terminated (or whose Career Agent Contract terminated) prior to January 1, 2010 shall be determined in accordance with the provisions of this Part II of the Plan as were in effect during the appropriate time or times prior to January 1, 2010; provided, however, that if the Accrued Benefit of any such Participant has not been completely distributed before January 1, 2010, then such Accrued Benefit shall be accounted for and distributed in accordance with the provisions of this version of Part II of the Plan, but only to the extent that any such provision is not inconsistent with Part III of the Plan and subject to the requirements of applicable law and as otherwise specifically provided herein.

ARTICLE II

DEFINITIONS

All section and article references in this Part II are to section and article references in this Part II, except as otherwise expressly provided.

Except to the extent a word or phrase is specifically defined in this Part II of the Plan, the words and phrases used in this Part II of the Plan shall have the meanings set forth in Part I of the Plan, unless a different meaning is clearly required by the context or is otherwise provided in Part III of the Plan.

2.01 “Accrued Benefit”:

(a) means, except as provided in (c) or (d) below, the sum of a Participant’s frozen Grandfathered Benefit (accrued during Years of Credited Service completed prior to January 1, 1999) and the defined benefit credited to eligible Participants in accordance with Section 5.01 attributable to Years of Credited Service completed by the Participant after December 31, 1998.

(b) No Employee contributions shall be required or permitted for Plan Years beginning after December 31, 1988. The portion of a Participant’s Accrued Benefit derived from required Employee contributions made on or after January 1, 1971 and prior to January 1, 1989 will be determined in accordance with the rules set forth below:

(i) STEP ONE - Determine the total amount of such contributions made by a Participant as a condition of participation in Part II of the Plan;

Part II -2

(ii) STEP TWO - Add to the amount in Step One interest required by the terms of Part II of the Plan to be credited to such contributions up to the Plan’s ERISA compliance date;

(iii) STEP THREE - Add to the sum of the amounts determined in Steps One and Two interest compounded annually at the rate of 5% from the Plan’s ERISA compliance date or the date the Participant began participation in Part II of the Plan, whichever is later, to the end of the last Plan Year beginning before January 1, 1988 or the Participant’s Normal Retirement Date, whichever is earlier.

(iv) STEP FOUR - Add to the sum of the amounts determined in Steps One, Two and Three interest compounded annually -

(A) at the rate of 120 percent of the Federal mid-term rate (as in effect under Section 1274 of the Code for the first month of the Plan Year) from the beginning of the first Plan Year beginning after December 31, 1987, and ending with the date on which the determination is being made, and

(B) at the interest rate which would be used under Part II of the Plan under Section 417(e)(3) of the Code (as of the determination date) for the period beginning with the determination date and ending on the date on which the Employee attains his Normal Retirement Date.

Notwithstanding the foregoing, for Plan Years beginning after December 31, 1998, the interest rate credited in Step (iv)(A) shall not be less than 5%.

(v) STEP FIVE - The amount in Step 4 will be converted into the normal form of benefit using the interest rate that would be used under Part II of the Plan under Code Section 417(e)(3).

The portion of a Participant’s Accrued Benefit derived from Employee contributions made prior to January 1, 1971 shall be equal to the total amount of such contributions made by a Participant, plus interest credited thereon. For Plan Years beginning prior to January 1, 1999, interest on such contributions shall be credited at the rate or rates in effect for each Plan Year under the terms of Part II of the Plan as in effect on December 31, 1998. For Plan Years beginning after December 31, 1998, interest on such contributions shall be credited as provided in STEPS FOUR and FIVE above.

Part II - 3

The portion of the Accrued Benefit described in Subsection (a) derived from Employer contributions as of any date is equal to such total Accrued Benefit less the portion derived from Employee contributions.

At all times the portion of a Participant’s Accrued Benefit attributable to mandatory Employee contributions shall be 100% vested and nonforfeitable.

(c) means, with respect to the minimum benefit for Non-Key Employee Participants in a Top Heavy Plan, the sum of such benefits earned by the Participant, which benefits are payable at the Participant’s Normal Retirement Date and are described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans).

(d) (i) Notwithstanding anything in Subsections (a), (b) or (c) to the contrary, unless a repayment has been made in accordance with the rules set forth in subparagraph (ii) below, in determining the portion of an Employee’s Accrued Benefit derived from Employer Contributions upon a resumption of participation, periods of service with respect to which the Employee received a distribution of the present value of his vested Accrued Benefit shall be disregarded.

(ii) In the case of an election of Option 2 described in Section 7.02 or in the case of an involuntary cash-out of the present value of an Employee’s Accrued Benefit in accordance with such Section, the Employee’s Accrued Benefit described in Subsections 2.01(a), (b) and (c) (including all optional forms of benefits and subsidies relating to such benefits) shall be restored if the Employee repays the amount distributed plus interest, compounded annually from the date of distribution at the rate of 5 percent. Such repayment must be made by the Employee before the earlier of five years after the first date on which the Employee is subsequently reemployed by the Employer, or the date the Employee incurs five consecutive One Year Breaks in Service following the date of distribution; provided, however, that there shall be no right of repayment if the Employee was 100% vested on the date of his termination of participation.

Notwithstanding anything in Part II of the Plan to the contrary, for Plan Years beginning before Section 411 of the Code is applicable hereto, the Participant’s Accrued Benefit shall be the greater of that provided by Part II of the Plan, or 1/2 of the benefit which would have accrued had the provisions of this Section 2.01 been in effect. In the event the Accrued Benefit as of the effective date of Code Section 411 is less than that provided hereunder, such difference shall be accrued in accordance with this Section.

Part II - 4

2.02 “Actuarial Equivalent” means a benefit having the same value as the benefit or benefits otherwise payable. Except as otherwise provided in this Section, the present value of any benefit determined under the terms of Part II of the Plan will be the actuarial equivalent of the no-death benefit life annuity retirement benefit specified in Section 5.01.

Actuarial Equivalent life annuity settlements of optional life annuity Top Heavy Plan benefits will be computed utilizing (i) the Code Section 417 Mortality Table and (ii) the Code Section 417 Interest Rate for determining the amount payable to a Participant having an annuity starting date on or after January 1, 2004.

Optional life annuity benefits will be computed on the basis of the 1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum. Adjustment factors used to determine optional forms of life annuity benefits are included in Exhibit A, attached hereto and made a part of Part II of the Plan. Adjustment factors for optional life annuity benefits not illustrated will be computed on an actuarial basis consistent with that used in computing the factors shown in Exhibit A.

The present value of any Plan benefit and the amount of any cash distribution shall be determined on the basis of (i) the mortality rates specified above and an interest rate of 7% per annum or (ii) the Code Section 417 Mortality Table and the Code Section 417 Interest Rate (or for determining the amount payable to a Participant having an annuity starting date on and after January 1, 2008, the Code Section 417 Applicable Interest Rate), whichever produces the greater benefit.

The preceding paragraphs shall not apply to the extent they would cause the Plan to fail to satisfy the requirements of Article IV of Part III of the Plan (Limitations on Benefits) or Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans).

For purposes of Part II of the Plan,

(a) the “Code Section 417 Mortality Table” means the applicable mortality table prescribed by the Secretary of the Treasury pursuant to Code Section 417(e)(3), as in effect from time to time, provided, however, that notwithstanding the preceding provisions of this paragraph, for distributions commencing on or after December 31, 2002 and prior to January 1, 2008, the Code Section 417 Mortality Table means the Table set forth in Revenue Ruling 2001-62 and for purposes of determining the amount payable to a Participant with an annuity starting date on or after January 1, 2008, the Code Section 417 Mortality Table means the Table set forth in Revenue Ruling 2007-67 or such other Table as may be prescribed by the Secretary of the Treasury pursuant to Code Section 417(e)(3);

(b) for periods beginning on and after January 1, 2004, the “Code Section 417 Interest Rate” means, for the Plan Year which contains the annuity starting date for the distribution, the annual rate of interest on a 30-year Treasury securities in effect for the second month immediately preceding the first day of the Plan Year (e.g., November 2009 for the 2010 Plan Year), and

Part II - 5

(c) for periods beginning on and after January 1, 2008, the “Code Section 417 Applicable Interest Rate” means, for the Plan Year which contains the annuity starting date for the distribution, the applicable interest rate described by Code section 417(e) after its amendment by the Pension Protection Act of 2006, which rate more specifically shall be the adjusted first, second, and third segment rates applied under rules similar to the rules of Code Section 430(h)(2)(C) for the lookback month used to determine the previously applicable interest rate on 30-year Treasury securities (e.g., November 2009 for the 2010 Plan Year) or for such other time as the Secretary of the Treasury may by regulations prescribe.

(d) For purposes of determining the Code Section 417 Applicable Interest Rate, the first, second, and third segment rates are the first, second, and third segment rates which would be determined under Code Section 430(h)(2)(C) if:

(i) Code Section 430(h)(2)(D) were applied by substituting the average yields for the month described in clause (ii) below for the average yields for the 24-month period described in such Code section, and

(ii) Code Section 430(h)(2)(G)(i)(II) were applied by substituting “Section 417(e)(3)(A)(ii)(II) for “Section 412(b)(5)(B)(ii)(II)”, and

(iii) The applicable percentage under Code section 430(h)(2)(G) is treated as being 20% in 2008, 40% in 2009, 60% in 2010, and 80% in 2011.

2.03 “Compensation” means:

(a) For purposes of determining a Participant’s Normal Retirement Benefit specified in Section 5.01 of Part II of the Plan, a Participant’s total calendar year compensation paid (or deferred pursuant to an unfunded, non-qualified deferred payment arrangement) on and after the date he becomes a Participant and while he remains in an eligible class of Employees for (i) and (ii) below:

(i) services performed in connection with the sale and service of products of First Allmerica Financial Life Insurance Company.

(ii) services performed in connection with the sale and service of products of Allmerica Financial Life Insurance and Annuity Company.

Compensation shall also mean and include:

(iii) commissions paid to the Participant by Allmerica Investments, Inc., and

Part II - 6

(iv) compensation which is not currently includable in the Participant’s gross income by reason of the application of Sections 125, 402(e)(3) or 132(f)(4) of the Code.

Notwithstanding the foregoing, for purposes of Subsection (a) renewal commissions received which are attributable to business sold prior to the date the Employee became a Career Agent or General Agent of the Employer shall be excluded.

(b) For purposes of Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) and or for purposes of Article IV of Part III of the Plan (Limitations on Benefits), the term “Compensation” means a Participant’s earned income, wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c) of the Treasury Regulations), and excluding the following:

(i) Employer contributions to a plan of deferred compensation which are not includible in the Employee’s gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the employee, or any distributions from a plan of deferred compensation;

(ii) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture;

(iii) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and

(iv) Other amounts which received special tax benefits.

For Plan Years commencing after December 31, 1997, Compensation for purposes of Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) and Article IV of Part III of the Plan (Limitations on Benefits) shall also include Employee elective deferrals under Code Section 402(g)(3), amounts contributed or deferred by the Employer at the election of the Employee and not includable in the gross income of the Employee by reason of Code Section 125, and elective amounts that are not includable in the gross income of the Employee by reason of Code Section 132(f)(4).

Part II - 7

(c) Notwithstanding (a) and (b) above, for Plan Years beginning on or after January 1, 1994 and prior to January 1, 2002, the annual Compensation of each Participant taken into account for determining all benefits provided under Part II of the Plan for any determination period shall not exceed $150,000. This limitation shall be adjusted for inflation by the Secretary under Code Section 401(a)(17)(B) in multiples of $10,000 by applying an inflation adjustment factor and rounding the result down to the next multiple of $10,000 (increases of less than $10,000 are disregarded). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined beginning in such calendar year. If Compensation is being determined over a period of time that contains fewer than 12 calendar months, then the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12.

If Compensation for any prior determination period is taken into account in determining a Participant’s benefits for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual Compensation limit in effect for that prior period. For this purpose, in determining benefits in Plan Years beginning on or after January 1, 1989, the annual compensation limit in effect for determination periods beginning before that date is $200,000. In addition, in determining benefits in Plan Years beginning on or after January 1, 1994, the annual Compensation limit in effect for determination periods beginning before that date is $150,000.

(d) Notwithstanding the foregoing and (a) and (b) above, the annual Compensation of each Participant taken into account in determining benefit accruals in any Plan Year beginning after December 31, 2001, shall not exceed $200,000. Annual compensation means Compensation during the Plan Year or such other consecutive 12-month period over which Compensation is otherwise determined under Part II of the Plan (the “determination period”). For purposes of determining benefit accruals in a Plan Year beginning after December 31, 2001, the annual Compensation for any prior determination period shall be limited to $200,000.

The $200,000 limit on annual Compensation for determination periods beginning after December 31, 2001 shall be adjusted for cost-of-living increases in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to annual Compensation for the determination period that begins with or within such calendar year.

2.04 “Career Agent Contract” means that form of contract between a life insurance agent and the Employer whereby the agent agrees to sell insurance and annuity policies on a full-time basis.

Part II - 8

2.05 “Credited Interest” means interest utilized in determining the minimum death benefit specified in Section 6.02 of Part II of the Plan. Such interest shall be at the rate determined in accordance with the Group Annuity Contract, but not less than 3% per annum compounded annually from the January 1st next following the date such contributions were made to the first day of the month as of which the Credited Interest is being determined for periods prior to January 1, 1976, plus 5% per annum compounded annually for periods beginning on or after January 1, 1976 and prior to January 1, 1988, plus the greater of (i) 5% per annum compounded annually or (ii) the interest rate which would be credited under Part II of the Plan under Step (iv)(A) of Subsection 2.01(b) for periods beginning on or after January 1, 1988.

2.06 “Credited Service”

(a) Except as provided in Subsection (c) and except for Hours excluded under Subsections 2.12(b), (c), (g) and (h), Credited Service shall mean and include all Hours of Service completed with the Employer on and after the date the Employee becomes a Participant in Part II of the Plan, completed while the Participant remains in an eligible class of Employees.

(b) A Participant shall receive a year of Credited Service for each Plan Year in which he is credited with 1,000 or more Hours of Service with the Employer.

Additionally, for Plan Years beginning after 1998, a Participant shall receive a Year of Credited Service for the Plan Year he retires or dies and a Former Participant shall receive a Year of Credited Service for the Year he again becomes a Participant upon a rehire, in each case regardless of the number of Hours of Service completed in such Year. In no event will a Participant receive more than one Year of Credited Service for any one Plan Year.

(c) Notwithstanding anything in this Section to the contrary, Credited Service shall not include periods of service with respect to which any Employee has received a distribution described in Section 2.01(d) unless a repayment has been made pursuant to the rules set forth in paragraph (ii) of such Section.

(d) For purposes only of determining a Participant’s eligibility for the Disability Benefit specified in Section 5.03 of Part II of the Plan, the following periods of service shall be counted:

(i) periods of prior service with an Affiliate during which he was a participant in a qualified pension or profit sharing plan sponsored by the Affiliate;

(ii) periods of prior service with the Employer in a position in which he was not eligible to participate in this Plan during which he was a participant in another qualified pension or profit sharing plan sponsored by the Employer; and

Part II - 9

(iii) the number of full years and completed months during which a General Agent or former General Agent made contributions under Part II of his General Agent’s Contract.

2.07 “Employee” means any General Agent or life insurance agent who is a common-law employee of the Company or any life insurance agent who holds a Career Agent’s Contract with the Employer.

2.08 “Employee Contributions” means contributions made by a Participant prior to January 1, 1989 as a condition of participation in Part II of the Plan.

2.09 “Employer” means First Allmerica; provided that on and after January 1, 2008 the term “Employer” shall also mean the Plan Sponsor.

2.10 “General Agent” means an agent of the Company whose relationship is determined by a General Agent’s Agreement wherein the General Agent is required to devote his full-time business activities in the hiring, supervision and management of life insurance agents who sell, administer and service the policies and contracts of the Employer.

2.11 “Grandfathered Benefit” means the frozen monthly retirement benefit payable as a single life annuity to a Participant on his Normal Retirement Date, calculated in accordance with the benefit formulas set forth in Sections 5.01 and, if applicable, 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) as in effect on December 31, 1998. Such benefit shall be calculated based on the Participant’s Average Compensation, Final Average Compensation, Credited Service, and the amount of benefit offset as determined by applying Section 5.06, each determined as of December 31, 1998, based on the provisions of Part II of the Plan in effect on such date.

2.12 “Hour of Service” means:

(a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. For purposes of Part II of the Plan a Career Agent shall be credited with 45 Hours of Service for each complete or partial week his Career Agent’s Contract remains in force and a General Agent or life insurance agent who is a common-law employee shall be credited with 45 Hours of Service for each complete or partial week he performs duties for the Employer.

(b) Each hour for which the Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence:

(i) Except in the case of a Participant who is eligible for the Disability Benefit specified in Section 5.04, no more than 1,000 Hours shall be credited to an Employee under this Subsection (b) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period);

Part II - 10

(ii) No hours shall be credited under this Subsection (b) for any payments made or due under a plan maintained solely for the purpose of complying with any applicable workers’ compensation, unemployment compensation or disability insurance laws; and

(iii) No hours shall be credited under this Subsection (b) for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee.

For purposes of this Subsection (b) a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund or insurer, to which the Employer contributes or pays premiums.

(c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be both credited under Subsections (a) or (b), as the case may be, and under this Subsection. No more than 501 Hours shall be credited under this Subsection for a period of time during which an Employee did not or would not have performed duties.

(d) Special rules for determining Hours of Service under Subsections (b) and (c) for reasons other than the performance of duties. In the case of a payment which is made or due which results in the crediting of Hours of Service under Subsection (b) or in the case of an award or agreement for back pay, to the extent that such an award or agreement is made with respect to a period during which an Employee performs no duties, the number of Hours of Service to be credited shall be determined as follows:

(i) In the case of a payment made or due which is calculated on the basis of units of time (such as hours, days, weeks or months), the number of Hours of Service to be credited shall be determined as provided in Subsection (a).

(ii) Except as provided in Paragraph (d)(iii), in the case of a payment made or due which is not calculated on the basis of units of time, the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employee’s most recent hourly rate of compensation (as determined below) before the period during which no duties are performed.

(A) In the case of General Agents, the hourly rate of compensation shall be the Employee’s most recent rate of semi-monthly compensation divided by 80.

Part II - 11

(B) In the case of life insurance agents, the hourly rate of compensation shall be the minimum wage as established from time to time under Section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended.

(iii) Rule against double credit. An Employee shall not be credited on account of a period during which no duties are performed with more hours than such Employee would have been credited but for such absence.

(e) Crediting of Hours of Service to computation periods.

(i) Hours of Service described in Subsection (a) shall be credited to the Employee for the computation period or periods in which the duties are performed.

(ii) Hours of Service described in Subsection (b) shall be credited as follows:

(A) Hours of Service credited to an Employee on account of a payment which is calculated on the basis of units of time (such as hours, days, weeks or months) shall be credited to the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates.

(B) Hours of Service credited to an Employee by reason of a payment which is not calculated on the basis of units of time shall be credited to the computation period in which the period during which no duties are performed occurs, or if the period during which no duties are performed extends beyond one computation period, such Hours of Service shall be allocated between not more than the first two computation periods in accordance with reasonable rules established by the Employer, which rules shall be consistently applied with respect to all Employees within the same job classification, reasonably defined.

(iii) Hours of Service described in Subsection (c) shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement or payment is made.

(f) For purposes of Article III (Participation Requirements), determining eligibility for early retirement (Section 5.02) and Article VII (Benefits upon Termination from Service), Hours of Service shall also include Hours of Service determined in accordance with the rules set forth in this Section 2.12 and which would not have been excluded if such Service had been performed with the Employer, completed prior or subsequent to the Employee’s commencement of service with the Employer, completed with an Affiliate, as a General Agent or with the Employer in a position in which he was not eligible to participate in this Plan.

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(g) Rules for Maternity or Paternity Leaves of Absence. In addition to the foregoing rules and solely for purposes of determining whether a One Year Break in Service for participation and vesting purposes has occurred in a computation period, an individual who is absent for maternity or paternity reasons, shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such Hours cannot be determined, 8 Hours of Service per day of such absence. Provided, however, that:

(i) Hours shall not be credited under both this Subsection (g) and one of the other Subsections of this Section 2.12;

(ii) no more than 501 hours shall be credited for each maternity or paternity absence; and

(iii) if a maternity or paternity leave extends beyond one Plan Year, the Hours shall be credited to the Plan Year in which the absence begins to the extent necessary to prevent a One Year Break in Service, otherwise such Hours shall be credited to the following Plan Year. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the individual, (ii) by reason of a birth of a child of the individual, (iii) by reason of the placement of a child with the individual, in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.

(h) Other Federal Law. Nothing in this Section 2.12 shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States or any rule or regulation issued under any such law.

2.13 “Normal Retirement Age” means the later of:

(a) the 65th birthday of the Employee; or

(b) the fifth anniversary of the time the Participant commenced participation in Part II of the Plan.

For purposes of the foregoing, the participation commencement date is the first day of the Plan Year in which the Participant commenced participation in Part II of the Plan.

2.14 “Normal Retirement Date” shall mean the first day of the month next following the Participant’s Normal Retirement Age.

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2.15 (a) “One Year Break in Service” means, except for purposes of Article III (Participation Requirements), any Plan Year during which the Employee has not completed more than 500 Hours of Service.

(b) For purposes of Article III, “One Year Break in Service” means a twelve consecutive month period, computed with reference to the date the Employee’s employment commenced, during which the Employee does not complete more than 500 Hours of Service.

ARTICLE III

PARTICIPATION REQUIREMENTS

3.01 Participation Requirements.

(a) Employee Participation. Individuals who were Participants in Part II of the Plan on December 31, 2009 shall continue as a Participant in this Part II of the Plan on January 1, 2010. On and after January 1, 1983 no additional Employees shall be eligible to become Participants in Part II of the Plan.

(b) Notwithstanding the rules set forth in Subsection (a), a Former Participant who again becomes eligible to participate in Part II of the Plan will become a Participant on the date of his recommencement of service with the Employer.

(c) Notwithstanding anything in Part II of the Plan to the contrary, for periods commencing on and after January 1, 2003, a Former Participant who is re-employed as an Employee shall be reinstated as an active Plan Participant only for purposes of increasing Plan vesting on his or her frozen Accrued Benefit and for purposes of determining eligibility for early retirement under Section 5.02.

3.02 Classification Changes. In the event of a change in job classification, such that an Employee, although still in the employment of the Employer, no longer is an eligible Employee, he shall receive no further Credited Service under Part II of the Plan, and the Participant’s Accrued Benefit on the date he becomes ineligible shall continue to vest, become payable or be forfeited, as the case may be, in the same manner and to the same extent as if the Employee had remained a Participant.

For periods commencing prior to January 1, 2003, in the event a Participant becomes ineligible to accrue further Credited Service because he is no longer a member of an eligible class of Employees, but has not terminated his employment with the Employer, such Employee shall again be eligible to accrue further Credited Service immediately upon his return to an eligible class of Employees.

3.03 Participant Cooperation. Each eligible Employee who becomes a Participant thereby agrees to be bound by all of the terms and conditions of this Plan. Each eligible

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Employee, by becoming a Participant, agrees to cooperate fully with the Insurer, including completion and signing of such forms as are required by the Insurer under the Group Annuity Contract.

ARTICLE IV

EMPLOYER CONTRIBUTIONS

4.01 Employer Contributions. Each Employer shall pay to the Trustee for each Plan Year such amount which, when combined with required Employee Contributions, shall be necessary in the opinion of the Plan’s enrolled actuary to provide the benefits of Part II of the Plan.

4.02 Plan Contributions to Trustees. The Employer shall make payment of all contributions directly to the Trustee to be held, managed and invested in one or more Group Annuity Contracts and in other investments permitted under the Trust, but subject to Section 4.03.

4.03 Receipt of Contributions by Trustee. The Trustee shall accept and hold under the Trust Indenture such contributions of money, or other property approved for acceptance by the Trustee, on behalf of the Employer and its Employees and Beneficiaries, as it may receive from time to time, other than cash it is instructed to remit to the Insurer for deposit with the Insurer. However, the payor may pay contributions directly to the Insurer and such payment shall be deemed a contribution to the Trust to the same extent as if payment had been made to the Trustee. All such contributions shall be accompanied by written instructions from the Plan Administrator accounting for the manner in which they are to be credited.

Notwithstanding the foregoing, for periods commencing on and after January 1, 1992, Plan contributions will also be used to fund costs and provide benefits under the merged State Mutual Companies’ Pension Plan, which plan was merged with The Allmerica Financial Agents’ Pension Plan on such date.

ARTICLE V

RETIREMENT AND DISABILITY BENEFITS

5.01 Normal Retirement Benefit. (Applicable to all Employees who are active Participants on or after January 1, 1999).

Except as provided in Sections 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) and Section 5.06 of Part II of the Plan, each Participant who retires on his Normal Retirement Date shall be entitled to receive a monthly retirement income, commencing on his Normal Retirement Date and terminating on the last regular payment date prior to his death, which monthly retirement income will be equal to the sum of (a) and, if applicable, (b) below:

(a) The Participant’s Grandfathered Benefit; and

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(b) For those Participants whose Participant Number is listed on Exhibit B, attached hereto and made a part hereof, an amount equal to 1/12 of the Participant’s Post-1998 Annual Accrued Benefit.

For purposes of Part II of the Plan, a Participant’s Post-1998 Annual Accrued Benefit shall be equal to the Participant’s total Compensation paid during all Years of Credited Service completed after December 31, 1998 multiplied by the Participant’s individual accrual percentage. Each eligible Participant’s accrual percentage is set forth in Exhibit B.

5.02 Early Retirement Benefit.

An actively employed Participant in Part II of the Plan who has completed at least 15 Years of Service may retire on the first day of any month after his 55th birthday, in which event, except as provided in Section 5.06, he shall receive a monthly retirement benefit equal to the appropriate percentage set forth below of his Accrued Benefit.

Notwithstanding the above, if the Plan is top heavy and the minimum benefit for Non-Key Employees described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) is to be provided to the Participant, the Participant’s early retirement benefit shall be equal to the appropriate percentage set forth below of the Participant’s Accrued Benefit (as described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans)) earned as of the date of his early retirement.

In the event of early retirement, benefits shall be determined as of the date of retirement and shall be equal to the following percentage of the benefit payable at Age 65:

Retirement Age*	Percentage of Monthly Accrued Benefit
65	100%
64	97
63	94
62	91
61	88
60	85
59	82
58	79
57	76
56	73
55	70
54	67
53	64
52	61
51	58
50	55

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*  If benefit payments commence in a month other than the month in which the Participant attains the specified Age, the percentage shall be determined by straight line interpolation.

If a Participant terminates his employment (or terminates his Career Agent Contract) after having completed at least 15 Years of Service, he may elect to retire at any time after the first day of the month next following his 55th birthday and prior to his Normal Retirement Date and receive a retirement benefit based on his Credited Service as of the date of termination. The benefit to be provided to any such terminee shall be equal to the appropriate percentage set forth above of his Accrued Benefit.

Notwithstanding anything in this Section to the contrary, any Participant who was actively employed on June 30, 1977 may elect early retirement on the earlier of (i) and (ii) below, in which event, except as provided in Section 5.06, he shall receive a monthly retirement benefit equal to the appropriate percentage set forth above of his Accrued Benefit.

(i) the first day of the month following attainment of Age 50, and completion of at least 20 Years of Service; and

(ii) the first day of any month following attainment of Age 55 and completion of at least 15 Years of Service.

5.03 Late Retirement Benefit.

With the consent of the Employer, a Participant may elect to have his retirement benefit deferred to a late retirement date which may be the first day of any month after his Normal Retirement Date; provided, however, that Employer consent shall not be required for Employees protected beyond their Normal Retirement Date under the Age Discrimination in Employment Act of 1967, as amended or under applicable state law. Except as provided in Section 5.06, the monthly benefit payable to the Participant on his late retirement date shall be equal to the sum of (a) and (b) below:

(a) The Participant’s Grandfathered Benefit, which benefit will be actuarially increased; and

(b) For those Participants whose Participant Number is listed on Exhibit B, attached hereto and made a part hereof, an amount equal to 1/12 the Participant’s Post-1998 Annual Accrued Benefit, which benefit will be actuarially increased.

For purposes of Part II of the Plan, a Participant’s Post-1998 Annual Accrued Benefit shall be equal to the Participant’s total Compensation paid during all Years of Credited Service completed after December 31, 1998, including Years of Credited Service completed after the Participant’s Normal Retirement Date, multiplied by the Participant’s individual accrual percentage. Each eligible Participant’s accrual percentage is set forth in Exhibit B. Actuarial increases will be determined as provided in Exhibit A, attached hereto and made a part hereof.

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Notwithstanding the above, if the Plan is top heavy and the minimum benefit for Non-Key Employees described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) is to be provided to the Participant, the Participant’s late retirement benefit shall be determined in accordance with Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans), with top-heavy minimum benefits being computed for each Year of Service completed until the Participant’s Late Retirement Date, which resulting benefit shall be actuarially increased.

5.04 Disability Benefit.

If a Participant becomes Totally Disabled while employed as a General Agent or while his Career Agent Contract remains in force and if such total disability commenced after the Participant had completed at least five Years of Credited Service, it shall be assumed for purposes of this Plan that his employment or contractual relationship continued unchanged from the date of the commencement of his total disability to the earliest of his Normal Retirement Date, death, termination of employment (or, in the case of an Agent, termination of his Career Agent Contract) or the date that he is no longer Totally Disabled. While an Employee is Totally Disabled it shall be assumed for purposes of this Section that the Employee continued to earn annually an amount determined by dividing by three the Compensation paid to the Participant during the 36 months prior to the month in which he became Totally Disabled.

For purposes of this Part II of the Plan “Totally Disabled” means the inability to perform the duties of any occupation for which the Employee is reasonably fitted by training, education or experience; provided, however, that during the first 30 months of any disability an Employee will be considered Totally Disabled if he is unable to perform the duties of his occupation and is not working at any other occupation unless such occupation constitutes rehabilitative employment approved by the Plan Administrator.

5.05 Distribution of Benefits. The Plan Administrator shall direct the Insurer to commence payment of benefits provided under this Article V (or provided to a Former Participant pursuant to Article VII of Part II of the Plan). Plan benefits will be paid only on death, disability, termination of employment, Plan termination or retirement.

Except as otherwise provided in Section 5.06 of Part II of the Plan, the requirements of this Section shall apply to any distribution of a Participant’s interest and will take precedence over any inconsistent provisions of this Part II of the Plan.

All distributions required under the Plan shall be determined and made in accordance with the Regulations under Code Section 401(a)(9), including, to the extent applicable, the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed Regulations.

Part II - 18

Except as provided below and in Section 5.06, a Participant’s retirement benefit shall be payable as a life annuity for the life of the Participant with no further benefits payable after the last regular payment date prior to his death.

At any time prior to actual retirement a Participant, with spousal consent if the Participant is married, may elect to receive his retirement benefit under one or more of the following settlement options:

(a) An annuity for the joint lives of the Participant and his spouse with 50% or 66 ²/3% (whichever is specified when this option is elected) of such amount payable as an annuity for life to the survivor. No further benefits are payable after the death of both the Participant and his spouse.

(b) An annuity for the life of the Participant and upon his death 100%, 66 ²/3%, or 50% (whichever is specified when this option is elected) of the annuity amount will be continued to his spouse as his contingent annuitant. No further annuity benefits are payable after the death of both the Participant and his spouse.

(c) An annuity for the life of the Participant with guaranteed installment payments for a period certain not longer than the life expectancy of the Participant.

(d) An annuity for the life of the Participant with guaranteed installment payments for a period certain not longer than the life expectancy of the Participant and his spouse.

(e) A lump sum amount equal to the present value of the portion of the Participant’s Accrued Benefit described in Section 2.01(b) attributable to required Employee Contributions. Additionally, the Participant shall be entitled to receive a monthly annuity benefit equal to the portion of his Accrued Benefit described in Section 2.01(a) attributable to Employer Contributions. The Participant may elect to receive such monthly annuity benefit under one or more of the options described in (a) through (d) above, subject to spousal consent if the Participant is married.

All optional forms of benefits shall be the Actuarial Equivalent (as of the date selected) of the normal retirement benefits described in Section 5.01 of Part II of the Plan or Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans). Any spousal consent shall satisfy the requirements of Section 5.06.

Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the later of the close of the Plan Year in which:

(i) the Participant attains Normal Retirement Age; or

(ii) the Participant terminates service with the Employer.

Part II - 19

Notwithstanding the foregoing, the failure of a Participant and spouse (or where either the Participant or the spouse has died, the survivor) to consent to a distribution when a benefit is “immediately distributable” (as described below) shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section 5.05 (and provisions of Article III of Part III of the Plan). In no event will benefits begin to be distributed prior to the later of Age 62 or Normal Retirement Age without the consent of the Participant. The consent of the Participant’s spouse will also be required for any such distribution unless the benefit is paid in the form of a Qualified Joint and Survivor Annuity.

If the Accrued Benefit is immediately distributable, the Participant and the Participant’s spouse (or where either the Participant or the spouse has died, the survivor) must consent to any distribution of such Accrued Benefit. The consent of the Participant and the Participant’s spouse shall be obtained in writing within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. The “annuity starting date” is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant and the Participant’s spouse of the right to defer any distribution until the Participant’s Accrued Benefit is no longer immediately distributable. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under Part II of the Plan in a manner that would satisfy the notice requirements of Section 417(a)(3) of the Code, and shall be provided no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date.

Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the Accrued Benefit is immediately distributable. Neither the consent of the Participant nor the Participant’s spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code.

An Accrued Benefit is immediately distributable if any part of the Accrued Benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or Age 62.

Notwithstanding the above, the distribution of the entire interest of a Participant or a Beneficiary must not violate the minimum required distribution rules set forth in Article III of Part III of the Plan.

5.06 Qualified Joint and Survivor Annuity for Married Participants.

(a) General Rules. Notwithstanding anything in this Article to the contrary, unless a married Participant’s Accrued Benefit has been paid in a lump sum pursuant to Section 5.05 above, such Participant’s retirement benefit will be payable to the Participant and his spouse in the form of a Qualified Joint and Survivor Annuity, with the survivor to receive 100% of the benefit which had been payable during

Part II - 20

their joint lives, unless an optional form of benefit is selected pursuant to a qualified election within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. In the case of an unmarried Participant, unless the Participant elects an optional form of benefit the Participant’s retirement benefit will be paid in the form of a no-death benefit life annuity.

(b) Definitions.

(i) Qualified election: A waiver of a Qualified Joint and Survivor Annuity. Any waiver of a Qualified Joint and Survivor Annuity shall not be effective unless: (A) the Participant’s spouse consents in writing to the election; (B) the election designates a specific Beneficiary, including any class of Beneficiaries or any contingent Beneficiaries, which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent); (C) the spouse’s consent acknowledges the effect of the election; and (D) the spouse’s consent is witnessed by a Plan representative or notary public. Additionally, a Participant’s waiver of the Qualified Joint and Survivor Annuity will not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of a Plan representative that there is no spouse or that the spouse cannot be located, a waiver will be deemed a qualified election.

Any consent by a spouse obtained under this provision (or establishment that the consent of a spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Participant without any requirement of further consent by such spouse must acknowledge that the spouse has the right to limit consent to a specific Beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in Subsection (c) below.

(ii) Spouse (surviving spouse): the opposite-gender person, if any, to whom the Participant is lawfully married at the date of his death or at his annuity starting date, whichever is earlier, provided that a former spouse will be treated as the spouse or surviving spouse to the extent provided under a Qualified Domestic Relations Order.

Part II - 21

(iii) Annuity starting date: The first day of the first period for which an amount is paid as an annuity or under any other form.

(c) Notice Requirement.

(i) In the case of a Qualified Joint and Survivor Annuity as described in Subsection (a), the Plan Administrator shall provide each Participant no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date a written explanation of: (A) the terms and conditions of a Qualified Joint and Survivor Annuity; (B) the Participant’s right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (C) the rights of a Participant’s spouse; (D) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity; and (E) the relative values of the various optional forms of benefit under Part II of the Plan. Notices given to Participants pursuant to Code Section 411(a)(11) in Plan Years beginning after December 31, 2006 shall include a description of how much larger benefits will be if the commencement of distributions is deferred.

(ii) A Participant may commence receiving a distribution in a form other than a Qualified Joint and Survivor Annuity less than 30 days after receipt of the written explanation described in the preceding paragraph provided: (1) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent) a form of distribution other than a Qualified Joint and Survivor Annuity; (2) the Participant is permitted to revoke any affirmative distribution election at least until the Distribution Commencement Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant; and (3) the Distribution Commencement Date is after the date the written explanation was provided to the Participant. For distributions on or after December 31, 1996, the Distribution Commencement Date may be a date prior to the date the written explanation is provided to the Participant if the distribution does not commence until at least 30 days after such written explanation is provided, subject to the waiver of the 30-day period. For the purposes of this paragraph, the “Distribution Commencement Date” is the date a Participant commences distributions from Part II of the Plan. If a Participant commences distribution with respect to a portion of his/her Accrued Benefit, a separate Distribution Commencement Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Distribution Commencement Date is the first day of the first period for which annuity payments are made.

Part II - 22

(d) Applicability. The provisions of this Section 5.06 shall apply to any Participant who is credited with at least one Hour of Service with the Employer on or after January 1, 1976. In addition, any living Participant or Former Participant not receiving Plan benefits on August 23, 1984 who would otherwise not receive the benefits prescribed by this Section 5.06 shall be given the opportunity to elect to have the provisions of this Section apply provided such Participant or Former Participant was credited with at least one Hour of Service under this Plan or a predecessor Plan on or after September 2, 1974.

The opportunity to elect a Qualified Joint and Survivor retirement option must be afforded to the appropriate Participants or Former Participants during the period commencing on August 23, 1984 and ending on the dates benefits would otherwise commence to such person.

5.07 Supplementary Pension Benefits.

Effective July 1, 1986, and on each July 1 thereafter, the amount of monthly retirement benefits payable to eligible retirees (as described below) or their Beneficiaries shall be increased by a percentage determined in accordance with the following formula:

Percentage Increase = .8 (M - .07) x 100

For Plan Years beginning after December 31, 2008, for purposes of the above formula, “M” equals the annual coupon return on December 31, 2009 and on each December 31 thereafter of the Barclays Capital U.S. Government/Credit 5-10 Year Index, or its successor.

For Plan Years beginning before January 1, 2009, for purposes of the above formula, “M” equals the earnings rate for the prior Plan Year on assets representing retired life reserves for retirees under this Plan and retirees under The Allmerica Financial Cash Balance Pension Plan as adopted by First Allmerica (now known as The Hanover Insurance Company Cash Balance Pension Plan), certain of First Allmerica’s General Agents, retirees of The Hanover Insurance Company (“Hanover”) and retirees of Citizens Insurance Company of America, both Affiliates of First Allmerica. Additionally, in determining “M”, retired life reserve assets attributable to retirees of Beacon Insurance Company of America, formerly an Affiliate of Hanover, shall be aggregated and combined with the retired life reserve assets of this Plan.

For the Plan Years for which “M” depended on the returns of designated retired life reserve assets, the earnings rate on retired life reserve assets was to be determined by an actuary, using the “investment year block” method of crediting interest that First Allmerica used to credit interest on its Experience Rated group annuity contracts that are in force on an active basis. The resulting earnings rate(s) should neither be associated with nor construed as the investment yield (all or in part) of the pension fund.

For each Plan Year for which “M” depended on the returns of designated retired life reserve assets, the retired life reserve assets for newly qualified retirees to be added to the total retired life assets outstanding was to be determined using a 7% interest rate and the 1971 GAM mortality table.

Part II - 23

The determination of “M” and of the overall earnings rate(s) shall be final and conclusively binding for all persons.

The effective date for the payment of supplemental pension benefits paid as a result of this Section shall be each July 1, commencing with July 1, 1986. Those eligible to receive supplemental pension benefits as a result of this Section shall be those Plan retirees and their Beneficiaries who were receiving basic Plan retirement benefits on the July 1 increase effective date, had been retired for at least 18 months on such increase effective date, and:

(A) were actively employed Plan Participants who had elected an immediate early retirement benefit pursuant to Section 5.02 (or its successor, if any):

(B) had terminated employment after having met the eligibility requirements for early retirement specified in Section 5.02 (or its successor, if any) and elected to defer receipt of retirement benefits; or

(C) had retired on or after their Normal Retirement Age after having completed at least 15 Years of Service.

The Beneficiaries of any retiree meeting the above requirements shall be entitled to receive a supplemental pension benefit under this Section if the Beneficiaries were receiving Plan survivor benefits on the July 1 increase effective date.

A supplemental pension benefit determined under this Section shall be added to and become a part of the recipient’s basic Plan benefit and shall be payable during such period and under such option as the basic Plan benefit is being paid.

5.08 Rollovers to Other Qualified Plans.

(a) Notwithstanding any provision of Part II of the Plan to the contrary that would otherwise limit a distributee’s election under this Article or under Articles VI and VII, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.

(b) Definitions.

(i) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic

Part II - 24

payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and any other distribution(s) that is reasonably expected to total less than $200 during a year. A portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to (i) an individual retirement account or annuity described in Section 408(a) or (b) of the Internal Revenue Code; (ii) for taxable years beginning after December 31, 2001 and before January 1, 2007, to a qualified trust which is part of a defined contribution plan that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible; or (iii) for taxable years beginning after December 31, 2006, to a qualified trust or to an annuity contract described in Section 403(b) of the Internal Revenue Code, if such trust or contract provides for separate accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.

(ii) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, a Roth IRA as pursuant to in Section 408A(e) of the Code, an annuity plan described in Section 403(a) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified Plan described in Section 401(a) of the Code, that accepts the distributee’s eligible rollover distribution or an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this plan. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity.

(iii) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving spouse and the Employee’s surviving spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse.

Part II - 25

(iv) Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. For distributions after June 9, 2009, a non-spouse Beneficiary who is a “designated beneficiary” under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (“direct rollover”), may roll over all or any portion of his or her distribution to an individual retirement account the Beneficiary establishes for purposes of receiving the distribution. In order to be able to do a direct rollover of the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution.

(v) For distributions after June 9, 2009, a non-spouse Beneficiary who is a “designated beneficiary” under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (“direct rollover”), may roll over all or any portion of his or her distribution to an individual retirement account the Beneficiary establishes for purposes of receiving the distribution. In order to do a direct rollover of the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution.

Although a non-spouse Beneficiary may roll over directly a distribution as provided in Subsection (b)(iv) above, any distribution made prior to January 1, 2010 is not subject to the direct rollover requirements of Code Section 401(a)(31) (including Code Section 401(a)(31)(B)), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c)). If a non-spouse Beneficiary receives a distribution from the Plan, the distribution is not eligible for a “60-day” rollover.

If the Participant’s named Beneficiary is a trust, the Plan may make a direct rollover to an individual retirement account on behalf of the trust, provided the trust satisfies the requirements to be a “designated beneficiary” within the meaning of Code Section 401(a)(9)(E).

A non-spouse Beneficiary may not roll over an amount which is a required minimum distribution, as determined under applicable Treasury regulations and other Internal Revenue Service guidance. If the Participant dies before his or her required beginning date and the non-spouse Beneficiary rolls over to an IRA the maximum amount eligible for rollover, the Beneficiary may elect to use either the 5-year rule or the life expectancy rule, pursuant to Treasury Regulation Section 1.401(a)(9)-3, A-4(c), in determining the required minimum distributions from the IRA that receives the non-spouse Beneficiary’s distribution.

Part II - 26

ARTICLE VI

DEATH BENEFITS

6.01 Pre-Retirement Spouse Benefit for Married Participants.

(a) General Rules. The provisions of this Section shall apply to any Participant or Former Participant described in Subsection (b).

(i) If an eligible married Participant:

(A) dies after attaining eligibility for early retirement but before actually retiring;

(B) dies on or after his Normal Retirement Age while still working for the Employer; or

(C) separates from service on or after his Normal Retirement Age (or after attaining the age necessary for early retirement) and after satisfying the eligibility requirements for the payment of benefits under Part II of the Plan and thereafter dies before beginning to receive such benefits;

then the Participant’s surviving spouse will receive a monthly retirement benefit equal to the benefit that would have been payable if the Participant had retired on the day before his death after having elected an immediate Qualified Joint and Survivor Annuity option with a 50% continuation of monthly benefits to be payable to the survivor. The amount of such 50% continuation shall be payable monthly for the life of such spouse, with the first payment payable as of the date of the Participant’s death, unless the spouse requests a later commencement date (consistent with the provisions of Part II of the Plan).

(ii) If a fully or partially vested eligible married Participant dies on or before the earliest retirement age, the Participant’s surviving spouse will receive the same benefit that would be payable if the Participant had:

(A) separated from service on the date of death;

(B) survived to the earliest retirement age;

(C) retired at the earliest retirement age after having elected an immediate Qualified Joint and Survivor Annuity option with a 50% continuation of monthly benefits to be payable to the survivor; and

(D) died on the day after the earliest retirement age.

Part II - 27

A surviving spouse entitled to benefits under this paragraph (ii) will begin to receive payments at the earliest retirement age unless the spouse requests an earlier or later commencement date (consistent with the provisions of Part II of the Plan).

For purposes of this paragraph (ii) the “earliest retirement age” is the earliest date on which, under Part II of the Plan, the Participant could elect to receive retirement benefits.

In the case of a partially vested Participant, benefits under this paragraph (ii) will be based on the Participant’s vested Accrued Benefit computed on the date of his death.

(b) Applicability. The provisions of paragraph (a)(i) shall apply to all Participants or Former Participants who were credited with an Hour of Service on or after January 1, 1976 who meet the eligibility requirements described in such paragraph and thereafter die before actually retiring. The provisions of Paragraph (a)(ii) shall apply to any Participant who is credited with at least one Hour of Service on or after August 23, 1984 and to any Participant or Former Participant living on August 23, 1984 not receiving Plan benefits on such date who was credited with at least one Hour of Service on or after January 1, 1976 and who had at least 10 years of vesting service when he separated from service.

6.02 Minimum Death Benefit. If no optional form of retirement benefit has been elected by a Participant pursuant to Section 5.05 of Part II of the Plan, a death benefit, as described below, shall be payable. If the death benefit is payable as a result of the Participant’s death, any such death benefit shall be payable to the Participant’s Beneficiary or, if no Beneficiary survives the Participant, to the executors or administrators of the Participant’s estate. If the Participant was survived by his spouse and (i) if the joint and survivor benefit described in Section 5.06 of Part II of the Plan was in effect on the date of the spouse’s death, or (ii) the pre-retirement spouse benefit described in Section 6.01 of Part II of the Plan was being paid to the spouse, any such death benefit shall be payable to the Participant’s Beneficiary, or if such Beneficiary does not survive the spouse, to the executors or administrators of the spouse’s estate.

The amount of this minimum death benefit will be equal to the Participant’s unrefunded required Contributions with Credited Interest to the first day of the month in which the earlier of the Participant’s death or retirement occurred reduced by (i), (ii) and (iii) below:

(i) the amount of monthly retirement payments which had been paid to the Participant;

(ii) the amount of monthly payments which had been paid to the Participant and his spouse, if the joint and survivor benefit described in Section 5.08 was being paid; and

Part II - 28

(iii) the amount of retirement benefits which had been paid to the spouse, if the pre-retirement spouse benefit described in Section 6.01 was being paid.

ARTICLE VII

BENEFITS UPON TERMINATION FROM SERVICE

7.01 In General. In the event that an Employee shall terminate service (or, in the case of a Career Agent, the agent terminates his Career Agent’s Contract) for any reason other than death, his becoming totally disabled (as described in Section 5.04), Normal, Early or Late Retirement, the interests and rights of such Participant shall be limited to those contained in this Article.

7.02 Options on Termination of Participation. Upon any termination of service described in Section 7.01, a Participant shall have the right, subject to any required spousal consent, to elect either Option 1 or Option 2 described below.

For purposes of determining the Actuarial Equivalent present value of benefits, values shall be calculated using the interest rate(s) specified in Section 2.02.

Any distributions made pursuant to this Article shall be subject to the requirements of Sections 5.05 and 5.06 of Part II of the Plan (and Article III of Part III of the Plan).

Option 1 - Deferred Benefit - Under this Option the Participant will receive a monthly retirement benefit commencing on his Normal Retirement Date equal to the sum of (a) and, if applicable, (b) below:

(a) 1/12 of the annual deferred benefit described in Section 2.01(b), which deferred benefit is attributable to required Employee contributions.

(b) In addition, if as of his date of termination of participation the Employee has completed at least the minimum Years of Service required for vesting, he will receive commencing on his Normal Retirement Date, an additional monthly retirement benefit equal to (i) or (ii) below, whichever is applicable:

(i) the portion of the Accrued Benefit described in Section 2.01(a) derived from Employer Contributions, multiplied by the appropriate percentage in Subparagraph (iii) below.

(ii) in the case of a Non-Key Employee Participant in a Top Heavy Plan, if greater than (i) above, the Accrued Benefit described in Section 2.01(c), multiplied by the appropriate percentage in Subparagraph (iii) below.

(iii)	Completed Years of Service	Nonforfeitable Percentage
	Less than 5	0%
	5 or more	100%

Part II - 29

Notwithstanding the above, if the Plan is a Top Heavy Plan for any Plan Year beginning after December 31, 1983, then the Plan shall meet the following vesting requirements for such Plan Year and for all subsequent Plan Years, even if the Plan is not a Top Heavy Plan for such subsequent Plan Years.

Completed Years of Service	Nonforfeitable Percentage
Less than 2	0%
2	20
3	40
4	60
5 or more	100

Notwithstanding anything in Part II of the Plan to the contrary, the portion of an Employee’s Accrued Benefit derived from Employer Contributions shall be 100% vested upon completion of three (3) Years of Service.

Option 2 - Cash Option - Under this option, except as provided in Section 5.08, the Participant will receive an amount equal to (a) below plus, if applicable, a deferred benefit as described in (b) below:

(a) an amount equal to the present value of the portion of the Participant’s Accrued Benefit described in Section 2.01(b) attributable to required Employee Contributions, and

(b) In addition, if the Employee is fully or partially vested in the portion of his Accrued Benefit derived from Employer Contributions, as determined from the appropriate table above on the date of his termination of participation, he will receive, commencing on his Normal Retirement Date, a monthly retirement benefit determined in accordance with Subsection (b) of Option 1.

Option 1 will be deemed to have been elected by an Employee unless he elects Option 2 within 90 days of his termination of participation in this Plan.

For purposes of this Article VII, Years of Service means Plan Years during which an Employee completed at least 1,000 Hours of Service; provided, however, for purposes of this Article service shall not be deemed to be interrupted or employment terminated because employment is transferred to a position or job with the Employer in which he is no longer eligible to participate in this Plan, or because the Employee becomes a General Agent who is not a common-law employee of the Company, but service shall be deemed terminated if the Employee terminates from the Employer or as a General Agent.

Notwithstanding anything in of Part II of the Plan to the contrary, a Participant’s Normal Retirement Benefit shall become 100% vested and nonforfeitable upon the attainment of his Normal Retirement Age.

Part II - 30

Notwithstanding anything in Part II of the Plan to the contrary, (i) a Participant who was actively employed on December 31, 2002 (or an agent whose Career Agent’s Contract had not been terminated prior to such date), and (ii) all Former Participants who had not incurred five consecutive One Year Breaks in Service as of December 31, 2002, shall have a fully vested and non-forfeitable interest in any Accrued Benefit that had not been distributed to the Participant or Former Participant prior to December 31, 2002.

7.03 Forfeitures. The non-vested portion of a Participant’s Accrued Benefit shall be treated as a forfeiture when the Participant or his or her spouse (or surviving spouse) receives a distribution of the present value of his or her vested Accrued Benefit attributable to Employer and Employee Contributions pursuant to Section 7.02 and the Participant’s service attributable to such distribution shall be disregarded as provided for in Section 7.06. For purposes of this Section, if the present value of a Participant’s vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested Accrued Benefit.

In the case of a partially vested terminated Participant who does not receive a distribution pursuant to the above paragraph, the value of the nonvested portion of his Accrued Benefit shall be treated as a forfeiture at the end of the Plan Year in which the Participant incurs a One Year Break in Service until the Participant has completed one Year of Service after he has been re-employed.

Forfeitures will be used to reduce (i) Employer contributions for the Plan Year following the Plan Year in which the forfeiture occurs; and or (ii) the Employer’s costs under the Plan.

7.04 Resumption of Service. A Participant who terminates his or her participation in Part II of the Plan and who subsequently resumes service with the Employer will again become a Participant, if eligible, on the date of his or her recommencement of such service.

7.05 Distribution of Benefits. On the Former Participant’s Normal Retirement Date, benefits to which he or she is entitled pursuant to this Article shall be distributed in accordance with Article V.

If a Former Participant entitled to a deferred benefit pursuant to this Article VII dies prior to his or her Normal Retirement Date, the death benefit, if any, to which he is entitled shall be as is specified in Article VI.

7.06 Cash Out Repayment Option.

(a) Notwithstanding anything in this Article to the contrary, unless a repayment has been made in accordance with Subsection (b) below, in determining the portion of an Employee’s Accrued Benefit derived from Employer contributions (or, in the case of a Top Heavy Plan, the minimum benefit for Non-Key Employees described in Subsection 2.01(c)) after a resumption of participation, periods of service with respect to which the Employee received a distribution of the present value of his vested Accrued Benefit shall be disregarded.

Part II - 31

(b) In the case of the distribution of the present value of a partially vested Employee’s vested Accrued Benefit in accordance with Section 7.02, the Employee’s Accrued Benefit described in Sections 2.01(a) and (b) (including all optional forms of benefits and subsidies relating to such benefits) shall be restored if the Employee repays the amount distributed plus interest, compounded annually from the date of distribution at the rate of 5 percent. Such repayment must be made by the Employee before the earlier of five years after the first date on which the Employee is subsequently reemployed by the Employer, or the date the Employee incurs five consecutive One Year Breaks in Service following the date of distribution.

If an Employee is deemed to receive a distribution pursuant to this Article, and the Employee resumes employment covered under this Plan before the date on which the Employee could no longer repay his distribution under the preceding paragraph, upon the reemployment of such Employee, the Employer-derived Accrued Benefit will be restored to the amount of such Accrued Benefit on the date of the deemed distribution.

7.07 Early Retirement Election. Any Participant who terminates service after having completed at least fifteen Years of Service may elect to retire on the first day of any month following his 55^th birthday. Any Participant who was actively employed on June 30, 1977 who terminates service after having completed at least twenty Years of Service may elect to retire on the first day of any month following his 50^th birthday.

7.08 Amendment to Vesting Schedule. If the Vesting Schedule of Part II of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of a Participant’s nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each Participant with at least 3 Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have their nonforfeitable percentage computed under Part II of the Plan without regard to such amendment or change. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of:

(1) 60 days after the amendment is adopted;

(2) 60 days after the amendment becomes effective; or

(3) 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator.

Part II - 32

EXHIBIT A

ADJUSTMENT FACTORS FOR OPTIONAL AND LATE RETIREMENT BENEFITS

Factors for ages not illustrated on the following tables will be computed on an actuarial basis consistent with that used to compute the factors shown.

JOINT AND SURVIVOR OPTION PERCENTAGES

(Applicable only if the Participant’s age, nearest birthday, on the date monthly income commences is 65).

Age Nearest Birthday of Joint Annuitant on the Date Monthly Income Commences to the Participant	Percentage of the Adjusted Retirement Annuity Payments which are to be Continued to the Surviving Joint Annuitant
	100%	66 2/3%			50%
50	80.3%		87.1	%		90.9	%
51	80.7		87.5			91.3
52	81.1		87.9			91.8
53	81.5		88.4			92.2
54	82.0		88.8			92.7
55	82.4		89.3			93.2
56	82.9		89.8			93.8
57	83.3		90.3			94.3
58	83.8		90.9			94.9
59	84.3		91.4			95.5
60	84.8		92.0			96.1
61	85.3		92.7			96.8
62	85.9		93.3			97.5
63	86.4		94.0			98.3
64	86.9		94.7			99.1
65	87.5		95.4			100.0
66	88.0		96.2			100.0
67	88.6		97.0			101.9
68	89.1		97.9			102.9
69	89.6		98.7			104.0
70	90.2		99.6			105.1
	1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum.

Part II - 33

CONTINGENT ANNUITANT OPTION PERCENTAGES

(Applicable only if the Participant’s age, nearest birthday, on the date monthly income commences is 65).

Age Nearest Birthday of Contingent Annuitant on the Date Monthly Income Commences to the Participant	Percentage of the Adjusted Retirement Annuity Payments which are to be Continued to the Surviving Contingent Annuitant
	100%			66 2/3%			50%
50		80.3	%		85.9	%		89.0	%~
51		80.7			86.2			89.3
52		81.1			86.5			89.6
53		81.5			86.9			89.8
54		82.0			87.2			90.1
55		82.4			87.5			90.4
56		82.9			87.9			90.6
57		83.3			88.2			90.9
58		83.8			88.6			91.2
59		84.3			89.0			91.5
60		84.8			89.3			91.8
61		85.3			89.7			92.1
62		85.9			90.1			92.4
63		86.4			90.5			92.7
64		86.9			90.9			93.0
65		87.5			91.3			93.3
66		88.0			91.7			93.6
67		88.6			92.1			93.9
68		89.1			92.5			94.2
69		89.6			92.9			94.5
70		90.2			93.2			94.8
		1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of  birth of 1930 and interest at the rate of 7% per annum. Life Ann/Opt.

Part II - 34

ANNUITY OPTION ADJUSTMENT PERCENTAGES

Percentages to be applied to the monthly benefit which would be payable to the Participant on his Retirement Date if no Optional Form of Annuity were in effect to determine the monthly income benefit commencing on the Participant’s Retirement Date if one of the following options is in effect.

Age nearest birthday on the date monthly income commences	Annuity Option
	5C&C			10C&C			15C&C			20C&C
50		99.8	%		99.2	%		98.3	%		97.2	%
51		99.8			99.1			98.1			96.9
52		99.7			99.0			97.9			96.6
53		99.7			98.9			97.7			96.3
54		99.7			98.8			97.5			96.0
55		99.6			98.6			97.3			95.6
56		99.6			98.5			97.0			95.2
57		99.6			98.4			96.8			94.8
58		99.5			98.3			96.5			94.3
59		99.5			98.1			96.2			93.8
60		99.4			98.0			95.9			93.3
61		99.4			97.8			95.5			92.7
62		99.3			97.6			95.0			92.0
63		99.3			97.3			94.5			91.2
64		99.2			97.1			94.0			90.4
65		99.1			96.7			93.3			89.5
66		99.0			96.4			92.6			88.5
67		98.9			95.9			91.8			87.4
68		98.8			95.4			91.0			86.2
69		98.6			94.9			90.0			84.9
70		98.4			94.3			89.0			83.5
		1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum. Life Ann/Opt.

Part II - 35

LATE RETIREMENT PERCENTAGES

(Applicable only if the Participant’s age, nearest birthday, on the date his or her Normal Retirement Date is 65).

The following percentages are applied to retirement benefits determined in accordance with Part II of the Plan prior to any actuarial increase with respect to a Participant whose date of retirement is subsequent to his or her Normal Retirement Date, to determine actuarially increased retirement benefits commencing on his or her Late Retirement Date. If benefits commence in a month other than the month in which the Participant attains the specified age, the percentage shall be determined by straight line interpolation. Percentages for Late Retirement Dates and ages not illustrated will be computed on an actuarial basis consistent with that used to compute the factors shown.

Number of Years Late Retirement Date Succeeds Normal Retirement Date	Actuarial Increase Percentage
1	111.3%
2	124.3%
3	139.2%
4	156.6%
5	176.8%
6	200.4%
7	228.3%
8	261.5%
9	301.1%
10	348.8%

The actuarial basis increase percentages beyond ten years after Normal Retirement Date shall be determined based on the 1951 Group Annuity Table with 2/3 of Projection C, with mortality rates based on calendar year of birth of 1910 and interest at a rate of 6% per annum (male rate).

Notwithstanding the foregoing, if late retirement benefits commence after Age 70 ¹/2, a Participant’s Accrued Benefit shall be actuarially increased to take into account the period after Age 70 ¹/2 in which the Participant was not receiving any benefits under Part II of the Plan. Any such actuarial increase shall be the greater of (i) the actuarial increase determined in accordance with the rules described above or (ii) such actuarial increase as shall be required under Code Section 401(a)(9)(C) and rules and regulations promulgated thereunder.

Part II - 36

Exhibit B

Participant Accrual Percentages

Participant Number	Accrual Percentage
###-##-###	0.9953%
###-##-###	1.1190%
###-##-###	0.3352%
###-##-###	0.3605%
###-##-###	2.3004%
###-##-###	1.7650%
###-##-###	1.1357%
###-##-###	0.8677%
###-##-###	2.1067%
###-##-###	1.4418%
###-##-###	1.2081%
###-##-###	0.2168%
###-##-###	1.5103%
###-##-###	1.3945%
###-##-###	1.1925%
###-##-###	0.9447%
###-##-###	2.1323%
###-##-###	1.1986%
###-##-###	1.5143%
###-##-###	4.3102%
###-##-###	0.8837%
###-##-###	0.8511%
###-##-###	0.6408%
###-##-###	5.3951%
###-##-###	1.7571%
###-##-###	1.6935%
###-##-###	1.3531%
###-##-###	0.6126%
###-##-###	1.4563%
###-##-###	1.5355%
###-##-###	1.9965%
###-##-###	1.1891%
###-##-###	0.9938%
###-##-###	1.8889%
###-##-###	1.9568%
###-##-###	2.3587%

Part II - 37

Participant Number	Accrual Percentage
###-##-####	4.6251%
###-##-####	1.7677%
###-##-####	1.7004%
###-##-####	1.3707%
###-##-####	0.3235%
###-##-####	1.3497%
###-##-####	2.7157%
###-##-####	1.7229%
###-##-####	0.6814%
###-##-####	1.8018%
###-##-####	1.1662%
###-##-####	2.0026%
###-##-####	2.3637%
###-##-####	0.7801%
###-##-####	1.0012%
###-##-####	4.8561%
###-##-####	2.1628%
###-##-####	0.0599%
###-##-####	1.0323%
###-##-####	1.7397%
###-##-####	1.5548%
###-##-####	5.6541%
###-##-####	1.6356%
###-##-####	1.2469%
###-##-####	0.5548%
###-##-####	1.0594%
###-##-####	0.8778%

Part II - 38

THE HANOVER INSURANCE GROUP CASH BALANCE

PENSION PLAN

PART III

(As amended and restated generally effective January 1, 2010)

Part III

THE HANOVER INSURANCE GROUP CASH BALANCE

PENSION PLAN

PART III

TABLE OF CONTENTS

		PAGE
ARTICLE I        PURPOSE AND EFFECTIVE DATE OF PLAN			1
1.01	General Statement.		1
1.02	Effective Date.		1
ARTICLE II       PROVISIONS APPLICABLE TO TOP HEAVY PLANS			1
2.01	Top Heavy Plan Requirements.		1
2.02	Determination of Top Heavy Status.		2
2.03	Minimum Benefit Requirements for Top Heavy Plans.		4
ARTICLE III      MINIMUM DISTRIBUTION REQUIREMENTS			6
3.01	General Rules.		6
3.02	Time and Manner of Distribution.		8
3.03	Determination of Amount to be Distributed Each Year.		9
3.04	Requirements for Annuity Distributions That Commence During Participant’s Lifetime.		12
3.05	Requirements for Minimum Distributions Where Participant Dies Before Date Distributions Begin.		13
3.06	Definitions.		14
ARTICLE IV      LIMITATIONS ON BENEFITS			16
4.01	General Limitations.		16
4.02	Additional General Limitations.		16
4.03	Limitation Year beginning after December 31, 1986.		17
4.04	Limitation Year beginning after December 31, 1994.		17
4.05	Definitions.		17
4.06	Final Section 415 Regulations.		24
ARTICLE V       PRE-TERMINATION BENEFIT RESTRICTIONS			26
5.01	In General.		26
5.02	Exceptions.		27
5.03	Included Benefits.		27
ARTICLE VI      BENEFIT RESTRICTIONS			27
6.01	Effective Date and Application of Section.		27
6.02	Funding-Based Limitation on Shutdown Benefits and Other Unpredictable Contingent Event Benefits.		27
6.03	Limitations on Plan Amendments Increasing Liability for Benefits.		28
6.04	Limitations on Accelerated Benefit Distributions.		29
6.05	Limitation on Benefit Accruals for Plans With Severe Funding Shortfalls.		30
6.06	Rules Relating to Contributions Required to Avoid Benefit Limitations.		31
6.07	Presumed Underfunding for Purposes of Benefit Limitations.		32
6.08	Treatment of Plan as of Close of Prohibited or Cessation Period.		33
6.09	Definitions.		33

Part III

ARTICLE VII        PLAN FIDUCIARY RESPONSIBILITIES		34
7.01	Plan Fiduciaries.	34
7.02	General Fiduciary Duties.	35
7.03	Duties of the Trustee(s).	35
7.04	Powers and Duties of the Plan Administrator.	35
7.05	Designation of Fiduciaries.	37
7.06	Delegation of Duties by a Fiduciary.	37
ARTICLE VIII      BENEFITS COMMITTEE		38
8.01	Appointment of Benefits Committee.	38
8.02	Benefits Committee to Act by Majority Vote, etc.	38
8.03	Records and Reports of the Benefits Committee.	38
8.04	Costs and Expenses of Administration.	38
8.05	Indemnification of the Plan Administrator and Assistants.	38
ARTICLE IX        CLAIMS PROCEDURE		39
9.01	Claims Fiduciary.	39
9.02	Claims for Benefits.	39
9.03	Duty to Keep Plan Administrator Informed of Current Address.	39
9.04	Failure to Claim Benefits.	39
9.05	Notice of Denial of Claim.	39
9.06	Request for Review of Denial of Claim.	40
9.07	Decision on Review of Denial of Claim.	40
9.08	Disability Claims.	40
ARTICLE X         AMENDMENT AND TERMINATION		40
10.01	Amendment of Plan.	40
10.02	Employer May Discontinue Plan.	41
10.03	Distribution of Benefits Upon Plan Termination.	43
10.04	Return of Employer Contributions Under Special Circumstances.	43
ARTICLE XI        MISCELLANEOUS		43
11.01	Protection of Employee Interest.	43
11.02	USERRA Compliance.	43
11.03	Meaning of Words Used in Plan.	44
11.04	Plan Does Not Create or Modify Employment Rights.	44
11.05	Massachusetts Law Controls.	44
11.06	Payments to come from Plan Assets.	45
11.07	Receipt and Release for Payments.	45
11.08	Mandatory Withholding on Eligible Rollover Distributions.	45
11.09	Payment under Qualified Domestic Relations Orders.	45
11.10	Electronic Communications.	45

Part III

ARTICLE I

PURPOSE AND EFFECTIVE DATE OF PLAN

1.01 General Statement. The Hanover Insurance Group Cash Balance Pension Plan (the “Plan”) consists of three parts, Part I, Part II and Part III. Part I of the Plan provides a cash balance and pension benefit, which was formerly provided under a plan known as “The Allmerica Financial Cash Balance Pension Plan”. Part II of the Plan provides a pension benefit, which was formerly provided under a plan known as “The Allmerica Financial Agents’ Pension Plan”. Part III of the Plan contains provisions applicable to each of Part I and Part II.

The provisions of Part III of the Plan shall override any provision of Part I and or Part II of the Plan as provided in Part III of the Plan.

The words and phrases used in this Part III of the Plan shall have the meanings set forth in Part I of the Plan, unless a different meaning is clearly required by the context or is otherwise provided in Part III of the Plan.

1.02 Effective Date. The effective date of Part III of the Plan is January 1, 2010 (except for those provisions of this Part of the Plan which have an expressly stated alternative effective date).

ARTICLE II

PROVISIONS APPLICABLE TO TOP HEAVY PLANS

2.01 Top Heavy Plan Requirements.

(a) For any Top Heavy Plan Year, the Plan shall provide the following:

(i) the minimum vesting requirements for Top Heavy Plans set forth in Section 8.02 of Part I of the Plan and Section 7.02 of Part II of the Plan; and

(ii) the minimum benefit accruals for Non-Key Employees set forth in Section 2.03 below.

(b) Once the Plan has become a Top Heavy Plan, the top heavy vesting requirements described in 8.02 of Part I of the Plan and Section 7.02 of Part II of the Plan shall be applicable to all subsequent Plan Years, regardless of whether such years are Top Heavy Plan Years.

(c) If the Plan is or becomes a Top Heavy Plan, the provisions of this Article II will supersede any conflicting provision in the Plan.

(d) In determining Top Heavy Plan vesting, the Top Heavy vesting schedule set forth in 8.02 of Part I of the Plan and in Section 7.02 of Part II of the Plan applies to all benefits within the meaning of Code Section 411(a)(7), including benefits accrued before the effective date of Code Section 416 and benefits accrued before the Plan became top-heavy. Further, no reduction in vested benefits may occur in the

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event the Plan’s status as top heavy changes for any Plan Year. However, this Section does not apply to the Accrued Benefits of any Employee who does not have an Hour of Service after the Plan has initially become top-heavy and such Employee’s Accrued Benefits attributable to Employer contributions will be determined without regard to this Section.

2.02 Determination of Top Heavy Status.

(a) This Plan shall be a Top Heavy Plan for any Plan Year commencing after December 31, 1983 if any of the following conditions exists:

(i) If the top heavy ratio for this Plan exceeds 60 percent and this Plan is not part of any required aggregation group or permissive aggregation group of plans.

(ii) If this Plan is a part of a required aggregation group of plans (but not part of a permissive aggregation group) and the top heavy ratio for the group of plans exceeds 60 percent.

(iii) If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the top heavy ratio for the permissive aggregation group exceeds 60 percent.

(b) The Plan top heavy ratio shall be determined as follows:

(i) If the Employer maintains one or more defined benefit plans and the employer has not maintained any defined contribution plan (including any simplified employee pension, as defined in section 408(k) of the Internal Revenue Code) which during the 5-year period ending on the determination date(s) has or has had account balances, the top-heavy ratio for this plan alone or for the required or permissive aggregation group as appropriate is a fraction, the numerator of which is the sum of the present value of Accrued Benefits of all Key Employees as of the determination date(s) (including any part of any Accrued Benefit distributed in the 1-year period ending on the determination date(s)) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability), and the denominator of which is the sum of the present value of Accrued Benefits (including any part of any Accrued Benefits distributed in the 1-year period ending on the determination date(s)) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability), determined in accordance with section 416 of the Internal Revenue Code and the regulations thereunder.

(ii) If the Employer maintains one or more defined benefit plans and the employer maintains or has maintained one or more defined contribution plans (including any simplified employee pension) which during the 5-

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year period ending on the determination date(s) has or has had any account balances, the top-heavy ratio for any required or permissive aggregation group as appropriate is a fraction, the numerator of which is the sum of the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees, determined in accordance with (i) above, and the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees as of the determination date(s), and the denominator of which is the sum of the present value of accrued benefits under the defined benefit plan or plans for all participants, determined in accordance with (i) above, and the account balances under the aggregated defined contribution plan or plans for all participants as of the determination date(s), all determined in accordance with section 416 of the Internal Revenue Code and the regulations thereunder. The account balances under a defined contribution in both the numerator and denominator of the top heavy ratio are increased for any distribution of an account balance made in the 1-year period ending on the determination date (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability).

(iii) For purposes of (i) and (ii) above, the value of account balances and the present value of Accrued Benefits will be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the determination date, except as provided in Code Section 416 and the regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service with any employer maintaining the Plan at any time during the 1-year period ending on the determination date will be disregarded. The calculation of the top-heavy ratio and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the regulations thereunder. Deductible employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans, the value of account balances and Accrued Benefits will be calculated with reference to the determination dates that fall within the same calendar year.

The Accrued Benefit of a Participant other than a Key Employee shall be determined under (A) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section Code 411(b)(1)(C).

(c) Permissive aggregation group: The required aggregation group of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410.

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(d) Required aggregation group: (i) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the Plan has terminated), and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of Code Sections 401(a)(4) or 410.

(e) Determination date: The last day of the preceding Plan Year.

(f) Valuation Date: The last day of each Plan Year, as of which Accrued Benefits are valued for purposes of calculating the top heavy ratio.

(g) Present value: Present value shall be based on the interest and mortality rates specified in the definition of Actuarial Equivalent.

2.03 Minimum Benefit Requirements for Top Heavy Plans.

(a) Minimum Benefit Requirements for Top Heavy Plans.

Notwithstanding any other provision in this Plan except Subsections (b) and (c) below, for any Plan Year in which this Plan is a Top Heavy Plan, each Participant who is not a Key Employee and has completed at least 1,000 Hours of Service will accrue a benefit (to be provided solely by Employer contributions and expressed as a life annuity commencing at Normal Retirement Age) of not less than 2% of the Participant’s highest average Compensation for the five consecutive years in which such Non-Key Employee had the highest Compensation (as defined for purposes of Article III of Part III of the Plan). The aggregate Compensation for the years during such five-year period in which the Participant was credited with a Year of Service will be divided by the number of such years in order to determine average annual Compensation.

Provided, however, that no additional benefit accruals shall be provided pursuant to this Section to the extent that the total accruals on behalf of the Participant attributable to Employer contributions will provide a benefit expressed as a life annuity commencing at Normal Retirement Age that equals or exceeds 20% of the Participant’s average Compensation for the five consecutive years in which the Participant had the highest Compensation (as defined for purposes of Article III of Part III of the Plan). All accruals of Employer-derived benefits, whether or not attributable to years for which the Plan is Top Heavy, may be used in computing whether the minimum 20% accrual requirements of this paragraph are satisfied.

The minimum accrual above applies even though under other Plan provisions the Participant would not otherwise be entitled to receive an accrual, or would have received a lesser accrual for the Plan Year because (i) the Non-Key Employee fails to make mandatory contributions to the Plan, (ii) the Non-Key Employee’s Compensation is less than a stated amount, (iii) the Non-Key Employee is not employed on the last day of the accrual computation period, or (iv) the Plan is integrated with Social Security.

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The Compensation required to be taken into account under this Section is Compensation as defined for purposes of Article III of Part III of the Plan that is not in excess of the applicable dollar limitation imposed by Code Section 401(a)(17). However, Compensation received by a Non-Key Employee for Plan Years beginning after the close of the last year in which the Plan was a Top Heavy Plan shall be disregarded. The minimum accrual determined under this Section shall be determined without regard to any Social Security contribution.

The top-heavy minimum benefit is a life annuity benefit (with no ancillary benefits) commencing at Normal Retirement Age. If the benefit commences at a date other than Normal Retirement Age, the Employee must receive at least an amount that is the Actuarial Equivalent of the minimum single life annuity benefit commencing at Normal Retirement Age.

Notwithstanding the foregoing, for Plan Years beginning after December 31, 2001, for purposes of satisfying the minimum benefit requirements of Code Section 416(c)(1) and the Plan, in determining Years of Service with the Employer, any service with the Employer shall be disregarded to the extent that such service occurs during a Plan Year when the Plan benefits (within the meaning of Code Section 410(b)) no Key Employee or former Key Employee.

(b) Notwithstanding anything herein to the contrary, in any Plan Year in which a Non-Key Employee participates in both a defined benefit plan and a defined contribution plan included in a Required or Permissive Aggregation Group of Top Heavy Plans, the Employer is not required to provide the Non-Key Employee with both the full and separate minimum benefit and the full and separate minimum contribution. Therefore, if the Employer maintains such a defined benefit and defined contribution plan, the top-heavy minimum benefits shall be provided as follows:

(i) If a Non-Key Employee is a participant in any such Top Heavy defined contribution plan, the minimum benefit described in Subsection (a) above shall not be provided to each such Non-Key Employee who receives at least the full Top Heavy minimum contribution provided in such defined contribution plan for Non-Key Employee participants.

(ii) If a Non-Key Employee is not a Participant in any such Top Heavy defined contribution plan, the minimum and extra minimum benefits, if applicable, described in Subsection (a) shall be provided to each such Non-Key Employee meeting the requirements of Section 2.03(a) above.

Notwithstanding any provision herein to the contrary, no minimum benefit will be required (or the minimum benefit will be reduced, as the case may be) for a Participant under this Plan for any Plan Year if the Employer maintains another qualified defined benefit plan under which a minimum benefit is being accrued in whole or in part for the Participant in accordance with Code Section 416(c).

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(c) The minimum accrued benefit described in this Section (to the extent required to be nonforfeitable under Code Section 416(b)) may not be forfeited under Code Sections 411(a)(3)(B) or 411(a)(3)(D).

ARTICLE III

MINIMUM DISTRIBUTION REQUIREMENTS

3.01 General Rules.

(a) Effective date. The provisions of this Article will apply with respect to distributions under the Plan made for calendar years beginning on or after January 1, 2006. With respect to distributions under the Plan made for calendar years beginning on or after January 1, 2002 and prior to the effective date of the application of the Treasury Regulations under Code Section 401(a)(9) that were finalized on June 15, 2004, the Plan will use the 1987 proposed regulations.

(b) Requirements of Treasury Regulations incorporated. All distributions required under this Article shall be determined and made in accordance with Code Section 401(a)(9), including the incidental death benefit requirement in Code Section 401(a)(9)(G), and the Treasury Regulations thereunder.

(c) Precedence. Subject to the joint and survivor annuity requirements of the Plan, the requirements of this Article will take precedence over any inconsistent provisions of the Plan.

(d) TEFRA Section 242(b)(2) elections.

(i) Notwithstanding the other provisions of this Article and the Plan, other than the spouse’s right of consent afforded under the Plan, distributions may be made on behalf of any Participant, including a five percent (5%) owner, who has made a designation in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (“TEFRA”) and in accordance with all of the following requirements (regardless of when such distribution commences):

(1) The distribution by the Plan is one which would not have disqualified such plan under Code Section 401(a)(9) as in effect prior to amendment by the Deficit Reduction Act of 1984.

(2) The distribution is in accordance with a method of distribution designated by the Participant whose interest in the plan is being distributed or, if the Participant is deceased, by a beneficiary of such Participant.

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(3) Such designation was in writing, was signed by the Participant or beneficiary, and was made before January 1, 1984.

(4) The Participant had accrued a benefit under the Plan as of December 31, 1983.

(5) The method of distribution designated by the Participant or the beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Participant’s death, the beneficiaries of the Participant listed in order of priority.

(ii) A distribution upon death will not be covered by the transitional rule of this Subsection unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Participant.

(iii) For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Participant, or the beneficiary, to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirements in (i)(1) and (i)(5) of this Subsection.

(iv) If a designation is revoked, any subsequent distribution must satisfy the requirements of Code Section 401(a)(9) and the Treasury Regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the Plan must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Code Section 401(a)(9) and the regulations thereunder, but for the Section 242(b)(2) election. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life).

(v) In the case in which an amount is transferred or rolled over from one plan to another plan, the rules in Treasury Regulation Section 1.401(a)(9)-8, Q&A-14 and Q&A-15, shall apply.

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(e) Limits on distribution periods. To the extent otherwise permitted under the terms of the Plan, as of the first Distribution Calendar Year, distributions to a Participant, if not made in a single sum, may only be made over one of the following periods:

(i) The life of the Participant;

(ii) The joint lives of the Participant and a Designated Beneficiary;

(iii) A period certain not extending beyond the Life Expectancy of the Participant; or

(iv) A period certain not extending beyond the joint life and last survivor expectancy of the Participant and a Designated Beneficiary.

3.02 Time and Manner of Distribution.

(a) Required Beginning Date. The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date.

(b) Death of Participant before distributions begin. If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows:

(i) Life Expectancy rule, spouse is beneficiary. If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, then, except as provided in Section 3.08, distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 ¹/2, if later.

(ii) Life Expectancy rule, spouse is not beneficiary. If the Participant’s surviving spouse is not the Participant’s sole Designated Beneficiary, then, except as provided in Section 3.08, distributions to the Designated Beneficiary will begin by December 31st of the calendar year immediately following the calendar year in which the Participant died.

(iii) No Designated Beneficiary, 5-year rule. If there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, the Participant’s entire interest will be distributed by December 31st of the calendar year containing the fifth anniversary of the Participant’s death.

(iv) Surviving spouse dies before distributions begin. If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 3.02(b), other than Section 3.02(b)(i), will apply as if the surviving spouse were the Participant.

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For purposes of this Section 3.02(b), distributions are considered to begin on the Participant’s Required Beginning Date (or, if Section 3.02(b)(iv) applies, the date distributions are required to begin to the surviving spouse under Section 3.02(a)). If annuity payments irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under Section 3.02(b)(i)), the date distributions are considered to begin is the date distributions actually commence.

(c) Form of distribution. Unless the Participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, distributions will be made in accordance with Sections 3.03, 3.04 and 3.05 as of the first Distribution Calendar Year. If the Participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Code Section 401(a)(9) and the Treasury Regulations thereunder. Any part of the Participant’s interest which is in the form of an individual account described in Code Section 414(k) will be distributed in a manner satisfying the requirements of Code Section 401(a)(9) and the Treasury Regulations thereunder applicable to individual accounts.

3.03 Determination of Amount to be Distributed Each Year.

(a) General annuity requirements. A Participant who is required to begin payments as a result of attaining his or her Required Beginning Date, whose interest has not been distributed in the form of an annuity purchased from an insurance company or in a single sum before such date, may receive such payments in the form of annuity payments under the Plan. Payments under such annuity must satisfy the following requirements:

(i) The annuity distributions will be paid in periodic payments made at intervals not longer than one year;

(ii) The distribution period will be over a life (or lives) or over a period certain not longer than the period described in Section 3.04 or 3.05;

(iii) Once payments have begun over a period certain, the period certain will not be changed, even if the period certain is shorter than the maximum period permitted, unless otherwise elected in Section 3.08(d);

(iv) Payments will either be non-increasing or increase only to the extent permitted by one or more of the following conditions:

(1) By an annual percentage increase that does not exceed the annual percentage increase in an Eligible Cost-of-Living Index for a 12-month period ending in the year during which the increase occurs or the prior year;

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(2) By a percentage increase that occurs at specified times (e.g., at specified ages) and does not exceed the cumulative total of annual percentage increases in an Eligible Cost-of-Living Index since the annuity starting date, or if later, the date of the most recent percentage increase. In cases providing such a cumulative increase, an actuarial increase may not be provided to reflect the fact that increases were not provided in the interim years;

(3) To the extent of the reduction in the amount of the Participant’s payments to provide for a survivor benefit upon death, but only if the beneficiary whose life was being used to determine the distribution period described in Section 3.04 dies or is no longer the Participant’s beneficiary pursuant to a qualified domestic relations order within the meaning of Code Section 414(p);

(4) To allow a beneficiary to convert the survivor portion of a joint and survivor annuity into a single sum distribution upon the Participant’s death;

(5) To pay increased benefits that result from a Plan amendment or other increase in the Participant’s accrued benefit under the Plan;

(6) By a constant percentage, applied not less frequently than annually, at a rate that is less than 5 percent per year;

(7) To provide a final payment upon the death of the Participant that does not exceed the excess of the actuarial present value of the Participant’s accrued benefit (within the meaning of Code Section 411(a)(7)) calculated as of the annuity starting date using the applicable interest rate and the applicable mortality table under Code Section 417(e) (or, if greater, the total amount of employee contributions) over the total of payments before the death of the Participant; or

(8) As a result of dividend or other payments that result from Actuarial Gains, provided:

(I) Actuarial Gain is measured not less frequently than annually;

(II) The resulting dividend or other payments are either paid no later than the year following the year for which the actuarial experience is measured or paid in the same form as the payment of the annuity over the remaining period of the annuity (beginning no later than the year following the year for which the actuarial experience is measured);

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(III) The Actuarial Gain taken into account is limited to actuarial gain from investment experience;

(IV) The assumed interest rate used to calculate such Actuarial Gains is not less than 3 percent; and

(V) The annuity payments are not also being increased by a constant percentage as described in Section 3.03(a)(iv)(6) above.

(b) Amount required to be distributed by Required Beginning Date.

(i) In the case of a Participant whose interest in the Plan is being distributed as an annuity pursuant to Section 3.03(a), the amount that must be distributed on or before the Participant’s Required Beginning Date (or, if the Participant dies before distributions begin, the date distributions are required to begin under Section 3.02(b)(i) or 3.02(b)(ii)) is the payment that is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year. Payment intervals are the periods for which payments are received, e.g., bi-monthly, monthly, semi-annually, or annually. All of the Participant’s benefit accruals as of the last day of the first Distribution Calendar Year will be included in the calculation of the amount of the annuity payments for payment intervals ending on or after the Participant’s Required Beginning Date.

(ii) In the case of a single sum distribution of a Participant’s entire accrued benefit during a Distribution Calendar Year, the amount that is the required minimum distribution for the Distribution Calendar Year (and thus not eligible for rollover under Code Section 402(c)) is determined under this Section 3.03(b)(ii). The portion of the single sum distribution that is a required minimum distribution is determined by treating the single sum distribution as a distribution from an individual account Plan and treating the amount of the single sum distribution as the Participant’s account balance as of the end of the relevant valuation calendar year. If the single sum distribution is being made in the calendar year containing the Required Beginning Date and the required minimum distribution for the Participant’s first Distribution Calendar Year has not been distributed, the portion of the single sum distribution that represents the required minimum distribution for the Participant’s first and second Distribution Calendar Years is not eligible for rollover.

(c) Additional accruals after first Distribution Calendar Year. Any additional benefits accruing to the Participant in a calendar year after the first Distribution

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Calendar Year will be distributed beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues. Notwithstanding the preceding, the Plan will not fail to satisfy the requirements of this Section 3.03(c) and Code Section 401(a)(9) merely because there is an administrative delay in the commencement of the distribution of the additional benefits accrued in a calendar year, provided that the actual payment of such amount commences as soon as practicable. However, payment must commence no later than the end of the first calendar year following the calendar year in which the additional benefit accrues, and the total amount paid during such first calendar year must be no less than the total amount that was required to be paid during that year under this Section 3.03(c).

(d) Death after distributions begin. If a Participant dies after distribution of the Participant’s interest begins in the form of an annuity meeting the requirements of this Article, then the remaining portion of the Participant’s interest will continue to be distributed over the remaining period over which distributions commenced.

3.04 Requirements for Annuity Distributions That Commence During Participant’s Lifetime.

(a) Joint life annuities where the beneficiary is the Participant’s spouse. If distributions commence under a distribution option that is in the form of a joint and survivor annuity for the joint lives of the Participant and the Participant’s spouse, the minimum distribution incidental benefit requirement will not be satisfied as of the date distributions commence unless, under the distribution option, the periodic annuity payment payable to the survivor does not at any time on and after the Participant’s Required Beginning Date exceed the annuity payable to the Participant. In the case of an annuity that provides for increasing payments, the requirement of this Section 3.04(a) will not be violated merely because benefit payments to the beneficiary increase, provided the increase is determined in the same manner for the Participant and the beneficiary. If the form of distribution combines a joint and survivor annuity for the joint lives of the Participant and the Participant’s spouse and a period certain annuity, the preceding requirements will apply to annuity payments to be made to the Designated Beneficiary after the expiration of the period certain.

(b) Joint life annuities where the beneficiary is not the Participant’s spouse. If distributions commence under a distribution option that is in the form of a joint and survivor annuity for the joint lives of the Participant and a beneficiary other than the Participant’s spouse, the minimum distribution incidental benefit requirement will not be satisfied as of the date distributions commence unless under the distribution option, the annuity payments to be made on and after the Participant’s Required Beginning Date will satisfy the conditions of this Section 3.04(b). The periodic annuity payment payable to the survivor must not at any time on and after the Participant’s Required Beginning Date exceed the applicable percentage of the annuity payment payable to the Participant using the table set forth in Q&A-2(c)(2) of section 1.401(a)(9)-6 of the Treasury regulations. The applicable percentage is based on the adjusted Participant/beneficiary age

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difference. The adjusted Participant/beneficiary age difference is determined by first calculating the excess of the age of the Participant over the age of the beneficiary based on their ages on their birthdays in a calendar year. If the Participant is younger than age 70, the age difference determined in the previous sentence is reduced by the number of years that the Participant is younger than age 70 on the Participant’s birthday in the calendar year that contains the annuity starting date. In the case of an annuity that provides for increasing payments, the requirement of this Section 3.04(b) will not be violated merely because benefit payments to the beneficiary increase, provided the increase is determined in the same manner for the Participant and the beneficiary. If the form of distribution combines a joint and survivor annuity for the joint lives of the Participant and a non-spouse beneficiary and a period certain annuity, the preceding requirements will apply to annuity payments to be made to the Designated Beneficiary after the expiration of the period certain.

(c) Period certain annuities. Unless the Participant’s spouse is the sole Designated Beneficiary and the form of distribution is a period certain and no life annuity, the period certain for an annuity distribution commencing during the Participant’s lifetime may not exceed the applicable distribution period for the Participant under the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations for the calendar year that contains the annuity starting date. If the annuity starting date precedes the year in which the Participant reaches age 70, the applicable distribution period for the Participant is the distribution period for age 70 under the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations plus the excess of 70 over the age of the Participant as of the Participant’s birthday in the year that contains the annuity starting date. If the Participant’s spouse is the Participant’s sole Designated Beneficiary and the form of distribution is a period certain and no life annuity, the period certain may not exceed the longer of the Participant’s applicable distribution period, as determined under this Section 3.04(c), or the joint life and last survivor expectancy of the Participant and the Participant’s spouse as determined under the Joint and Last Survivor Table set forth in section 1.401(a)(9)-9 of the Treasury regulations, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the calendar year that contains the annuity starting date.

3.05 Requirements for Minimum Distributions Where Participant Dies Before Date Distributions Begin.

(a) Participant survived by Designated Beneficiary. Except as provided in Section 3.08, if the Participant dies before the date distribution of his or her interest begins and there is a Designated Beneficiary, the Participant’s entire interest will be distributed, beginning no later than the time described in Section 3.02(b)(i) or Section 3.02(b)(ii), over the life of the Designated Beneficiary or over a period certain not exceeding:

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(i) Unless the annuity starting date is before the first Distribution Calendar Year, the Life Expectancy of the Designated Beneficiary determined using the beneficiary’s age as of the beneficiary’s birthday in the calendar year immediately following the calendar year of the Participant’s death; or

(ii) If the annuity starting date is before the first Distribution Calendar Year, the Life Expectancy of the Designated Beneficiary determined using the beneficiary’s age as of the beneficiary’s birthday in the calendar year that contains the annuity starting date.

(b) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(c) Death of surviving spouse before distributions to surviving spouse begin. If the Participant dies before the date distribution of his or her interest begins, the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, and the surviving spouse dies before distributions to the surviving spouse begin, this Section 3.05 will apply as if the surviving spouse were the Participant, except that the time by which distributions must begin will be determined without regard to Section 3.02(b)(i).

3.06 Definitions.

(a) Actuarial Gain. “Actuarial Gain” means the difference between an amount determined using the actuarial assumptions (i.e., investment return, mortality, expense, and other similar assumptions) used to calculate the initial payments before adjustment for any increases and the amount determined under the actual experience with respect to those factors. Actuarial Gain also includes differences between the amount determined using actuarial assumptions when an annuity was purchased or commenced and such amount determined using actuarial assumptions used in calculating payments at the time the Actuarial Gain is determined.

(b) Designated Beneficiary. “Designated Beneficiary” means the individual who is designated as the beneficiary under the Plan and is the Designated Beneficiary under Code Section 401(a)(9) and section 1.401(a)(9)-4, Q&A-1, of the Treasury Regulations.

(c) Distribution Calendar Year. “Distribution Calendar Year” means a calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year that contains the Participant’s Required Beginning Date. For distributions beginning after the Participant’s death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to Section 3.02(b).

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(d) Eligible Cost-of-Living Index. An “Eligible Cost-of-Living Index” means an index described below:

(i) A consumer price index that is based on prices of all items (or all items excluding food and energy) and issued by the Bureau of Labor Statistics, including an index for a specific population (such as urban consumers or urban wage earners and clerical workers) and an index for a geographic area or areas (such as a given metropolitan area or state); or

(ii) A percentage adjustment based on a cost-of-living index described in Section (a) above, or a fixed percentage, if less. In any year when the cost-of-living index is lower than the fixed percentage, the fixed percentage may be treated as an increase in an Eligible Cost-of-Living Index, provided it does not exceed the sum of:

(1) The cost-of-living index for that year, and

(2) The accumulated excess of the annual cost-of-living index from each prior year over the fixed annual percentage used in that year (reduced by any amount previously utilized under this Section 3.06(d)(ii)).

(e) Life Expectancy. “Life Expectancy” means the life expectancy as computed by use of the Single Life Table in section 1.401(a)(9)-9 of the Treasury Regulations.

(f) Required Beginning Date. Except as otherwise provided in the Plan, the “Required Beginning Date” means the April 1st of the calendar year following the later of the calendar year in which the Participant attains age 70  ¹/2, or the calendar year in which the Participant retires, except that benefit distributions to a “5-percent owner” must commence by April 1 of the calendar year following the calendar year in which the Participant attains age 70  ¹/2. Once distributions have begun to a “5-percent owner” under this Article II, they must continue to be distributed, even if the Participant ceases to be a “5-percent owner” in a subsequent Plan Year.

“5-percent owner” means a Participant who is a 5-percent owner as defined in Code Section 416 at any time during the Plan Year ending with or within the calendar year in which such owner attains age 70  ¹/2. Once required minimum distributions have begun to a 5-percent owner, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year.

Part III – 15

ARTICLE IV

LIMITATIONS ON BENEFITS

The limitations of Sections 4.01 through 4.05 shall be subject to those of Section 4.06 which shall apply in Limitation Years beginning on or after July 1, 2007, except as otherwise provided therein.

4.01 General Limitations. This Section applies regardless of whether any Participant is or has ever been a participant in another qualified plan maintained by the Employer. If any Participant is or has ever been a participant in another qualified plan, or a welfare benefit fund (as defined in Code Section 419(e)), an individual medical account (as defined in Code Section 415(l)(2), or a simplified employee pension (as defined in Code Section 408(k)) maintained by the Employer, which provides an Annual Addition as defined in Section 4.05(a), Section 4.02 is also applicable to that Participant’s benefits.

(a) The Annual Benefit otherwise payable to a Participant at any time will not exceed the Maximum Permissible Benefit. If the benefit the Participant would otherwise accrue in a Limitation Year would produce an Annual Benefit in excess of the Maximum Permissible Benefit, the benefit must be limited (or the rate of accrual reduced) so that the Annual Benefit does not exceed the Maximum Permissible Benefit.

(b) If a Participant has made voluntary employee contributions, or mandatory employee contributions as defined in Code Section 411(c)(2)(C) under the terms of this Plan, the amount of such contributions is treated as an Annual Addition to a qualified defined contribution plan, for purposes of Sections 4.01(a) and 4.01(b) of this Article.

4.02 Additional General Limitations. This Section applies if any Participant is also a participant, or has ever participated in another plan maintained by the Employer, including a qualified plan, a welfare benefit fund maintained by the Employer (as defined in Code Section 419(e)) under which amounts attributable to post-retirement medical benefits are allocated to separate accounts of Key Employees (as defined in Code Section 419(A)(d)(3), an individual medical account, or a simplified employee pension that provides an annual addition as described in Section 4.05(a).

(a) If a Participant is, or has ever been, a participant covered under more than one defined benefit plan maintained by the Employer, the sum of the Participant’s Annual Benefits from all such plans may not exceed the Maximum Permissible Benefit. If a Participant is or has ever been a participant in more than one defined benefit Plan maintained by an Employer, the rate of accrual in this Plan will be reduced so that the total Annual Benefits payable at any time under such plans will not exceed the Maximum Permissible Benefit.

(b) For Limitation Years beginning before January 1, 2000, if the Employer maintains, or ever maintained, one or more qualified defined contribution plans covering any Participant in this Plan, a welfare benefit fund (as defined in Code

Part III – 16

Section 419(e)), an individual medical account (as defined in Code Section 415(l)(2)), or a simplified employee pension(as defined in Code Section 408(k)), the sum of the Participant’s Defined Contribution Fraction and Defined Benefit Fraction (the “Combined Limit”) will not exceed 1.0 in any Limitation Year. In the event that a Participant’s Combined Limit would otherwise be exceeded for a Limitation Year, shall be reduced, to the extent necessary, such that such accrual plus the Annual Additions credited to any such Participant’s account for the Limitation Year under the defined contribution plan, welfare benefit fund, individual medical account or simplified employee pension will not exceed the Combined Limit.

4.03 Limitation Year beginning after December 31, 1986. In the case of an individual who was a participant in one or more defined benefit plans of the Employer as of the first day of the first Limitation Year beginning after December 31, 1986, the application of the limitations of this Article shall not cause the Maximum Permissible Benefit for such individual under all such defined benefit plans to be less than the individual’s current Accrued Benefit. The preceding sentence applies only if all such defined benefit plans met the requirements of Code Section 415 for all Limitation Years beginning before January 1, 1987.

4.04 Limitation Year beginning after December 31, 1994. In the case of an individual who was a participant in one or more defined benefit plans of the Employer as of the first day of the first Limitation Year beginning after December 31, 1994, the application of the limitations of this Article shall not cause the Maximum Permissible Amount for such individual under all such defined benefit plans to be less than the individual’s Retirement Protection Act of 1994 (“RPA ‘94”) old law benefit. The preceding sentence applies only if all such defined benefit plans met the requirements of Code Section 415 on December 7, 1994.

4.05 Definitions.

(a) Annual Additions. The sum of the following amounts credited to a Participant’s account for the Limitation Year:

(i) Employer contributions;

(ii) Employee contributions;

(iii) Allocations under a simplified employee pension;

(iv) Forfeitures; and

(v) Amounts allocated after March 31, 1984, to an individual medical account that is part of a pension or annuity plan maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in Section 419A(d)(3), under a welfare benefit fund, as defined in Code Section 419(e), maintained by the Employer, are treated as Annual Additions to a defined contribution plan.

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(b) Annual Benefit. A retirement benefit under the Plan which is payable annually in the form of a straight life annuity. A benefit which is payable in a form other than a straight life annuity must be adjusted to an actuarially equivalent straight life annuity before applying the limitations of this Article. In the case of a “GATT Benefit” (which for this purpose is any benefit unless it is paid in the form of a non-decreasing annuity payable over a period not less than the life of the Participant) or a “Non-GATT Benefit” (which for this purpose is any benefit other than a GATT Benefit), the actuarial equivalent straight life annuity commencing as of the benefit commencement date of such GATT Benefit or Non-GATT Benefit is the greater of (i) the equivalent annual life annuity determined by using the interest rate and mortality table in Section 2.02 in Part I of the Plan (the definition of the term “Actuarial Equivalent”) for the purposes of Part I of the Plan and Section 2.02 in Part II of the Plan (the definition of the term “Actuarial Equivalent”) for the purposes of Part II of the Plan; and (ii) the equivalent annual life annuity determined by using the combination of (A) a 5% interest rate in the case of a Non-GATT Benefit or the Code Section 417 Interest Rate in the case of a GATT Benefit; and (B) the Code Section 417 Mortality Table. The portion of the actuarial equivalent straight life annuity attributable to the GATT Benefit is the GATT percentage and the portion of the actuarial equivalent straight life annuity attributable to the Non-GATT Benefit is the Non-GATT Percentage. The Annual Benefit does not include any benefits attributable to Employee contributions or rollover contributions, or the assets transferred from a qualified plan that was not maintained by the Employer. No actuarial adjustment to the benefit is required for (i) the value of a Qualified Joint and Survivor Annuity, (ii) the value of benefits that are not directly related to retirement benefits (such as the qualified disability benefit, pre-retirement death benefits, and post-retirement medical benefits), and (iii) the value of post-retirement cost-of-living increases made in accordance with Code Section 415(d) and Treasury Regulation Section 1.415(c)(2)(iii).

(c) Defined Benefit Dollar Limitation. $90,000. Effective on January 1 of each year, the $90,000 limitation above will be automatically adjusted by multiplying such limit by the cost of living adjustment factor prescribed by the Secretary of the Treasury under Code Section 415(d) in such manner as the Secretary shall prescribe. The new limitation will apply to Limitation Years ending within the calendar year of the date of the adjustment.

Notwithstanding the foregoing, effective for Limitation Years ending after December 31, 2001, the Defined Benefit Dollar Limitation is $160,000, as adjusted effective January 1 of each year under Section 415(d) of the Code in such manner as the Secretary shall prescribe, and payable in the form of a straight life annuity. A limitation as adjusted under Code Section 415(d) will apply to Limitation Years ending with or within the calendar year for which the adjustment applies.

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(d) Defined Benefit Fraction. A fraction, the numerator of which is the sum of the Participant’s Projected Annual Benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Code Section 415(b)(1)(A) and (d) or 140 percent of the Highest Average Compensation, including any adjustments under Code Section 415(b)(5), both in accordance with paragraph (h) below.

Notwithstanding the above, if the Participant was a participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Section 415 for all Limitation Years beginning before January 1, 1987.

Notwithstanding the foregoing, for Limitation Years beginning before January 1, 2000, for any Top Heavy Plan Year, 100 percent shall be substituted for 125 percent unless an extra minimum benefit or contribution is credited pursuant to Section 2.03(b) of Part III of the Plan. However, for any such Plan Year in which this Plan is a super top heavy plan, 100 percent shall be substituted for 125 percent in any event.

(e) Defined Contribution Fraction. A fraction, the numerator of which is the sum of the Annual Additions to the Participant’s account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years, (including the Annual Additions attributable to the Participant’s nondeductible employee contributions to this and all other defined benefit plans (whether or not terminated) maintained by the Employer, and the Annual Additions attributable to all welfare benefit funds (as defined in Code Section 419(e)), individual medical accounts (as defined in Code Section 415(l)(2)), or simplified employee pensions (as defined in Code Section 408(k)), maintained by the Employer, and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer).

The maximum aggregate amount in any Limitation Year is the lesser of (1) 125 percent of the dollar limitation under Code Section 415(c)(1)(A) after adjustment under Section 415(d), or (2) 35 percent of the Participant’s Compensation for such year.

If the Employee was a participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans

Part III – 19

maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this plan. Under the adjustment, an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 times (ii) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plans made after May 6, 1986, but using the Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987.

The annual addition for any Limitation Year beginning before January 1, 1987 shall not be recomputed to treat all employee contributions as Annual Additions.

Notwithstanding the foregoing, for Limitation Years beginning before January 1, 2000, for any Top Heavy Plan Year, 100 percent shall be substituted for 125 percent unless an extra minimum allocation is made pursuant to Section 2.03(b) of Part III of the Plan. However, for any such Plan Year in which this Plan is a super top heavy plan, 100 percent shall be substituted for 125 percent in any event.

(f) Employer. For purposes of this Article, Employer shall mean the employer that adopt this Plan and all members of a controlled group of corporations (as defined in Code Section 414(b) as modified by Code Section 415(h), all trades or businesses under common control (as defined in Code Section 414(c) as modified by code Section 415(h), or all members of an affiliated service group (as defined in Code Section 414(m) of which the adopting Employer is a part, and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o).

(g) Highest Average Compensation. The average Compensation for the three consecutive years of service with the Employer that produces the highest average. A year of service with the Employer is the 12-consecutive month period defined in Section 2.44 of Part I of the Plan (the definition of the term, “Year of Service”).

In the case of a Participant who has separated from service, the Participant’s Highest Average Compensation will be automatically adjusted by multiplying such compensation by the cost of living adjustment factor prescribed by the Secretary of the Treasury under Code Section 415(d) in such manner as the Secretary shall prescribe. The adjusted compensation amount will apply to Limitation Years ending within the calendar year of the date of the adjustment.

(h) Maximum Permissible Benefit.

(i) The lesser of the Defined Benefit Dollar Limitation or 100 percent of the Participant’s Highest Average Compensation.

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(ii) If the Participant has less than 10 years of participation in the Plan, the Defined Benefit Dollar Limitation is reduced by one-tenth for each year of participation (or part thereof) less than ten.

(iii) If the Participant has less than ten years of service with the Employer, the Compensation limitation is reduced by one-tenth for each Year of Service (or part thereof) less than ten. The adjustments of this paragraph (iii) shall be applied in the denominator of the Defined Benefit Fraction based upon Years of Service. For purposes of computing the Defined Benefit Fraction only, Years of Service shall include future years of service occurring before the Participant’s Normal Retirement Age. Such future years of service shall include the year that contains the date the Participant reaches Normal Retirement Age, only if it can be reasonably anticipated that the Participant will receive a Year of Service for such year, or the year in which the Participant terminates employment, if earlier.

(iv) If the Annual Benefit of the Participant commences before the Participant’s Social Security Retirement Age, but on or after Age 62, the Defined Benefit Dollar Limitation as reduced above, if necessary, shall be determined as follows:

(A) If a Participant’s Social Security Retirement Age is 65, the Dollar Limitation for benefits commencing on or after Age 62 is determined by reducing the Defined Benefit Dollar Limitation by 5/9 of one percent for each month by which benefits commence before the month in which the Participant attains Age 65.

(B) If a Participant’s Social Security Retirement Age is greater than 65, the Dollar Limitation for benefits commencing on or after Age 62 is determined by reducing the Defined Benefit Dollar Limitation by 5/9 of one percent for each of the first 36 months and 5/12 of one percent for each of the additional months (up to 24 months) by which benefits commence before the month of the Participant’s Social Security Retirement Age.

(v) If the Annual Benefit of a Participant commences prior to Age 62, the Defined Benefit Dollar Limitation shall be the actuarial equivalent of an Annual Benefit beginning at Age 62, as determined above, reduced for each month by which benefits commence before the month in which the Participant attains Age 62. The reduced dollar limitation is the sum of the Non-GATT Limitation and the GATT Limitation. For purposes of the immediately preceding sentence, the Non-GATT Limitation is the product of the Non-GATT Percentage and the lesser of the equivalent early retirement dollar amount computed as described in Section 6.02 of Part I of the Plan (Early Retirement Benefit) or in Section 5.02 of Part II of the Plan (Early Retirement Benefit) and the amount computed using an interest rate of 5% and the Code Section 417 Mortality Table in Section

Part III – 21

2.02 in Part I of the Plan (the definition of the term “Actuarial Equivalent” for the purposes of Part I of the Plan) or Section 2.02 in Part II of the Plan (the definition of the term “Actuarial Equivalent” for the purposes of Part II of the Plan); and the GATT Limitation is the product of the GATT Percentage (as described in Section 4.05(b) of Part III of the Plan) and the lesser of the equivalent early retirement dollar amount computed as in described in Section 6.02 of Part I of the Plan (Early Retirement Benefit) or in Section 5.02 of Part II of the Plan (Early Retirement Benefit) and the amount computed using an interest rate of 5% and the Code Section 417 Mortality Table (as described in Section 2.02 in Part I of the Plan (the definition of the term “Actuarial Equivalent” for the purposes of Part I of the Plan) or Section 2.02 in Part II of the Plan (the definition of the term “Actuarial Equivalent” for the purposes of Part II of the Plan); and the GATT Limitation is the product of the GATT Percentage (as described in Section 4.05(b) of Part III of the Plan) and the lesser of the equivalent early retirement dollar amount computed as described in Section 6.02 of Part I of the Plan (Early Retirement Benefit) or in Section 5.02 of Part II of the Plan (Early Retirement Benefit) and the amount computed using the Code Section 417 Interest Rate and the Code Section 417 Mortality Table. Any decrease in the Defined Benefit Dollar Limitation determined in accordance with this Paragraph (iv) shall not reflect the mortality decrement to the extent that benefits will not be forfeited upon the death of the Participant.

(vi) If the Annual Benefit of a Participant commences after the Participant’s Social Security Retirement Age, the Defined Benefit Dollar Limitation as reduced in (ii) above, if necessary, shall be adjusted so that it is the actuarial equivalent of an annual benefit of such Dollar Limitation beginning at the Participant’s Social Security Retirement Age. The increased dollar limitation is the lesser of the equivalent dollar amount computed using the interest rate and mortality table used for actuarial equivalence set forth in Part I of the Plan (the definition of the term “Actuarial Equivalent” for the purposes of Part I of the Plan) or Section 2.02 in Part II of the Plan (the definition of the term “Actuarial Equivalent” for the purposes of Part II of the Plan) and the amount computed using an interest rate of 5 percent and the Code Section 417 Mortality Table (as described in Part I of the Plan (the definition of the term “Actuarial Equivalent” for the purposes of Part I of the Plan) or Section 2.02 in Part II of the Plan (the definition of the term “Actuarial Equivalent” for the purposes of Part II of the Plan).

(i) Projected Annual Benefit. The Annual Benefit, as defined in Section 4.05(b) of this Article, to which the Participant would be entitled under the terms of the Plan assuming:

(i) the Participant will continue employment until Normal Retirement Age under the Plan (or current Age, if later); and

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(ii) the Participant’s Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years.

(j) RPA ‘94 Old Law Benefit. The Participant’s Accrued Benefit under the terms of the plan as of December 31, 1996, (the “RPA ‘94 freeze date”), for the annuity starting date and optional form and taking into account the limitations of Code Section 415, as in effect on December 7, 1994, including the participation requirements under Code Section 415(b)(5). In determining the amount of a Participant’s RPA ‘94 old law benefit, the following shall be disregarded;

(i) any Plan amendment increasing benefits adopted after the RPA ‘94 freeze date; and

(ii) any cost of living adjustments that become effective after such date.

A Participant’s RPA ‘94 old law benefit is not increased after the RPA ‘94 freeze date, but if the limitations of Code Section 415, as in effect on December 7, 1994, are less than the limitations that were applied to determine the Participant’s RPA ‘94 old law benefit on the RPA ‘94 freeze date, then the Participant’s RPA ‘94 old law benefit will be reduced in accordance with such reduced limitation. If, at any date after the RPA ‘94 freeze date, the Participant’s total plan benefit, before the application of Code Section 415, is less than the Participant’s RPA ‘94 old law benefit, the RPA ‘94 old law benefit will be reduced to the Participant’s total plan benefit.

(k) Social Security Retirement Age. Age 65 in the case of a Participant attaining Age 62 before January 1, 2000 (i.e., born before January 1, 1938), Age 66 for a Participant attaining age 62 after December 31, 1999, and before January 1, 2017 (i.e., born after December 31, 1937, but before January 1, 1955), and Age 67 for a participant attaining Age 62 after December 31, 2016 (i.e., born after December 31, 1954).

(l) TRA ‘86 Accrued Benefit. A Participant’s Accrued Benefit under the Plan, determined as if the Participant had separated from service as of the close of the last Limitation Year beginning before January 1, 1987, when expressed as an annual benefit within the meaning of Code Section 415(b)(2). In determining the amount of a Participant’s TRA ‘86 Accrued Benefit, the following shall be disregarded:

(i) any change in the terms and conditions of the Plan after May 5, 1986; and

(ii) any cost of living adjustments occurring after May 5, 1986.

(m) Year of Participation. The Participant shall be credited with a year of participation (computed to fractional parts of a year) for each accrual computation period for which the following conditions are met: (i) The Participant is credited with at least the number of Hours of Service for benefit accrual purposes, required

Part III – 23

under the terms of the Plan in order to accrue a benefit for the accrual computation period, and (ii) the Participant is included as a Participant under the eligibility provisions of the plan for at least one day of the accrual computation period. If these two conditions are met, the portion of a year of participation credited to the Participant shall equal the amount of benefit accrual service credited to the Participant for such accrual computation period.

4.06 Final Section 415 Regulations.Effective Date. The limitations of this Section shall apply in Limitation Years beginning on or after July 1, 2007, except as otherwise provided herein.

(b) Grandfather Provision. The application of the provisions of this Section shall not cause the maximum permissible benefit for any Participant to be less than the Participant’s accrued benefit under all the defined benefit plans of the employer or a predecessor employer as of the end of the last Limitation Year beginning before July 1, 2007 under provisions of the plans that were both adopted and in effect before April 5, 2007. The preceding sentence applies only if the provisions of such defined benefit plans that were both adopted and in effect before April 5, 2007 satisfied the applicable requirements of statutory provisions, regulations, and other published guidance relating to Code Section 415 in effect as of the end of the last Limitation Year beginning before July 1, 2007, as described in Section 1.415(a)-1(g)(4) of the Treasury Regulations.

(c) Incorporation by Reference. Notwithstanding anything contained in the Plan to the contrary, the limitations, adjustments, and other requirements prescribed in the Plan shall comply with the provisions of Code Section 415 and the final regulations promulgated thereunder, the terms of which are specifically incorporated herein by reference as of the first Limitation Year beginning on or after July 1, 2007, except where an earlier effective date is otherwise provided in the final regulations or in this Section. However, where the final regulations permit the Plan to specify an alternative option to a default option set forth in the regulations, and the alternative option was available under statutory provisions, regulations, and other published guidance relating to Code Section 415 as in effect prior to April 5, 2007, and the Plan provisions in effect as of April 5, 2007 incorporated the alternative option, said alternative option shall remain in effect as a plan provision for Limitation Years beginning on or after July 1, 2007.

(d) High Three-Year Average Compensation. For purposes of the Plan’s provisions reflecting Code Section 415(b)(3) (i.e., limiting the annual benefit payable to no more than 100% of the Participant’s average annual compensation), a Participant’s average compensation shall be the average compensation for the three consecutive years of service, during which the Employee had the greatest aggregate compensation from the Employer, except that a Participant’s compensation for a year of service shall not include compensation in excess of the limitation under Code Section 401(a)(17) that is in effect for the calendar year in which such year of service begins. If the Participant has less than three consecutive years of service, compensation shall be averaged over the

Part III – 24

Participant’s longest consecutive period of service, including fractions of years, but not less than one year. In the case of a Participant who is rehired by the Employer after a severance of employment, the Participant’s high three-year average compensation shall be calculated by excluding all years for which the Participant performs no services for and receives no compensation from the Employer (the “break period”), and by treating the years immediately preceding and following the break period as consecutive.

(e) Adjustment to dollar limit after date of severance. In the case of a Participant who has had a severance from employment with the Employer, the Defined Benefit Dollar Limitation applicable to the Participant in any Limitation Year beginning after the date of severance shall be automatically adjusted under Code Section 415(d).

(f) Compensation paid after severance from employment. For Limitation Years beginning on or after July 1, 2007 compensation for a Limitation Year, within the meaning of Code Section 415(c)(3), shall also include the following types of compensation paid by the later of 2 ¹/2 months after a Participant’s severance from employment with the employer maintaining the plan or the end of the Limitation Year that includes the date of the Participant’s severance from employment with the employer maintaining the plan. Any other payment of compensation paid after severance of employment that is not described in the following types of compensation is not considered compensation within the meaning of Code Section 415(c)(3), even if payment is made within the time period specified above.

(i) Regular pay after severance from employment. Compensation shall include regular pay after severance of employment if:

(1) The payment is regular compensation for services during the Participant’s regular working hours, or compensation for services outside the Participant’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments; and

(2) The payment would have been paid to the Participant prior to a severance from employment if the Participant had continued in employment with the employer.

(ii) Leave cashouts and deferred compensation. Leave cashouts and deferred compensation shall be included in compensation, if those amounts would have been included in the definition of compensation if they were paid prior to the Participant’s severance from employment with the Employer maintaining the Plan, and the amounts are either:

(1) Payment for unused accrued bona fide sick, vacation, or other leave, but only if the Participant would have been able to use the leave if employment had continued; or

Part III – 25

(2) Received pursuant to a nonqualified unfunded deferred compensation plan, but only if the payment would have been paid to the if the Participant had continued in employment with the employer and only to the extent that the payment is includible in the Participant’s gross income.

(iii) Salary continuation payments for military service Participants. Compensation does not include payments to an individual who does not currently perform services for the employer by reason of qualified military service (as that term is used in Code Section 414(u)(1)) to the extent those payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the employer rather than entering qualified military service. Notwithstanding the foregoing, for Plan Years beginning after December 31, 2008, a differential wage payment, as defined by Code Section 3401(h)(2), shall be treated as compensation, for purposes of Code Section 415(c)(3) and Treasury Regulation Section 1.415(c)-2, as provided Section 11.02 of Part III of the Plan.

(iv) Salary continuation payments for disabled Participants. Compensation does not include compensation paid to a Participant who is permanently and totally disabled (as defined in Code Section 22(e)(3)) if the Participant is not a highly compensated employee (as defined in Code Section 414(q)) immediately before becoming disabled, or to all Participants if the Plan provides for the continuation of compensation on behalf of all Participants who are permanently and totally disabled for a fixed or determinable period.

(g) Administrative delay. Compensation for a Limitation Year shall not include amounts earned but not paid during the Limitation Year solely because of the timing of pay periods and pay dates, provided the amounts are paid during the first few weeks of the next Limitation Year, the amounts are included on a uniform and consistent basis with respect to all similarly situation Participants, and no compensation is included in more than one Limitation Year.

(h) Option to apply compensation provisions early. The rules in Sections 4.6(g) shall apply for Limitation Years beginning on or after July 1, 2007.

ARTICLE V

PRE-TERMINATION BENEFIT RESTRICTIONS

5.01 In General. In the event of Plan termination, the benefit of any Highly Compensated Employee is limited to a benefit that is nondiscriminatory under Code Section 401(a)(4).

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Benefits distributed to any of the 25 most Highly Compensated Employees shall be restricted such that the annual payments shall be no greater than an amount equal to the payment that would be made on behalf of the Employee under a single life annuity that is the Actuarial Equivalent of the sum of the Employee’s Accrued Benefit and the Employee’s other benefits under the Plan.

5.02 Exceptions. Section 5.01 shall not apply if: (i) after payment of the benefit to an Employee described in the preceding Section, the value of Plan assets equals or exceeds 110% of the value of current liabilities, as defined in Code Section 412(l)(7); or (ii) the value of the benefits for an Employee described above is less than 1% of the value of current liabilities.

5.03 Included Benefits. For purposes of this Article, benefits include any periodic income, any withdrawal values payable to a living Employee, and any death benefits not provided for by insurance on the Employee’s life.

ARTICLE V I

BENEFIT RESTRICTIONS

6.01 Effective Date and Application of Section.

(i) Effective Date. The provisions of this Section apply to Plan Years beginning after December 31, 2007.

(ii) Notwithstanding anything in this Section to the contrary, the provisions of Code Section 436 and the Regulations thereunder are incorporated herein by reference.

(iii) For Plans that have a valuation date other than the first day of the Plan Year, the provisions of Code Section 436 and this Article will be applied in accordance with Regulations.

6.02 Funding-Based Limitation on Shutdown Benefits and Other Unpredictable Contingent Event Benefits.

(i) In general. If a Participant is entitled to an “unpredictable contingent event benefit” payable with respect to any event occurring during any Plan Year, then such benefit may not be provided if the “adjusted funding target attainment percentage” for such Plan Year (A) is less than sixty percent (60%) or, (B) would be less than sixty percent (60%) percent taking into account such occurrence.

(ii) Exemption. Paragraph (i) shall cease to apply with respect to any Plan Year, effective as of the first day of the Plan Year, upon payment by the Employer of a contribution (in addition to any minimum required contribution under Code Section 430) equal to:

(A) in the case of 5.02(i)(A) above, the amount of the increase in the funding target of the Plan (under Code Section 430) for the Plan Year attributable to the occurrence referred to in paragraph (i), and

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(B) in the case of 5.02(i)(B) above, the amount sufficient to result in an “adjusted funding target attainment percentage” of sixty percent (60%).

(iii) Unpredictable contingent event benefit. For purposes of this subsection, the term “unpredictable contingent event benefit” means any benefit payable solely by reason of:

(A) a plant shutdown (or similar event, as determined by the Secretary of the Treasury), or

(B) an event other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or occurrence of death or disability.

6.03 Limitations on Plan Amendments Increasing Liability for Benefits.

(i) In general. No amendment which has the effect of increasing liabilities of the Plan by reason of increases in benefits, establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits become nonforfeitable may take effect during any Plan Year if the “adjusted funding target attainment percentage” for such Plan Year is:

(A) less than eighty percent (80%), or

(B) would be less than eighty percent (80%) taking into account such amendment.

(ii) Exemption. Paragraph 5.03(i) above shall cease to apply with respect to any Plan Year, effective as of the first day of the Plan Year (or if later, the effective date of the amendment), upon payment by the Employer of a contribution (in addition to any minimum required contribution under Code Section 430) equal to -

(A) in the case of paragraph 5.03(i)(A) above, the amount of the increase in the funding target of the Plan (under Code Section 430) for the Plan Year attributable to the amendment, and

(B) in the case of paragraph 5.03(i)(B) above, the amount sufficient to result in an “adjusted funding target attainment percentage” of eighty percent (80%).

(iii) Exception for certain benefit increases. Paragraph (i) shall not apply to any amendment which provides for an increase in benefits under a formula

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which is not based on a Participant’s compensation, but only if the rate of such increase is not in excess of the contemporaneous rate of increase in average wages of Participants covered by the amendment.

6.04 Limitations on Accelerated Benefit Distributions.

(i) Funding percentage less than sixty percent (60%). If the Plan’s “adjusted funding target attainment percentage” for a Plan Year is less than sixty percent (60%), then the Plan may not pay any “prohibited payment” after the valuation date for the Plan Year.

(ii) Bankruptcy. During any period in which the Employer is a debtor in a case under title 11, United States Code, or similar Federal or State law, the Plan may not pay any “prohibited payment.” The preceding sentence shall not apply on or after the date on which the enrolled actuary of the Plan certifies that the “adjusted funding target attainment percentage” of the Plan is not less than one-hundred percent (100%).

(iii) Limited payment if percentage at least sixty percent (60%) but less than eighty percent (80%) percent.

(A) In general. If the Plan’s “adjusted funding target attainment percentage” for a Plan Year is sixty percent (60%) or greater but less than eighty percent (80%), then the Plan may not pay any “prohibited payment” after the valuation date for the Plan Year to the extent the amount of the payment exceeds the lesser of:

(1) fifty (50) percent of the amount of the payment which could be made without regard to this subsection, or

(2) the present value (determined under guidance prescribed by the Pension Benefit Guaranty Corporation, using the interest and mortality assumptions under Code Section 417(e)) of the maximum guarantee with respect to the participant under ERISA Section 4022.

(B) One-time application.

(1) In general. Only 1 “prohibited payment” meeting the requirements of subparagraph (A) may be made with respect to any Participant during any period of consecutive Plan Years to which the limitations under either paragraph (i) or (ii) or this paragraph applies.

(2) Treatment of beneficiaries. For purposes of this subparagraph, a Participant and any Beneficiary (including an alternate payee, as defined in Code Section 414(p)(8)) shall be treated as one Participant. If the Accrued Benefit

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of a Participant is allocated to such an alternate payee and one or more other persons, the amount under subparagraph (A) shall be allocated among such persons in the same manner as the Accrued Benefit is allocated unless the qualified domestic relations order (as defined in Code Section 414(p)(1)(A)) provides otherwise.

(iv) Exception. This subsection shall not apply for any Plan Year if the terms of the Plan (as in effect for the period beginning on September 1, 2005, and ending with such Plan Year) provide for no benefit accruals with respect to any Participant during such period.

(v) “Prohibited payment.” For purpose of this subsection, the term “prohibited payment” means:

(A) any payment, in excess of the monthly amount paid under a single life annuity (plus any Social Security supplements described in the last sentence of Code Section 411(a)(9)), to a Participant or Beneficiary whose Annuity Starting Date occurs during any period a limitation under paragraph (i) or (ii) is in effect,

(B) any payment for the purchase of an irrevocable commitment from an insurer to pay benefits, and

(C) any other payment specified by the Secretary by Regulations.

Such term shall not include the payment of a benefit which under Code Section 411(a)(11) may be immediately distributed without the consent of the Participant.

6.05 Limitation on Benefit Accruals for Plans With Severe Funding Shortfalls.

(i) In general. If the Plan’s “adjusted funding target attainment percentage” for a Plan Year is less than sixty percent (60%), benefit accruals under the Plan shall cease as of the valuation date for the Plan Year.

(ii) Exemption. Paragraph (i) shall cease to apply with respect to any Plan Year, effective as of the first day of the Plan Year, upon payment by the Employer of a contribution (in addition to any minimum required contribution under Code Section 430) equal to the amount sufficient to result in an “adjusted funding target attainment percentage” of sixty percent (60%).

(iii) Temporary modification of limitation. In the case of the first Plan Year beginning during the period beginning on October 1, 2008, and ending on September 30, 2009, the provisions of Section 6.05(i) above shall be applied by substituting the Plan’s “adjusted funding target attainment percentage” for the preceding Plan Year for such percentage for such Plan Year, but only if the “adjusted funding target attainment percentage” for the preceding year is greater.

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6.06 Rules Relating to Contributions Required to Avoid Benefit Limitations.

(i) Security may be provided.

(A) In general. For purposes of this section, the “adjusted funding target attainment percentage” shall be determined by treating as an asset of the Plan any security provided by the Employer in a form meeting the requirements of subparagraph (B).

(B) Form of security. The security required under subparagraph (A) shall consist of:

(1) a bond issued by a corporate surety company that is an acceptable surety for purposes of ERISA Section 412;

(2) cash, or United States obligations which mature in three (3) years or less, held in escrow by a bank or similar financial institution; or

(3) such other form of security as is satisfactory to the Secretary and the parties involved.

(C) Enforcement. Any security provided under subparagraph (A) may be perfected and enforced at any time after the earlier of:

(1) the date on which the Plan terminates;

(2) if there is a failure to make a payment of the minimum required contribution for any Plan Year beginning after the security is provided, the due date for the payment under Code Section 430(j); or

(3) if the “adjusted funding target attainment percentage” is less than sixty percent (60%) for a consecutive period of 7 years, the valuation date for the last year in the period.

(D) Release of security. The security shall be released (and any amounts thereunder shall be refunded together with any interest accrued thereon) at such time as the Secretary may prescribe in Regulations, including Regulations for partial releases of the security by reason of increases in the “adjusted funding target attainment percentage.”

(ii) Prefunding balance or funding standard carryover balance may not be used. No prefunding balance under Code Section 430(f) or funding

Part III – 31

standard carryover balance may be used under Sections 6.02, 6.03, or 6.05 to satisfy any payment an Employer may make under any such subsection to avoid or terminate the application of any limitation under such subsection.

(iii) Deemed reduction of funding balances:

(A) In general. In any case in which a benefit limitation under Sections 6.02, 6.03, 6.04, or 6.05 would (but for this subparagraph and determined without regard to Sections 6.02(ii), 6.03(ii), or 6.05(ii)) apply to such Plan for the Plan Year, the Employer shall be treated for purposes of this title as having made an election under Code Section 430(f) to reduce the prefunding balance or funding standard carryover balance by such amount as is necessary for such benefit limitation to not apply to the Plan for such Plan Year.

(B) Exception for insufficient funding balances. Subparagraph (A) shall not apply with respect to a benefit limitation for any Plan Year if the application of subparagraph (A) would not result in the benefit limitation not applying for such Plan Year.

6.07 Presumed Underfunding for Purposes of Benefit Limitations.

(i) Presumption of continued underfunding. In any case in which a benefit limitation under Sections 6.02, 6.03, 6.04, or 6.05 has been applied to a Plan with respect to the Plan Year preceding the current Plan Year, the “adjusted funding target attainment percentage” of the Plan for the current Plan Year shall be presumed to be equal to the “adjusted funding target attainment percentage” of the Plan for the preceding Plan Year until the enrolled actuary of the Plan certifies the actual “adjusted funding target attainment percentage” of the Plan for the current Plan Year.

(ii) Presumption of underfunding after 10th month. In any case in which no certification of the “adjusted funding target attainment percentage” for the current Plan Year is made with respect to the Plan before the first day of the 10th month of such year, for purposes of Sections 6.02, 6.03, 6.04, and 6.05, such first day shall be deemed, for purposes of such subsection, to be the valuation date of the Plan for the current Plan Year and the Plan’s “adjusted funding target attainment percentage” shall be conclusively presumed to be less than sixty percent (60%) as of such first day.

(iii) Presumption of underfunding after 4th month for nearly underfunded plans. In any case in which:

(A) a benefit limitation under Sections 6.02, 6.03, 6.04, or 6.05 did not apply to a Plan with respect to the Plan Year preceding the current Plan Year, but the “adjusted funding target attainment percentage”

Part III – 32

of the Plan for such preceding Plan Year was not more than ten (10) percentage points greater than the percentage which would have caused such subsection to apply to the Plan with respect to such preceding Plan Year, and

(B) as of the first day of the 4th month of the current Plan Year, the enrolled actuary of the Plan has not certified the actual “adjusted funding target attainment percentage” of the Plan for the current Plan Year, until the enrolled actuary so certifies, such first day shall be deemed, for purposes of such subsection, to be the valuation date of the Plan for the current Plan Year and the “adjusted funding target attainment percentage” of the Plan as of such first day shall, for purposes of such subsection, be presumed to be equal to ten (10) percentage points less than the “adjusted funding target attainment percentage” of the Plan for such preceding Plan Year.

6.08 Treatment of Plan as of Close of Prohibited or Cessation Period. The following provisions apply for purposes of applying this Section.

(i) Operation of Plan after period. Payments will resume effective as of the day following the close of the period for which any limitation of payment of benefits under Section 6.04 applies. If a limitation on benefit accruals under Section 6.05 applies to the Plan as of a “Section 436 measurement date,” but that limit no longer applies to the Plan as of a later “Section 436 measurement date,” then that limitation shall not apply to benefit accruals that are based on service on or after that later “Section 436 measurement date,” except to the extent that the Plan does then not provide for such benefit accruals or provides that benefit accruals will not resume when the limitation ceases to apply. A “Section 436 measurement date” is the date that is used to determine when the limitations of Code Sections 436(d) and 436(e) apply or cease to apply.

(ii) Treatment of affected benefits. Nothing in this subsection shall be construed as affecting the Plan’s treatment of benefits which would have been paid or accrued but for this Section.

6.09 Definitions.

(i) The term “funding target attainment percentage” has the same meaning given such term by Code Section 430(d)(2), except as otherwise provided herein. However, in the case of Plan Years beginning in 2008, the “funding target attainment percentage” for the preceding Plan Year may be determined using such methods of estimation as the Secretary may provide.

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(ii) The term “adjusted funding target attainment percentage” means the “funding target attainment percentage” which is determined under paragraph (i) by increasing each of the amounts under subparagraphs (A) and (B) of Code Section 430(d)(2) by the aggregate amount of purchases of annuities for employees other than highly compensated employees (as defined in Code Section 414(q)) which were made by the Plan during the preceding two (2) Plan Years.

(iii) Application to plans which are fully funded without regard to reductions for funding balances.

(A) In general. In the case of a Plan for any Plan Year, if the “funding target attainment percentage” is one-hundred percent (100%) or more (determined without regard to this paragraph and without regard to the reduction in the value of assets under Code Section 430(f)(4)(A)), the “funding target attainment percentage” for purposes of paragraphs (i) and (ii) shall be determined without regard to such reduction.

(B) Transition rule. Subparagraph (A) shall be applied to Plan Years beginning after 2007 and before 2011 by substituting for “one-hundred percent (100%)” the applicable percentage determined in accordance with the following table:

In the case of a Plan Year beginning in calendar year:	The applicable percentage is:
2008	92%
2009	94%
2010	96%

(C) Subparagraph (B) shall not apply with respect to any Plan Year after 2008 unless the “funding target attainment percentage” (determined without regard to this paragraph) of the Plan for each preceding Plan Year after 2007 was not less than the applicable percentage with respect to such preceding Plan Year determined under subparagraph (B).

ARTICLE VII

PLAN FIDUCIARY RESPONSIBILITIES

7.01 Plan Fiduciaries. The Plan Fiduciaries shall be:

(i) the Trustee(s) of the Plan;

(ii) the Plan Administrator; and

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(iii) such other person or persons as may be designated by the Plan Administrator as a fiduciary in accordance with the provisions of this Article.

7.02 General Fiduciary Duties. Each Plan Fiduciary shall discharge his or her duties solely in the interest of the Participants and their Beneficiaries and act:

(i) for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan;

(ii) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(iii) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so, if the Fiduciary has the responsibility to invest plan assets; and

(iv) in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with the provisions only Title I of ERISA.

Each Plan Fiduciary shall perform the duties specifically assigned to him or her. No Plan Fiduciary shall have any responsibility for the performance or non-performance of any duties not specifically allocated to him or her.

7.03 Duties of the Trustee(s). The specific responsibilities and duties of the Trustee(s) are set forth in the Trust Indenture among the Plan Sponsor, the Plan Administrator, and the Trustee(s). In general the Trustee(s) shall:

(i) invest Plan assets, subject to directions from the Plan Administrator or from any duly appointed investment manager;

(ii) maintain adequate records of receipts, disbursements, and other transactions involving the Plan; and

(iii) prepare such reports, statements, tax returns and other forms as may be required under the Trust Indenture or applicable laws and regulations.

7.04 Powers and Duties of the Plan Administrator. The Plan Administrator is the Benefits Committee. The Plan Administrator shall have the power, discretionary authority, and duty to interpret the provisions of the Plan and to make all decisions and take all actions that shall be necessary or proper in order to carry out the provisions of the Plan. Without limiting the generality of the foregoing, the Plan Administrator shall:

(i) monitor compliance with the provisions of ERISA and other applicable laws with respect to the Plan;

Part III – 35

(ii) establish an investment policy and funding method consistent with objectives of the Plan and with the requirements of applicable laws and regulations;

(iii) invest Plan assets except to the extent that the Plan Administrator has delegated such investment duties to an investment manager;

(iv) evaluate from time to time investment policy and the performance of any investment manager or investment advisor appointed by it;

(v) be solely responsible to, and shall, interpret and construe the Plan and resolve any ambiguities therein, with any such interpretations or constrictions to be conclusively binding and final, to the extent permitted by applicable law, upon all persons interested or claiming under the Plan;

(vi) determine, in its sole discretion, all questions concerning the eligibility of any person to participate in the Plan, the right to and the amount of any benefit payable under the Plan to or on behalf of an individual and the date on which any individual ceases to be a Participant, with any such determination to be conclusively binding and final, to the extent permitted by applicable law, upon all persons interested or claiming an interest in the Plan;

(vii) establish guidelines as required for the orderly and uniform administration of the Plan;

(viii) exercise overall control of the operation and administration of the Plan in matters not allocated to some other Fiduciary by the terms of this Plan.

(ix) administer the Plan on a day-to-day basis in accordance with the provisions of this Plan and all other pertinent documents;

(x) retain and maintain Plan records, including Participant census data, participation dates, compensation records, and such other records necessary or desirable for proper Plan administration;

(xi) prepare and arrange for delivery to Participants of such summaries, descriptions, announcements and reports as are required to be given to participants under applicable laws and regulations;

(xii) file with the U.S. Department of Labor, the Internal Revenue Service and other regulatory agencies on a timely basis all required reports, forms and other documents;

Part III – 36

(xiii) prepare and furnish to the Trustee(s) sufficient records and data to enable the Trustee(s) to properly perform its obligations under the Trust Indenture; and

(xiv) to take appropriate actions required to correct any errors made in determining the eligibility of any employee for benefits under the Plan or the amount of benefits payable under the Plan, including as part of correcting any error made in computing the benefits of any Participant or Beneficiary, making equitable adjustments (an increase or decrease) in the amount of any future benefits payable under the Plan and including the recovery of any overpayment of benefits paid from the Plan as provided in Treasury Regulation Section 1.401(a)-13(c)(2)(iii).

The Plan Administrator may appoint or employ such advisers or assistants as the Plan Administrator deems necessary and may delegate to any one or more of its members any responsibility it may have under the Plan or designate any other person or persons to carry out any responsibility it may have under the Plan.

Notwithstanding any provisions elsewhere to the contrary, the Plan Administrator shall have total discretion to fulfill the above responsibilities as the Plan Administrator sees fit on a uniform and consistent basis and as the Plan Administrator believes a prudent person acting in a like capacity and familiar with such matters would do.

7.05 Designation of Fiduciaries. The Plan Administrator shall have the authority to appoint and remove Trustee(s) in accordance with the Trust Indenture. The Plan Administrator may appoint and remove an investment manager and delegate to said investment manager power to manage, acquire or dispose of any assets of the Plan.

While there is an investment manager, the Plan Administrator shall have no obligation under this Plan with regard to the performance or non-performance of the duties delegated to the investment manager.

The Plan Administrator shall appoint all other Fiduciaries of this Plan. In making its appointment or delegation of authority, the Plan Administrator may designate all of the responsibilities to one person or it may allocate the responsibilities, on a continuing basis or on an ad hoc basis, to one or more individuals either jointly or severally. No individual named a Fiduciary shall have any responsibility for the performance or non-performance of any responsibilities or duties not allocated to him or her.

The appointing authority of a Fiduciary shall periodically, but not less frequently than annually, review the performance of each Fiduciary appointed in order to carry out the general fiduciary duties specified in Section 7.02 and, where appropriate, in its sole discretion, take or recommend remedial action.

7.06 Delegation of Duties by a Fiduciary. Except as provided in this Plan or in the appointment as a Fiduciary, no Fiduciary may delegate his or her or her fiduciary responsibilities. If authorized by the appointing authority, a Fiduciary may appoint such agents as may be deemed necessary and delegate to such agents any non-fiduciary powers or duties,

Part III – 37

whether ministerial or discretionary. No Fiduciary or agent of a Fiduciary who is a full-time employee of the Employer will receive any compensation from the Plan for his or her or her services, but the Employer or the Plan shall pay all expenses that such employee reasonably incurs in the discharge of his or her duties.

ARTICLE VIII

BENEFITS COMMITTEE

8.01 Appointment of Benefits Committee. The Benefits Committee (the “Benefits Committee”) shall consist of three or more members appointed from time to time by the President of the Employer (the “President”), who shall also designate one of the members as chairperson. Each member of the Benefits Committee and its chairperson shall serve at the pleasure of the appointing authority.

8.02 Benefits Committee to Act by Majority Vote, etc. The Benefits Committee shall act by majority vote of all members. All actions, determinations, interpretations and decisions of the Benefits Committee with respect to any matter within its jurisdiction will be conclusive and binding on all persons. Any person may rely conclusively upon any action if certified by the Benefits Committee.

Notwithstanding the above, a member of the Benefits Committee who is also a Participant shall not vote or act upon any matter relating solely or primarily to himself or herself.

8.03 Records and Reports of the Benefits Committee. The Benefits Committee shall keep a record of all of its proceedings and acts, and shall keep such books of account, records and other data as may be necessary for the proper administration of the Plan and file or deliver to Participants and their Beneficiaries whatever reports are required by any regulatory authority.

8.04 Costs and Expenses of Administration. Notwithstanding any provisions of the Plan to the contrary, all clerical, legal and other expenses of the Plan and the Trust, including Trustee’s fees, shall be paid by the Plan, except to the extent the Employer elects to pay such amounts; provided, however, that if the Employer pays such amounts it shall be reimbursed by the Trust for such amounts unless the Employer elects not to be so reimbursed.

8.05 Indemnification of the Plan Administrator and Assistants. The Employer shall indemnify and defend, to the extent permitted under the By-Laws of the Employer, any Employee or former Employee (i) who serves or has served as a member of the Benefits Committee, (ii) who has been appointed to assist the Benefits Committee in administering the Plan, or (iii) to whom the Benefits Committee has delegated any of its duties or responsibilities against any liabilities, damages, costs and expenses (including attorneys’ fees and amounts paid in settlement of any claims approved by the Employer) occasioned by any act or omission to act in connection with the Plan, if such act or omission to act is in good faith and without gross negligence; provided that such Employee or former Employee is not otherwise indemnified or saved harmless under any liability insurance or other indemnification arrangement.

Part III – 38

ARTICLE IX

CLAIMS PROCEDURE

9.01 Claims Fiduciary. The Plan Administrator will act as Claims Fiduciary, except to the extent that the Plan Administrator has delegated the function to some other person or persons, committee or entity.

Notwithstanding anything in the Plan to the contrary, the Claims Fiduciary shall have total and complete discretion to fulfill its fiduciary responsibilities as it sees fit on a uniform and consistent basis and as it believes a prudent person acting in a like capacity and familiar with such matters would do.

9.02 Claims for Benefits. Claims for benefits under the Plan may be filed with the Plan Administrator on forms supplied by the Employer. For the purpose of this procedure, “claim” means a request for a Plan benefit by a Participant or a Beneficiary of a Participant. If the basis of the claim includes documentation not a part of the records of the Plan or of the Employer, all such documentation must be included with the claim.

9.03 Duty to Keep Plan Administrator Informed of Current Address. Each Participant and Beneficiary must file with the Plan Administrator from time to time his or her post office address and each change thereof. Any communication, statement or notice addressed to a Participant or Beneficiary at his or her last post office address filed with the Plan Administrator, or if no address is filed with the Plan Administrator, then at his or her last post office address as shown on the Employer’s records, will be binding on the Participant and Beneficiary for all purposes of the Plan. Neither the Plan Administrator nor the Employer shall be required to search for or locate a Participant or Beneficiary.

9.04 Failure to Claim Benefits. If the Plan Administrator notifies a Participant or Beneficiary by registered or certified mail at his or her last known address that he or she is entitled to a distribution and also notifies him or her of the provision of this Section, and the Participant or Beneficiary fails to claim his or her benefits under the Plan, the Plan Administrator shall make reasonable efforts to locate such Participant or Beneficiary. If the Participant or Beneficiary fails to claim his or her benefits under the Plan or fails to make his or her or her current address known to the Plan Administrator within three years after such notification, the Plan Administrator, at the end of such three-year period, shall direct that benefits which would have been payable to such Participant or Beneficiary shall be forfeited. In the event that the Participant or Beneficiary is subsequently located, the benefits which were forfeited shall be reinstated, and such reinstatement shall be taken into account in determining the Employer contribution for the Plan Year of the reinstatement.

9.05 Notice of Denial of Claim. If a claim is wholly or partially denied, the Plan Administrator shall notify the claimant of the denial of the claim within a reasonable period of time. Such notice of denial (i) shall be in writing, (ii) shall be written in a manner calculated to be understood by the claimant, and (iii) shall contain (A) the specific reason or reasons for denial of the claim, (B) a specific reference to the pertinent Plan provisions upon which the denial is based, (C) a description of any additional material or information necessary for the claimant to perfect the claim, along with an explanation why such material or information is necessary, and

Part III – 39

(D) an explanation of the Plan’s claim review procedure. Unless special circumstances require an extension of time for processing the claim, the Plan Administrator shall notify the claimant of the claim denial no later than 90 days after the Plan Administrator’s receipt of the claim. If such an extension is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. The extension notice shall indicate the special circumstances requiring the extension of time and the date by which the Plan Administrator expects to render the final decision, which date will not be later than 180 days after the Plan Administrator’s receipt of the claim.

9.06 Request for Review of Denial of Claim. Within 120 days of the receipt by the claimant of the written notice of the denial of the claim, or such later time as shall be deemed reasonable in the sole discretion of the Plan Administrator, taking into account the nature of the benefit subject to the claim and any other attendant circumstances, or if the claim has not been granted within a reasonable period of time, the claimant may file a written request with the Plan Administrator to conduct a full and fair review of the denial of the claimant’s claim for benefits. In connection with the claimant’s appeal of the denial of his or her benefit, the claimant may review pertinent documents and may submit issues and comments in writing.

9.07 Decision on Review of Denial of Claim. The Plan Administrator shall deliver to the claimant a written decision on the claim promptly, but not later than 60 days, after the receipt of the claimant’s request for review, except that if there are special circumstances which require an extension of time for processing, the aforesaid 60-day period may be extended to 120 days. Such decision shall (i) be written in a manner calculated to be understood by the claimant, (ii) include specific reasons for the decision, and (iii) contain specific references to the pertinent Plan provisions upon which the decision is based.

9.08 Disability Claims. Notwithstanding anything in this Article IX of Part III of the Plan to the contrary, when a claim under this Article is made in connection with a benefit payable under Section 6.05 of Part I (as a result of a qualifying Participant’s total disability) or is made in connection with a benefit payable under Section 5.04 of Part II (as a result of a qualifying Participant’s Total Disability), solely for purposes of processing such a claim (i) all references in Sections 9.05 and 9.07 of this Part III to “90 days” and “60 days” are deemed to have been replaced with “45 days”, (ii) the reference to “180 days” in Section 9.05 of this Part III is deemed to have been replaced with “75 days”, (iii) the reference to “120 days” in Section 9.07 of this Part III is deemed to have been replaced with “90 days”, (iv) a second, maximum 30 day extension of time will be allowed only under Section 9.05 of this Part III in the case of a claim within this Section, but only if the other requirements for an extension of time to respond described in Section 9.05 of this Part III are satisfied with respect to this second extension, and (v) the claimant will be allowed at least 45 days within which to provide any needed additional information sought in connection with any extension under Sections 9.05 and 9.08 of this Part III.

ARTICLE X

AMENDMENT AND TERMINATION

10.01 Amendment of Plan. The right is reserved to the Employer to amend the Plan at any time and from time to time and all parties or any person claiming any interest hereunder shall be

Part III – 40

bound thereby; except no person having an already vested interest in the Plan shall be deprived of any interest already existing nor have such interest adversely affected. No such amendment shall have the effect of vesting in the Employer any right, title or interest to any assets of the Plan. The decision of the Employer shall be binding upon the Participants and all other persons and parties interested as to whether or not any amendment does deprive a Participant or any other person or adversely affects such interest. No amendment to the Plan (including a change in the actuarial basis for determining optional or early retirement benefits) shall decrease a Participant’s Accrued Benefit or eliminate an optional form of distribution. Notwithstanding the preceding sentence, a Participant’s Accrued Benefit may be reduced to the extent permitted under Code Section 412(c)(8). For purposes of this paragraph, a Plan amendment which has the effect of (i) eliminating or reducing an early retirement benefit or a retirement-type subsidy, or (ii) eliminating an optional form of benefit with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a Participant who satisfies (either before or after the amendment) the pre-amendment conditions for the subsidy. In general, a retirement-type subsidy is a subsidy that continues after retirement, but does not include a qualified disability benefit, a medical benefit, or a social security supplement that does not continue after retirement age. Furthermore, no amendment to the Plan shall have the effect of decreasing a Participant’s vested interest determined without regard to such amendment as of the later of the date such amendment is adopted, or becomes effective. Participants shall be notified of any Plan amendments.

In the case of any merger, consolidation with or transfer of assets or liabilities by the Employer to another Plan, each Participant in the Plan on the date of the transaction shall have a benefit in the surviving Plan (determined as if such Plan were terminated immediately after the transaction) at least equal to the benefit to which he or she would have been entitled to receive immediately prior to the transaction if the Plan had been terminated. However, this provision shall not be construed to be a termination or discontinuance of the Plan or to be a guarantee of a specific level of benefits from this Plan.

Notwithstanding the foregoing, a transfer of amounts from this Plan or its related trust to a nonqualified foreign trust as described in Revenue Ruling 2008-40 shall be treated as a distribution from the Plan.

10.02 Employer May Discontinue Plan. The Employer reserves the right at any time to reduce its annual payments, to partially terminate its Plan or to terminate its Plan in its entirety.

In the event of the liquidation of the Employer or the bona fide sale of the controlling interest thereof, the Employer or its successors or assigns shall not be obligated to continue the Plan.

Upon termination of the Employer’s Plan or upon a partial termination of the Plan, each affected Participant shall have a 100% vested and non-forfeitable right to his or her Accrued Benefit to the extent then funded.

In the event of termination or partial termination of the Employer’s Plan, the assets of the Plan then available to provide benefits shall be applied in accordance with ERISA Section 4044

Part III – 41

and Rules and Regulations promulgated thereunder, in accordance with the following order of priority; provided, however, that no benefits being provided to former Participants or their Beneficiaries by the Insurer shall be canceled.

(a) First, to provide that portion of each affected Participant’s Accrued Benefit which is derived from any mandatory Employee contributions.

(b) Second, to provide, in the case of retirement income benefits of each affected Participant or Beneficiary:

(i) Annuity benefits which were in pay status for at least the three-year period ending on the date of Plan termination; and

(ii) Annuity benefits which would have been in pay status during the three-year period ending on the date of Plan termination, had a Participant eligible to retire at the beginning of such three-year period retired on the date of Plan termination.

The level of benefits allocated to this priority class shall be determined on the basis of the Plan’s provisions which were in effect at any time during the five-year period ending on the date of Plan termination under which the annuity benefits would be the least. Additionally, the level of such benefits is limited to the lowest level which was, or could have been, in pay status during the three- year period ending on the date of Plan termination (but, in the case of a benefit which would have been in pay status, the amount of the benefit, but not the entitlement to the benefit, shall be determined using the age, service and other relevant factors for computing the benefit under the Plan with respect to the Participant as of the date of Plan termination).

(c) Third, to provide all other benefits guaranteed to affected Participants under Title IV of ERISA and Rules and Regulations promulgated thereunder (determined as if the insurance limits provided under the Act for benefits payable to one person with respect to more than one Participant or from more than one terminated Plan and the insurance limits on benefits payable to a substantial owner all were not applicable).

(d) Fourth, to provide all other non-forfeitable benefits accrued by affected Participants under the Plan.

(e) Fifth, to provide all other benefits accrued by affected Participants under the Plan.

(f) Any residual assets of the Plan remaining after distribution in accordance with this Article shall be distributed to the Employer provided that all liabilities of the Plan to Participants and their Beneficiaries have been satisfied.

Notwithstanding anything in this Section to the contrary, in the event of a partial termination of the Plan, this Section shall be applicable only to those Participants and their Beneficiaries affected by the partial termination.

Part III – 42

10.03 Distribution of Benefits Upon Plan Termination. Subject to Article IV (Pre-Termination Benefit Restrictions) and upon approval of the Pension Benefit Guaranty Corporation (“PBGC”), when required, upon a termination or partial termination of the Plan, benefits shall be distributed to affected Participants in any manner which the Plan Administrator deems to be in the best interests of the Participants which is acceptable under applicable PBGC and Internal Revenue Service laws, Rules and Regulations. Any such distribution may include a lump sum payment, deferment of the distribution or the distribution of an annuity contract without life insurance, immediate or deferred, which by its terms may not be sold, assigned discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any party other than the issuer thereof. Spousal consent shall be required for distributions made on account of Plan termination. In no event shall the payment of benefits be deferred beyond the Participant’s Normal Retirement Date.

10.04 Return of Employer Contributions Under Special Circumstances.

Notwithstanding any provisions of this Plan to the contrary:

(a) Any monies or other Plan assets attributable to any contributions made by the Employer to the Plan because of a mistake of fact must be returned to the Employer within one year after the date of contribution.

(b) Any monies or other Plan assets attributable to any contribution made by the Employer which is conditional on the deductibility of such contribution must be refunded to the Employer, to the extent the deduction is disallowed, within one year after the date of such disallowance.

ARTICLE XI

MISCELLANEOUS

11.01 Protection of Employee Interest. No Participant or Beneficiary shall have the right to assign, pledge, alienate or convey any right, benefit or payment to which he or she shall be entitled in accordance with the provisions of the Plan, and any such attempted assignment, pledge, alienation or conveyance shall be null and void and of no effect. To the extent permitted by law, none of the benefits, payments, proceeds or rights herein created and provided for shall in any way be subject to any debts, contracts or engagements of any Participant or Beneficiary, as herein before described, nor to any suits, actions or other judicial process to levy upon or attach the same for the payment thereof; provided, however, that this provision does not preclude the Plan Administrator from complying with the terms of a Qualified Domestic Relations Order.

11.02 USERRA Compliance. Notwithstanding any provisions of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with the rules and requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”) and Code Section 414(u).

(a) Differential Wage Payments. For Plan Years beginning after December 31, 2008, (i) an individual receiving a differential wage payment (as defined by Code Section 3401(h)(2)), shall be treated as an employee of the employer making the payment, (ii) the differential wage payment shall be treated as compensation, the

Part III – 43

the differential wage payment shall be treated as compensation, for purposes of Code Section 415(c)(3) and Treasury Regulation Section 1.415(c)-2 (e.g., for purposes of Code Section 415, top-heavy provisions of Code Section 416, determination of highly compensated employees under Code Section 414(q), and applying the 5% gateway requirement under the Code Section 401(a)(4) regulations), and (iii) the Plan shall not be treated as failing to meet the requirements of any provision described in Code Section 414(u)(1)(C) by reason of any contribution or benefit which is based on the differential wage payment. Subparagraph (iii) in the foregoing sentence shall apply only if all employees of the Employer performing service in the uniformed services described in Code Section 3401(h)(2)(A) are entitled to receive differential wage payments (as defined in Code Section 3401(h)(2)) on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the employer, to make contributions based on the payments on reasonably equivalent terms (taking into account Code Sections 410(b)(3), (4), and (5)).

(b) Death Benefits Under USERRA. Effective for deaths occurring on or after January 1, 2007, in the case of a Participant who dies while performing qualified military service as defined in Code Section 414(u), the survivors of the Participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the Plan had the Participant resumed and then terminated employment on account of death. Moreover, the Plan will credit the Participant’s qualified military service as service for vesting purposes, as though the Participant had resumed employment under USSERRA immediately prior to the Participant’s death. Moreover, the Plan will credit the Participant’s qualified military service as service for vesting purposes, as though the Participant had resumed employment under USSERRA immediately prior to the Participant’s death.

11.03 Meaning of Words Used in Plan. Wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine or neuter gender in all cases where they would so apply. Wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply.

Titles used herein are for general information only and this Plan is not to be construed by reference thereto.

11.04 Plan Does Not Create or Modify Employment Rights. The Plan shall not be construed as creating or modifying any contract of employment between the Employer and any Participant. All Employees shall be subject to discharge to the same extent that they would have been if the Plan had never been adopted.

11.05 Massachusetts Law Controls. This Plan shall be governed by the laws of the Commonwealth of Massachusetts to the extent that they are not pre-empted by the laws of the United States of America.

Part III – 44

11.06 Payments to come from Plan Assets. All benefits and amounts payable under the Plan shall be paid or provided for solely from the assets of the Plan, and neither the Employer nor the Plan Administrator assumes any liability or responsibility therefor.

11.07 Receipt and Release for Payments. Any payment to any Participant, his or her legal representative, Beneficiary, or to any guardian, custodian or committee appointed for such Participant or Beneficiary in accordance with the provisions of this Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Employer and the Insurer, any of whom may require such Participant, legal representative, Beneficiary, guardian, custodian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Employer or Insurer.

11.08 Mandatory Withholding on Eligible Rollover Distributions. Except as provided in Code Section 3405 and in rules and regulations promulgated thereunder, the Employer is required to withhold 20% on any portion of an eligible rollover distribution not paid directly to an eligible retirement plan.

11.09 Payment under Qualified Domestic Relations Orders. Notwithstanding any provisions of the Plan to the contrary, if there is entered any Qualified Domestic Relations Order that affects the payment of benefits hereunder, such benefits shall be paid in accordance with the applicable requirements of such Order, provided that such Order (i) does not require the Plan to provide any type or form of benefits, or any option that is not otherwise provided hereunder, (ii) does not require the Plan to provide increased benefits, and (iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a Qualified Domestic Relations Order.

The Plan Administrator shall establish reasonable procedures to determine whether an order or other decree is a Qualified Domestic Relations Order and to administer distributions under such orders.

To the extent required or permitted by any such Order, at any time on or after the date the Plan Administrator has determined that the Order is a Qualified Domestic Relations Order, the alternate payee shall have the right to request the Plan Administrator to commence distribution of benefits under the Plan (including any single sum cash-out that would be available if the Participant were the payee and entitled to a benefit payment on account of termination from service) regardless of whether the Participant is otherwise entitled to a distribution at such time under the Plan.

11.10 Electronic Communications. Effective for Plan Years beginning on or after January 1, 2007, any electronic communications made by the Plan to Participants in regards to eligible rollover distribution tax notices, Participant consents to distributions, and tax withholding notices shall comply with the requirements contained in Treasury Regulation Section 1.401(a)-21, in addition to all otherwise applicable requirements relating to the specific communication.

[Remainder of the page intentionally left blank]

Part III – 45

EXECUTED this 28th day of January, 2011

The Hanover Insurance Company
By:	/s/ Lorna Stearns
	Name: Lorna Stearns
	Title: Vice President

Part III – 46

EX-21

Exhibit 21

Direct and Indirect Subsidiaries of the Registrant

I. The Hanover Insurance Group, Inc. (Delaware)

A. Opus Investment Management, Inc. (Massachusetts)

a. The Hanover Insurance Company (New Hampshire)

1. Citizens Insurance Company of America (Michigan)

(i) Citizens Management Inc. (Delaware)

2. Allmerica Financial Benefit Insurance Company (Michigan)

3. Allmerica Plus Insurance Agency, Inc. (Massachusetts)

4. The Hanover American Insurance Company (New Hampshire)

5. Hanover Texas Insurance Management Company, Inc. (Texas)

6. Citizens Insurance Company of Ohio (Ohio)

7. Citizens Insurance Company of the Midwest (Indiana)

8. The Hanover New Jersey Insurance Company (New Hampshire)

9. Massachusetts Bay Insurance Company (New Hampshire)

10. Allmerica Financial Alliance Insurance Company (New Hampshire)

11. Professionals Direct, Inc. (Michigan)

(i) Professionals Direct Insurance Company (Michigan)

(ii) Professionals Direct Insurance Services, Inc. (Michigan)

(iii) Professionals Direct Finance, Inc. (Michigan)

(iv) Professionals Direct Statutory Trust II (Delaware)

12. Verlan Fire Insurance Company (New Hampshire)

13. The Hanover National Insurance Company (New Hampshire)

14. AIX Holdings, Inc. (Delaware)

(i) Nova American Group, Inc. (New York)

1. Nova Insurance Group, Inc. (Delaware)

a. Professional Underwriters Agency, Inc. (Florida)

2. Nova Casualty Company (New York)

a. AIX Specialty Insurance Company (Delaware)

3. Nova Alternative Risk, LLC (New York)

4. AIX Group Trust (Delaware)

(ii) AIX, Inc. (Delaware)

1. AIX Insurance Services of California, Inc. (California)

15. 440 Lincoln Street Holding Company, LLC (Massachusetts)

16. Campmed Casualty & Indemnity Company, Inc. of Maryland (Maryland)

17. Health Facilities Insurance Corporation Ltd. (Bermuda)

18. CitySquare II Investment Company LLC (Massachusetts)

(i) One Mercantile Place LLC (Massachusetts)

b. Citizens Insurance Company of Illinois (Illinois)

c. CitySquare II Development Co. LLC. (Massachusetts)

B. VeraVest Investments, Inc. (Massachusetts)

C. Verlan Holdings, Inc. (Maryland)

a. Hanover Specialty Insurance Brokers, Inc. (Virginia)

D. Benchmark Professional Insurance Services, Inc. (Illinois)

E. Campania Holding Company, Inc. (Virginia)

a. Campania Management Company, Inc. (Virginia)

b. Campania Shared Services Company, Inc. (Virginia)

c. Campania Insurance Agency, Inc. (Virginia)

F. Educators Insurance Agency, Inc. (Massachusetts)

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-164446) and Form S-8 (No. 333-159387, No. 333-576, No. 333-24929, No. 333-31397, No. 333-134394 and No. 333-134395) of The Hanover Insurance Group, Inc. of our report dated February 23, 2011 relating to the financial statements, financial statement schedules and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K.

PricewaterhouseCoopers LLP

Boston, Massachusetts

February 23, 2011

EX-24

EXHIBIT 24

POWER OF ATTORNEY

We, the undersigned, hereby severally constitute and appoint Frederick H. Eppinger, Jr., J. Kendall Huber, and Steven J. Bensinger, each of them singly, our true and lawful attorneys, with full power in each of them, to sign for and in each of our names and in any and all capacities, the Form 10-K of The Hanover Insurance Group, Inc. (the “Company”) and any other filings made on behalf of said Company pursuant to the requirements of the Securities Exchange Act of 1934, and to file the same with all exhibits and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and each of them, acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done, hereby ratifying and confirming all that said attorneys or any of them may lawfully do or cause to be done by virtue hereof. Witness our hands and common seal on the date set forth below.

Signature	Title	Date
/s/ Frederick H. Eppinger, Jr. Frederick H. Eppinger, Jr.	President, Chief Executive Officer and Director	February 23, 2011
/s/ Steven J. Bensinger		February 23, 2011
Steven J. Bensinger	Executive Vice President, Chief Financial Officer, and Principal Accounting Officer
/s/ Michael P. Angelini Michael P. Angelini	Chairman of the Board	February 23, 2011
/s/ P. Kevin Condron P. Kevin Condron	Director	February 23, 2011
/s/ Neal F. Finnegan Neal F. Finnegan	Director	February 23, 2011
/s/ David J. Gallitano David J. Gallitano	Director	February 23, 2011
/s/ Wendell J. Knox Wendell J. Knox	Director	February 23, 2011
/s/ Robert J. Murray Robert J. Murray	Director	February 23, 2011
/s/ Joseph R. Ramrath Joseph R. Ramrath	Director	February 23, 2011
/s/ Harriett T. Taggart Harriett T. Taggart	Director	February 23, 2011

EX-31.1

Exhibit 31.1

CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Frederick H. Eppinger, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of The Hanover Insurance Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 23, 2011

/s/ Frederick H. Eppinger, Jr.

Frederick H. Eppinger, Jr.

President, Chief Executive Officer

and Director

EX-31.2

Exhibit 31.2

CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Steven J. Bensinger, certify that:

1. I have reviewed this annual report on Form 10-K of The Hanover Insurance Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 23, 2011

/s/ Steven J. Bensinger

Steven J. Bensinger

Executive Vice President,

Chief Financial Officer,

and Principal Accounting Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as President, Chief Executive Officer and Director of The Hanover Insurance Group, Inc. (the “Company”), does hereby certify that to the undersigned’s knowledge:

1) the Company’s Annual Report on Form 10-K for the period ended December 31, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Company’s Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Frederick H. Eppinger, Jr.

Frederick H. Eppinger, Jr.

President, Chief Executive Officer

and Director

Dated: February 23, 2011

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Executive Vice President, Chief Financial Officer, and Principal Accounting Officer of The Hanover Insurance Group, Inc. (the “Company”), does hereby certify that to the undersigned’s knowledge:

1) the Company’s Annual Report on Form 10-K for the period ended December 31, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Company’s Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Steven J. Bensinger

Steven J. Bensinger

Executive Vice President,

Chief Financial Officer,

and Principal Accounting Officer

Dated: February 23, 2011

XML

Schedule III - Supplementary Insurance Information

12 Months Ended

Dec. 31, 2010

Schedule III - Supplementary Insurance Information

Schedule III - Supplementary Insurance Information

SCHEDULE III

THE HANOVER INSURANCE GROUP, INC.

SUPPLEMENTARY INSURANCE INFORMATION

DECEMBER 31, 2010

(In millions)

Segments	Deferred policy acquisition costs		Future policy benefits, losses, claims and loss expenses		Unearned premiums		Other policy claims and benefits payable		Premium revenue		Net investment income		Benefits, claims, losses and settlement expenses		Amortization of deferred policy acquisition costs		Other operating expenses			Premiums written
Property and Casualty	$	345.3	$	3,275.8	$	1,520.3	$	1.9	$	2,841.0	$	247.2	$	1,856.3	$	669.0	$	374.1		$	3,048.0
Interest on Debt		—		—		—		—		—		—		—		—		44.3			—
Eliminations		—		—		—		—		—		—		—		—		(4.6	)		—
Total	$	345.3	$	3,275.8	$	1,520.3	$	1.9	$	2,841.0	$	247.2	$	1,856.3	$	669.0	$	413.8		$	3,048.0

DECEMBER 31, 2009

(In millions)

Segments (1)	Deferred policy acquisition costs		Future policy benefits, losses, claims and loss expenses		Unearned premiums		Other policy claims and benefits payable		Premium revenue		Net investment income		Benefits, claims, losses and settlement expenses		Amortization of deferred policy acquisition costs		Other operating expenses			Premiums written
Property and Casualty	$	286.3	$	3,152.1	$	1,300.5	$	1.8	$	2,546.4	$	251.7	$	1,639.2	$	581.3	$	346.1		$	2,608.7
Interest on Debt		—		—		—		—		—		0.4		—		—		35.5			—
Eliminations		—		—		—		—		—		—		—		—		(4.4	)		—
Total	$	286.3	$	3,152.1	$	1,300.5	$	1.8	$	2,546.4	$	252.1	$	1,639.2	$	581.3	$	377.2		$	2,608.7

DECEMBER 31, 2008

(In millions)

Segments (1)	Deferred policy acquisition costs		Future policy benefits, losses, claims and loss expenses		Unearned premiums		Other policy claims and benefits payable		Premium revenue		Net investment income		Benefits, claims, losses and settlement expenses		Amortization of deferred policy acquisition costs		Other operating expenses			Premiums written
Property and Casualty	$	264.8	$	3,201.3	$	1,246.3	$	1.8	$	2,484.9	$	258.0	$	1,626.2	$	556.2	$	299.2		$	2,518.0
Interest on Debt		—		—		—		—		—		0.7		—		—		40.6			—
Eliminations		—		—		—		—		—		—		—		—		(6.2	)		—
Total	$	264.8	$	3,201.3	$	1,246.3	$	1.8	$	2,484.9	$	258.7	$	1,626.2	$	556.2	$	333.6		$	2,518.0

⁽¹⁾ Results of our former Life Companies segment have been reclassified to discontinued operations due to the sale of FAFLIC on January 2, 2009. Additionally, the corresponding assets and liabilities of this business are presented as discontinued operations in our Consolidated Balance Sheets.

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Deferred Policy Acquisition Costs

12 Months Ended

Dec. 31, 2010

Deferred Policy Acquisition Costs

Deferred Policy Acquisition Costs

17. DEFERRED POLICY ACQUISITION COSTS

Changes to the deferred policy acquisition asset are as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Balance at beginning of year	$	286.3		$	264.8		$	246.8
Acquisition expenses deferred		728.0			602.8			574.2
Amortized to expense		(669.0	)		(581.3	)		(556.2	)
Balance at end of year	$	345.3		$	286.3		$	264.8

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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2010

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation and Principles of Consolidation

The consolidated financial statements of The Hanover Insurance Group, Inc. ("THG" or the "Company"), include the accounts of The Hanover Insurance Company ("Hanover Insurance") and Citizens Insurance Company of America ("Citizens"), THG's principal property and casualty companies; and certain other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments as discussed in Note 14 – "Segment Information". All significant intercompany accounts and transactions have been eliminated. The Company's results of operations also included the results of First Allmerica Financial Life Insurance Company ("FAFLIC") through December 31, 2008. On January 2, 2009, the Company sold FAFLIC to Commonwealth Annuity and Life Insurance Company ("Commonwealth Annuity") a subsidiary of the Goldman Sachs Group, Inc. ("Goldman Sachs"). Accordingly, the FAFLIC business was classified as a discontinued operation in accordance with Accounting Standards Codification ("ASC 205"), Presentation of Financial Statements - Discontinued Operations ("ASC 205"). FAFLIC's accounts have been classified as assets and liabilities of discontinued operations in the consolidated Balance Sheets (See Note 2 – Discontinued Operations). The results of operations for FAFLIC are reported as discontinued operations and prior periods in the Consolidated Statements of Income have been reclassified to conform to this presentation. The following discussion reflects the significant accounting policies for the Company, including the discontinued operations as applicable, except for those policies specifically identified in item Q below which relate solely to the discontinued operations of the Company.

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

B. Valuation of Investments

In accordance with the provisions of ASC 320, Investments – Debt and Equity Securities ("ASC 320"), the Company is required to classify its investments into one of three categories: held-to-maturity, available-for-sale or trading. The Company determines the appropriate classification of fixed maturity and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Fixed maturities and equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported in accumulated other comprehensive income, a separate component of shareholders' equity. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in net investment income.

Fixed maturities that are delinquent are placed on non-accrual status, and thereafter interest income is recognized only when cash payments are received.

Realized investment gains and losses are reported as a component of revenues based upon specific identification of the investment assets sold. When an other-than-temporary decline in value of a specific investment is deemed to have occurred, and a charge to earnings is required, the Company recognizes a realized investment loss. The Company reviews all investments in an unrealized loss position to identify other-than-temporary declines in value. On April 1, 2009, the Company adopted accounting guidance which modified the assessment of other-than-temporary impairments ("OTTI") on debt securities, as well as the method of recording and reporting other-than-temporary impairments. When it is determined that a decline in value of an equity security is other-than-temporary, the Company reduces the cost basis of the security to fair value with a corresponding charge to earnings. When an other-than-temporary decline in value of a debt security is deemed to have occurred, the Company must assess whether it intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the impairment measurement date. If the Company does not intend to sell the debt security and it is not more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, the credit loss portion of an other-than-temporary impairment is recorded through earnings while the portion attributable to all other factors is recorded separately as a component of other comprehensive income. The amount of the other-than-temporary impairment that relates to credit is estimated by comparing the amortized cost of the fixed maturity security with the net present value of the fixed maturity security's projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment. The non-credit portion of the impairment is equal to the difference between the fair value and the net present value of the fixed maturity security at the impairment measurement date. Once an OTTI has been recognized, the new amortized cost basis of the security is equal to the previous amortized cost less the amount of OTTI recognized in earnings. Prior to the adoption of this guidance on April 1, 2009, an other-than-temporary impairment recognized in earnings for fixed maturity securities was equal to the difference between amortized cost and fair value at the time of impairment. For equity method investments, an impairment is recognized when evidence demonstrates that an other-than-temporary loss in value has occurred, including the absence of the ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.

C. Financial Instruments

In the normal course of business, the Company may enter into transactions involving various types of financial instruments, including debt, investments such as fixed maturities, mortgage loans and equity securities, investment and loan commitments, swap contracts, option contracts, forward contracts and futures contracts. These instruments involve credit risk and could also be subject to risk of loss due to interest rate and foreign currency fluctuation. The Company evaluates and monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses.

D. Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, amounts due from banks and highly liquid debt instruments purchased with an original maturity of three months or less.

E. Deferred Policy Acquisition Costs

Acquisition costs consist of commissions, underwriting costs and other costs, which vary with, and are primarily related to, the production of revenues. Acquisition costs are deferred and amortized over the terms of the insurance policies.

Deferred acquisition costs ("DAC") for each line of business are reviewed to determine if it is recoverable from future income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. Although recoverability of DAC is not assured, the Company believes it is more likely than not that all of these costs will be recovered. The amount of DAC considered recoverable, however, could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of a disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised.

F. Reinsurance Recoverables

The Company shares certain insurance risks it has underwritten, through the use of reinsurance contracts, with various insurance entities. Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944, Financial Services – Insurance ("ASC 944"), have been met. As a result, when the Company experiences loss or claims events that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business or an aggregate amount associated with a particular accident year. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, or an incurred but not reported loss. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve. The reinsurance recoverables are based on what the Company believes are reasonable estimates and the balance is disclosed separately in the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled.

G. Property, Equipment and Capitalized Software

Property, equipment, leasehold improvements and capitalized software are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line or accelerated method over the estimated useful lives of the related assets, which generally range from 3 to 30 years. The estimated useful life for capitalized software is generally 3 to 5 years. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the term of the leases or the estimated useful life of the improvements.

The Company tests for the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of long-lived assets exceed the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. When an impairment loss occurs, the Company reduces the carrying value of the asset to fair value. Fair values are estimated using discounted cash flow analysis.

H. Goodwill

In accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, the Company carries its goodwill at amortized cost, net of impairments. Increases to goodwill are generated through acquisition and represent the excess of the cost of an acquisition over the fair value of the assets and liabilities acquired, including any intangible assets acquired. During the year ended December 31, 2010, the Company recorded $7.8 million in goodwill related to acquisitions of several businesses. The Company tests for the recoverability of goodwill annually or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of reporting units with goodwill exceed the fair value. The amount of the impairment loss that is recognized is determined based upon the excess of the carrying value of goodwill compared to the implied fair value of the goodwill, as determined with respect to all assets and liabilities of the reporting unit. The Company has performed its annual review of goodwill for impairment in the fourth quarters of 2010, 2009 and 2008 with no impairments recognized.

I. Liabilities for Losses, LAE, and Unearned Premiums

Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE") are estimates of payments to be made on property and casualty contracts for reported losses and LAE and estimates of losses and LAE incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. These estimates are continually reviewed and adjusted as necessary; adjustments for our property and casualty business are reflected in current operations. Estimated amounts of salvage and subrogation on unpaid property and casualty losses are deducted from the liability for unpaid claims.

Premiums for property and casualty insurance are reported as earned on a pro-rata basis over the contract period. The unexpired portion of these premiums is recorded as unearned premiums.

All losses, LAE and unearned premium liabilities are based on the various estimates discussed above. Although the adequacy of these amounts cannot be assured, the Company believes that it is more likely than not that these liabilities and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised.

J. Debt

The Company's debt includes senior debentures, junior subordinated debentures, trust preferred capital securities, and advances under the Company's collateralized borrowing program with the Federal Home Loan Bank of Boston ("FHLBB"). The senior debentures are carried at principal amount borrowed, net of unamortized discounts. The junior subordinated debentures and borrowings under the FHLBB program are carried at principal amount borrowed. Debt also includes liabilities connected to trust preferred capital securities, related to outstanding securities issued by AIX Holdings, Inc. ("AIX") and Professionals Direct, Inc. ("PDI"). Cash distributions on such trust preferred stock are accounted for as interest expense. (See Note 7 – Debt).

K. Premium, Premium Receivable, Fee Revenue and Related Expenses

Property and casualty insurance premiums are recognized as revenue over the related contract periods. Premium receivables reflect the unpaid balance of premium written as of the balance sheet date. Premium receivables are generally short-term in nature. The Company reviews its receivables for collectibility at the balance sheet date. The allowance for uncollectible accounts was not material as of December 31, 2010 and 2009. Losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through estimated and unpaid losses and amortization of deferred policy acquisition costs.

L. Federal Income Taxes

THG and its domestic subsidiaries (including certain non-insurance operations) file a consolidated United States federal income tax return. In 2009 and 2008 entities included within the consolidated group were segregated into either a life insurance or a non-life insurance company subgroup. The consolidation of these subgroups is subject to certain statutory restrictions on the percentage of eligible non-life tax losses that can be applied to offset life company taxable income. In 2010, as a result of the sale of FAFLIC, all entities are designated non-life insurance companies.

Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by ASC 740, Income Taxes ("ASC 740"). These differences result primarily from insurance reserves, deferred policy acquisition costs, tax credit carryforwards, capital loss carryforwards, employee benefit plans, and internally developed software. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized. Changes in valuation allowances are generally reflected in federal income tax expense or as an adjustment to other comprehensive income (loss) depending on the nature of the item for which the valuation allowance is being recorded.

M. Stock-Based Compensation

The Company recognizes the fair value of compensation costs for all share-based payments, including employee stock options, in the financial statements. Unvested awards are generally expensed on a straight line basis, by tranche, over the vesting period of the award. The Company's stock-based compensation plans are discussed further in Note 11 – "Stock-Based Compensation Plans".

N. Earnings Per Share

Earnings per share ("EPS") for the years ended December 31, 2010, 2009 and 2008 is based on a weighted average of the number of shares outstanding during each year. Basic and diluted EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. The weighted average shares outstanding used to calculate basic EPS differ from the weighted average shares outstanding used in the calculation of diluted EPS due to the effect of dilutive employee stock options, nonvested stock grants and other contingently issuable shares. If the effect of such items are antidilutive, the weighted average shares outstanding used to calculate diluted EPS equal those used to calculate basic EPS.

Options to purchase shares of common stock whose exercise prices are greater than the average market price of the common shares are not included in the computation of diluted earnings per share because the effect would be antidilutive.

O. New Accounting Pronouncements

Recently Implemented Standards

ASC 105, Generally Accepted Accounting Principles ("ASC 105") reorganized by topic existing accounting and reporting guidance issued by the Financial Accounting Standards Board ("FASB") into a single source of authoritative generally accepted accounting principles ("GAAP") to be applied by nongovernmental entities. All guidance contained in the ASC carries an equal level of authority. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Accordingly, all other accounting literature will be deemed "non-authoritative". ASC 105 was effective on a prospective basis for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has implemented the guidance included in ASC 105 as of July 1, 2009. The implementation of this guidance changed the Company's references to GAAP authoritative guidance but did not impact the Company's financial position or results of operations.

As of April 1, 2009, the Company adopted guidance included in ASC 320, which modifies the assessment of OTTI for fixed maturity securities, as well as the method of recording and reporting OTTI. Under the new guidance, if a company intends to sell or more likely than not will be required to sell a fixed maturity security before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings. If a company does not intend to sell the fixed maturity security, or more likely than not will not be required to sell it, the company is required to separate the other-than-temporary impairment into the portion which represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings and the amount related to non-credit factors is recognized in accumulated other comprehensive income, net of applicable taxes. A cumulative effect adjustment was recognized by the Company upon adoption of this guidance to reclassify the non-credit component of previously recognized impairments from retained earnings to accumulated other comprehensive income. The Company increased the amortized cost basis of these fixed maturity securities and recorded a cumulative effect adjustment of $33.3 million as an increase to retained earnings and reduction to accumulated other comprehensive income. (See further disclosure in Note 5 – Investment Income and Gains and Losses).

ASC 805, Business Combinations ("ASC 805") contains guidance which provided additional clarification of application issues regarding initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. ASC 805 was effective for business combinations initiated on or after the first annual reporting period beginning after December 15, 2008. The Company implemented this guidance effective January 1, 2009. Implementing this guidance did not have an effect on the Company's financial position or results of operations upon adoption; however, the Company applied this guidance in accounting for the Company's acquisitions during 2010.

In December 2009, the FASB issued ASC Update No. 2009-17, Consolidation (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities ("ASC Update No. 2009-17") which codified Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R). This guidance amends FASB Interpretation No. 46R, Consolidation of Variable Interest Entities an interpretation of ARB No. 51 to require an analysis to determine whether a company has a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has a) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The statement requires an ongoing assessment of whether a company is the primary beneficiary of a variable interest entity when the holders of the entity, as a group, lose power, through voting or similar rights, to direct the actions that most significantly affect the entity's economic performance. This statement also enhances disclosures about a company's involvement in variable interest entities. ASC Update No. 2009-17 was effective as of the beginning of the first annual reporting period that began after November 15, 2009. The Company implemented this guidance as of January 1, 2010. The effect of implementing this guidance was not material to the Company's financial position or results of operations.

ASC 820, Fair Value Measurements and Disclosures ("ASC 820") includes guidance that was issued by the FASB which is to be considered when determining whether or not a transaction is orderly and clarifies the valuation of securities in markets that are not active. This guidance includes information related to a company's use of judgment, in addition to market information, in certain circumstances to value assets which have inactive markets. This fair value guidance in ASC 820 was effective for interim and annual reporting periods ending after June 15, 2009.

In August 2009, the FASB issued ASC Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820): Measuring Liabilities at Fair Value. This update amends ASC 820, Fair Value Measurements and Disclosures ("ASC Update No. 2009-05") and provides further guidance on measuring the fair value of a liability. The guidance establishes the types of valuation techniques to be used to value a liability when a quoted market price in an active market for the identical liability is not available, such as the use of an identical or similar liability when traded as an asset. The guidance also further clarifies that a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are both Level 1 fair value measurements. If adjustments are required to be applied to the quoted price, it results in a level 2 or 3 fair value measurement. The guidance provided in the update was effective for the first reporting period (including interim periods) beginning after issuance.

In September 2009, the FASB issued ASC Update No. 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent) ("ASC Update No. 2009-12"). This update sets forth guidance on using the net asset value per share provided by an investee to estimate the fair value of an alternative investment. Specifically, the update permits a reporting entity to measure the fair value of this type of investment on the basis of the net asset value per share of the investment (or its equivalent) if all or substantially all of the underlying investments used in the calculation of the net asset value is consistent with ASC 820. The update also requires additional disclosures by each major category of investment, including, but not limited to, fair value of underlying investments in the major category, significant investment strategies, redemption restrictions, and unfunded commitments related to investments in the major category. The amendments in this update were effective for interim and annual periods ending after December 15, 2009.

In January 2010, the FASB issued ASC Update No. 2010-06 (Topic 820) – Improving Disclosures about Fair Value Measurements. This update amends ASC 820 and requires new and clarified disclosures for fair value measurements. The guidance requires that transfers in and out of Levels 1 and 2 be disclosed separately, including a description of the reasons for such transfers. Additionally, the reconciliation of fair value measurements of Level 3 assets should separately disclose information about purchases, sales, issuance and settlements in a gross, rather than net disclosure presentation. The guidance further clarifies that fair value disclosures should be separately presented for each class of assets and liabilities and disclosures should be provided for valuation techniques and inputs for both recurring and non-recurring fair value measurements related to Level 2 and Level 3 categories. The disclosure guidance provided in the update was effective for reporting periods beginning after December 15, 2009. The Company implemented this guidance effective January 1, 2010. Implementing this guidance did not have an effect on the Company's financial position or results of operations.

The Company applied the provisions of ASC 820 to its financial assets and liabilities upon adoption at January 1, 2008 and adopted the remaining provisions relating to certain nonfinancial assets and liabilities on January 1, 2009. The difference between the carrying amounts and fair values of those financial instruments held upon initial adoption, on January 1, 2008, was recognized as a cumulative effect adjustment to the opening balance of retained earnings and was not material to the Company's financial position or results of operations. The Company implemented the guidance related to orderly transactions under current market conditions as of April 1, 2009, which also was not material to the Company's financial position or results of operations. Furthermore, the implementation as of October 1, 2009 of ASC Update No. 2009-05 and ASC Update No. 2009-12 did not have a material effect on the Company's financial position or results of operations. (See further disclosure in Note 6 – Fair Value).

ASC 855, Subsequent Events ("ASC 855"), and as modified by ASC Update 2010-09, Amendments to Certain Recognition and Disclosure Requirements, includes guidance that was issued by the FASB in May 2009, and is consistent with current auditing standards in defining a subsequent event. Additionally, the guidance provides for disclosure regarding the existence of a company's evaluation of its subsequent events. ASC 855 defines two types of subsequent events, "recognized" and "non-recognized". Recognized subsequent events provide additional evidence about conditions that existed at the date of the balance sheet and are required to be reflected in the financial statements. Non-recognized subsequent events provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date and, therefore, are not required to be reflected in the financial statements. However, certain non-recognized subsequent events may require disclosure to prevent the financial statements from being misleading. This guidance was effective prospectively for interim or annual financial periods ending after June 15, 2009. The Company implemented the guidance included in ASC 855 as of April 1, 2009 and the updated guidance as of December 31, 2009. The effect of implementing the guidance was not material to the Company's financial position or results of operations.

In December 2009, the FASB issued ASC Update No. 2009-16 Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets ("ASC Update No. 2009-16") which codified Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140. This guidance revises FASB Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Extinguishment of Liabilities a replacement of FASB Statement 125 and requires additional disclosures about transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial assets. It also eliminates the concept of a "qualifying special-purpose entity", changes the requirements for derecognizing financial assets, and enhances disclosure requirements. ASC Update 2009-16 was effective prospectively, for annual periods beginning after November 15, 2009, and interim and annual periods thereafter. The Company has implemented this guidance as of January 1, 2010. The effect of implementing this guidance was not material to the Company's financial position or results of operations.

Recently Issued Standards

In December 2010, the FASB issued ASC Update No. 2010-29 (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). This update provides clarity on the presentation of comparable proforma financial statements for business combinations. Revenues and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Additionally, this update requires the disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported proforma revenue and earnings. The disclosure guidance provided in this ASC update is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 and is not expected to have an impact on the Company's results of operations or financial position.

In December 2010, the FASB issued ASC Update No. 2010-28 (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force) ("ASC Update No. 2010-28"). This update modifies Step 1 of the goodwill impairment test for companies with zero or negative carrying amounts to require Step 2 of the goodwill impairment test to be performed if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This ASC update is effective for annual and interim periods beginning after December 15, 2010. The Company does not expect the adoption of ASC Update No. 2010-28 to have a material impact on its financial position or results of operations.

In October 2010, the FASB issued ASC Update No. 2010-26 (Topic 944) Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force). This update provides clarity in defining which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, commonly known as deferred acquisition costs. Additionally, this update specifies that only costs associated with the successful acquisition of a policy or contract may be deferred, whereas current industry practice often includes costs relating to unsuccessful contract acquisitions. This ASC update is effective for annual and interim periods, beginning after December 15, 2011. The Company is currently assessing the impact of this guidance to its financial position and results of operations.

In July 2010, the FASB issued ASC Update No. 2010-20 (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASC update is applicable for financing receivables recognized on a company's balance sheet that have a contractual right to receive payment either on demand or on fixed or determinable dates. This update enhances the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses, at disaggregated levels. The disclosure guidance provided in the update relating to those required as of the end of the reporting period was effective for interim and annual reporting periods ending on or after December 15, 2010. The effect of implementing the guidance was not significant to the Company's financial statement disclosures. The disclosure guidance related to activity that occurs during the reporting period is effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company expects that the implementation of the disclosure guidance related to activity will not be significant to its financial statement disclosures.

P. Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Q. Discontinued Operations Significant Accounting Policy Discussion

The following accounting policies relate only to the Company's discontinued operations, which are in run-off. Please refer to the above captions for policies related to assets and liabilities that were held by both the Company's ongoing business and the discontinued business.

Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944 have been met. As a result, when the Company experiences loss or claims events, or unfavorable mortality or morbidity experience that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, an incurred but not reported loss or a future policy benefit. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses and future policy benefits, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve and future policy benefit estimates. The reinsurance recoverables are based on what the Company believes are reasonable estimates. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled.

Liabilities for outstanding claims, losses and LAE are estimates of payments to be made on health insurance contracts for reported losses and LAE and estimates of losses and LAE incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. These estimates are continually reviewed and adjusted as necessary; adjustments are reflected in discontinued operations. Although the adequacy of these amounts cannot be assured, the Company believes that it is more likely than not that policy liabilities and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised.

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Quarterly Results of Operations (Unaudited)

12 Months Ended

Dec. 31, 2010

Quarterly Results of Operations (Unaudited)

Quarterly Results of Operations (Unaudited)

21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The quarterly results of operations for 2010 and 2009 are summarized below.

FOR THE THREE MONTHS ENDED
(In millions, except per share data)
2010	March 31		June 30		Sept. 30		Dec. 31
Total revenues	$	746.6	$	768.3	$	804.0	$	833.3
Income from continuing operations	$	42.2	$	2.2	$	51.4	$	57.4
Net income	$	41.8	$	2.3	$	52.3	$	58.4
Income from continuing operations per share:
Basic	$	0.89	$	0.05	$	1.14	$	1.27
Diluted	$	0.88	$	0.05	$	1.12	$	1.25
Net income per share:
Basic	$	0.88	$	0.05	$	1.16	$	1.29
Diluted	$	0.87	$	0.05	$	1.15	$	1.27
Dividends declared per share	$	0.25	$	0.25	$	0.25	$	0.25
FOR THE THREE MONTHS ENDED
(In millions, except per share data)
2009	March 31		June 30		Sept. 30		Dec. 31
Total revenues	$	698.9	$	696.4	$	708.5	$	730.3
Income from continuing operations (1)	$	20.2	$	63.1	$	48.6	$	55.9
Net income	$	25.8	$	64.4	$	49.7	$	57.3
Income from continuing operations per share: (1)
Basic	$	0.40	$	1.23	$	0.96	$	1.13
Diluted	$	0.39	$	1.23	$	0.95	$	1.11
Net income per share:
Basic	$	0.51	$	1.26	$	0.98	$	1.16
Diluted	$	0.50	$	1.25	$	0.97	$	1.14
Dividends declared per share	$	—	$	—	$	—	$	0.75

(1) On January 2, 2009, the Company sold substantially all of the remaining business of its former Life Companies Segment. The results of operations related to this business are reflected as Discontinued Operations for all time periods presented. See also Note 2 – "Discontinued Operations of FAFLIC Business" on pages 92 to 94.

Note:  Due to the use of weighted average shares outstanding when calculating earnings per common share, the sum of the quarterly per common share data may not equal the per common share data for the year.

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Statutory Financial Information

12 Months Ended

Dec. 31, 2010

Statutory Financial Information

Statutory Financial Information

20. STATUTORY FINANCIAL INFORMATION

The Company's insurance subsidiaries are required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis), as codified by the National Association of Insurance Commissioners. Statutory surplus differs from shareholders' equity reported in accordance with generally accepted accounting principles primarily because policy acquisition costs are expensed when incurred, the recognition of deferred tax assets is based on different recoverability assumptions and postretirement benefit costs are based on different assumptions and reflect a different method of adoption. Additionally, prior to the sale of FAFLIC on January 2, 2009, statutory surplus for FAFLIC differed as a result of life insurance reserves being based on different assumptions and statutory accounting principles requiring asset valuation and interest maintenance reserves for life insurance companies.

The following table provides statutory net income and surplus as of the periods indicated:

	2010		2009		2008
(In millions)
Statutory Net Income
Property and Casualty Companies - Combined	$	101.7	$	187.4	$	142.5
First Allmerica Financial Life Insurance Company		—		—		33.1
Statutory Surplus
Property and Casualty Companies - Combined	$	1,747.3	$	1,741.6	$	1,600.7
First Allmerica Financial Life Insurance Company		—		—		113.7

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Subsequent Events

12 Months Ended

Dec. 31, 2010

Subsequent Events

Subsequent Events

22. SUBSEQUENT EVENTS

There were no subsequent events requiring adjustment to the financial statements.

On February 15, 2011, the Company repurchased an additional $48.0 million of Junior Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million on the repurchase. See also Note 7 - "Debt".

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Schedule I - Summary of Investments - Other than Investments in Related Parties

12 Months Ended

Dec. 31, 2010

Schedule I - Summary of Investments - Other than Investments in Related Parties

Schedule I - Summary of Investments - Other than Investments in Related Parties

SCHEDULE I

THE HANOVER INSURANCE GROUP, INC.

SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 2010

(In millions)

Type of investment	Cost(1)			Value		Amount at which shown in the balance sheet(2)
Fixed maturities:
Bonds:
United States Government and government agencies and authorities	$	856.9		$	884.8	$	884.8
States, municipalities and political subdivisions		963.4			965.5		965.5
Public utilities		487.7			521.8		521.8
All other corporate bonds		2,406.6			2,543.1		2,543.1
Total fixed maturities		4,714.6			4,915.2		4,915.2
Equity securities:
Common stocks:
Public utilities		41.8			40.9		40.9
Banks, trust and insurance companies		15.9			15.6		15.6
Industrial, miscellaneous and all other		52.9			55.2		55.2
Nonredeemable preferred stocks		10.1			16.9		16.9
Total equity securities		120.7			128.6		128.6
Other long-term investments (3)		36.7			XXXXXX		39.4
Total investments		4,872.0			XXXXXX		5,083.2
Less: investments of discontinued operations (2)		(115.8	)		XXXXXX		(117.3	)
Total investments, excluding investments of discontinued operations	$	4,756.2			XXXXXX	$	4,965.9

(1) For equity securities, represents original cost, and for fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums and accretion of discounts.

(2) The separate classifications include investment assets classified as discontinued operations on the balance sheet. Investment assets classified as discontinued operations are adjusted in total and are reflected as such in this schedule. The discontinued operations portfolio is comprised solely of fixed maturities.

(3) The cost of other long-term investments differs from the carrying value due to market value changes in the Company's equity ownership of limited partnership investments.

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Consolidated Statements of Cash Flows (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Cash Flows From Operating Activities
Net income	$ 154.8	$ 197.2	$ 20.6
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposal of variable life insurance and annuity business	(1.3)	(4.9)	(11.3)
(Gain) loss on sale of FAFLIC	(0.5)	(7.1)	77.3
Gain on sale of AMGRO, Inc.			(11.1)
Loss (gain) from retirement of debt	2.0	(34.5)
Net realized investment (gains) losses	(29.3)	1.8	112.2
Net amortization and depreciation	16.7	11.8	15.1
Stock-based compensation expense	11.3	11.7	11.6
Amortization of defined benefit plan costs	9.8	19.8	(3.6)
Deferred federal income taxes	52.0	31.9	53.7
Change in deferred acquisition costs	(57.7)	(21.5)	(10.5)
Change in premiums and notes receivable, net of reinsurance premiums payable	(204.9)	(14.1)	75.0
Change in accrued investment income	(1.1)		3.1
Change in policy liabilities and accruals, net	288.2	9.9	(156.8)
Change in reinsurance receivable	(38.2)	(58.3)	116.7
Change in expenses and taxes payable	(85.0)	(44.6)	(103.2)
Other, net	(33.2)	(7.5)	20.7
Net cash provided by operating activities	83.6	91.6	209.5
Cash Flows From Investing Activities
Proceeds from disposals and maturities of available-for-sale fixed maturities	1,376.2	2,162.3	1,114.1
Proceeds from disposals of equity securities and other investments	123.6	70.9	11.9
Proceeds from mortgages sold, matured or collected	9.0	17.4	10.2
Proceeds from collections of installment finance and notes receivable			192.3
Cash transferred with sale of FAFLIC		(108.1)
Net proceeds from sale of AMGRO, Inc.			1.0
Proceeds from sale of variable life insurance and annuity business, net			13.3
Purchase of available-for-sale fixed maturities	(1,401.5)	(2,345.8)	(828.2)
Purchase of equity securities and other investments	(184.9)	(44.5)	(22.9)
Capital expenditures	(10.9)	(10.4)	(9.5)
Disbursements to fund installment finance and notes receivable			(178.6)
Other investing items	3.0		(0.3)
Net cash (used in) provided by investing activities	(98.8)	(174.2)	189.2
Cash Flows From Financing Activities
Withdrawals from contractholder deposit funds and trust instruments supported by funding obligations			(21.0)
Exercise of options	12.0	3.1	8.2
Proceeds from debt borrowings	207.5	125.0
Change in collateral related to securities lending program	(7.7)	53.1	(50.6)
Dividends paid to shareholders	(47.2)	(37.5)	(23.0)
Repurchases of debt	(38.5)	(125.9)
Repurchases of common stock	(134.7)	(148.1)	(58.5)
Other financing activities		0.1	0.3
Net cash used in financing activities	(8.6)	(130.2)	(144.6)
Net change in cash and cash equivalents	(23.8)	(212.8)	254.1
Net change in cash related to discontinued operations	(2.3)	131.6	(67.0)
Cash and cash equivalents, beginning of year	316.5	397.7	210.6
Cash and cash equivalents, end of year	290.4	316.5	397.7
Supplemental Cash Flow information
Interest payments	40.3	35.5	40.9
Income tax net payments	11.3	47.9	36.5
FAFLIC [Member]
Cash Flows From Investing Activities
Proceeds from the sale of FAFLIC		105.8
AIX Holdings, Inc. [Member]
Cash Flows From Investing Activities
Net cash used for business acquisitions	$ (13.3)	$ (21.8)	$ (114.1)

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Schedule II - Condensed Financial Information of Registrant Parent Company Only

12 Months Ended

Dec. 31, 2010

Schedule II - Condensed Financial Information of Registrant Parent Company Only

Schedule II - Condensed Financial Information of Registrant Parent Company Only

SCHEDULE II

THE HANOVER INSURANCE GROUP, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PARENT COMPANY ONLY

STATEMENTS OF INCOME

For the Years Ended December 31	2010			2009			2008
(In millions)
Revenues
Net investment income	$	12.2		$	16.5		$	15.2
Net realized investment gains:
Total other-than-temporary impairment losses on investments		(0.3	)		—			—
Portion of loss transferred to other comprehensive income		—			—			—
Net other-than-temporary impairment losses on investments recognized in earnings		(0.3	)		—			—
Net realized gains from sales and other		0.6			7.7			9.0
Total net realized investment gains		0.3			7.7			9.0
Other income		—			—			0.6
Total revenues		12.5			24.2			24.8
Expenses
Interest expense		35.7			31.8			40.6
Employee benefit related expenses		6.9			16.4			1.5
Loss (gain) from retirement of debt		2.0			(34.5	)		—
Other operating expenses		3.9			6.9			5.7
Total expenses		48.5			20.6			47.8
Net (loss) income before income taxes and equity in net income of unconsolidated subsidiaries		(36.0	)		3.6			(23.0	)
Income tax benefit:
Federal		25.1			7.4			17.0
State		—			—			0.1
Equity in income of unconsolidated subsidiaries		163.8			176.5			92.1
Income from continuing operations		152.9			187.5			86.2
Discontinued operations:
Income from operations of discontinued variable life insurance and annuity business, net of taxes (including gain on disposal of $1.3, $4.9 and $8.7 in 2010, 2009 and 2008)		1.3			4.9			12.2
Gain (loss) from discontinued FAFLIC business, net of taxes		0.5			4.8			(77.3	)
Other discontinued operations		0.1			—			(0.5	)
Net income	$	154.8		$	197.2		$	20.6

The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PARENT COMPANY ONLY

BALANCE SHEETS

December 31	2010			2009
(In millions, except per share data)
Assets
Fixed maturities – at fair value (amortized cost of $372.7 and $287.6)	$	380.6		$	289.9
Equity securities – at fair value (cost of $1.0)		1.0			—
Cash and cash equivalents		66.6			3.2
Investment in unconsolidated subsidiaries		2,477.3			2,333.4
Net receivable from subsidiaries		12.6			7.8
Deferred federal income tax asset		—			32.4
Other assets		19.1			14.0
Total assets	$	2,957.2		$	2,680.7
Liabilities
Expenses and state taxes payable	$	29.1		$	28.0
Deferred federal income tax liability		6.8			—
Interest payable		10.9			7.0
Debt		449.9			287.1
Total liabilities		496.7			322.1
Shareholders' Equity
Preferred stock, par value $0.01 per share, 20.0 million shares authorized, none issued		—			—
Common stock, par value $0.01 per share, 300.0 million shares authorized, 60.5 million shares issued		0.6			0.6
Additional paid-in capital		1,796.5			1,808.5
Accumulated other comprehensive income		136.7			28.8
Retained earnings		1,246.8			1,141.1
Treasury stock at cost (15.6 million and 13.0 million shares)		(720.1	)		(620.4	)
Total shareholders' equity		2,460.5			2,358.6
Total liabilities and shareholders' equity	$	2,957.2		$	2,680.7

The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PARENT COMPANY ONLY

STATEMENTS OF CASH FLOWS

For the Years Ended December 31	2010			2009			2008
(In millions)
Cash flows from operating activities
Net income	$	154.8		$	197.2		$	20.6
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Gain) loss on disposal of FAFLIC		(0.5	)		(4.8	)		77.3
Gain on disposal of variable life insurance and annuity business		(1.3	)		(4.9	)		(12.2	)
Loss (gain) from retirement of debt		2.0			(34.5	)		—
Equity in net income of unconsolidated subsidiaries		(163.8	)		(176.5	)		(92.1	)
Net realized investment gains		(0.3	)		(7.7	)		(9.0	)
(Contributions paid to) dividends received from unconsolidated subsidiaries (1)		(0.6	)		(83.7	)		117.9
Deferred federal income tax expense (benefit)		104.3			5.6			(1.5	)
Change in expenses and taxes payable		(8.2	)		(41.4	)		13.9
Change in net payable from subsidiaries		8.7			7.1			20.0
Other, net		(0.7	)		2.7			(1.1	)
Net cash provided by (used in) operating activities		94.4			(140.9	)		133.8
Cash flows from investing activities
Proceeds from disposals and maturities of available-for-sale fixed maturities		177.3			469.3			295.0
Purchase of available-for-sale fixed maturities		(167.4	)		(278.4	)		(217.4	)
Purchase of equity securities		(1.0	)		—			—
Net cash used for business acquisitions		(29.5	)		1.5			(112.8	)
Proceeds from sale of variable life insurance and annuity business, net		—			—			13.2
Proceeds from sale of FAFLIC		—			105.8			—
Net cash provided by the sale of AIX Holdings, Inc. to Hanover Insurance		—			64.9			—
Net cash provided by the sale of assets to Hanover Insurance		—			38.9			—
Other investing activities		—			—			(2.8	)
Net cash (used in) provided by investing activities		(20.6	)		402.0			(24.8	)
Cash flow from financing activities
Proceeds from debt borrowings		198.0			—			—
Repurchases of debt		(38.5	)		(125.9	)		—
Dividends paid to shareholders		(47.2	)		(37.5	)		(23.0	)
Treasury stock purchased at cost		(134.7	)		(148.1	)		(58.5	)
Exercise of options		12.0			3.1			8.2
Other financing activities		—			0.1			0.3
Net cash used in financing activities		(10.4	)		(308.3	)		(73.0	)
Net change in cash and cash equivalents		63.4			(47.2	)		36.0
Cash and cash equivalents, beginning of year		3.2			50.4			14.4
Cash and cash equivalents, end of year	$	66.6		$	3.2			50.4

⁽¹⁾ Amounts reflect cash payments made to the parent company for dividends. Investment assets of $69.4 million, $136.1 million and $65.1 million were also transferred to the parent company in 2010, 2009 and 2008, respectively, to settle dividend balances.

The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.

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Consolidated Statements of Income (USD $) In Millions, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Revenues
Premiums	$ 2,841.0	$ 2,546.4	$ 2,484.9
Net investment income	247.2	252.1	258.7
Net realized investment gains (losses):
Total other-than-temporary impairment losses on investments	(9.4)	(42.2)	(113.1)
Portion of loss transferred (from) to other comprehensive income	(4.5)	9.3
Net other-than-temporary impairment losses on investments recognized in earnings	(13.9)	(32.9)	(113.1)
Net realized gains from sales and other	43.6	34.3	15.3
Total net realized investment gains (losses)	29.7	1.4	(97.8)
Fees and other income	34.3	34.2	34.6
Total revenues	3,152.2	2,834.1	2,680.4
Losses and expenses
Losses and loss adjustment expenses	1,856.3	1,639.2	1,626.2
Policy acquisition expenses	669.0	581.3	556.2
Loss (gain) from retirement of debt	2.0	(34.5)
Other operating expenses	413.8	377.2	333.6
Total losses and expenses	2,941.1	2,563.2	2,516.0
Income before federal income taxes	211.1	270.9	164.4
Federal income tax expense:
Current	5.7	51.2	17.5
Deferred	52.2	31.9	62.4
Total federal income tax expense	57.9	83.1	79.9
Income from continuing operations	153.2	187.8	84.5
Discontinued operations (Note 2):
Gain (loss) from discontinued FAFLIC business (net of income tax benefit (expense) of $0.3, $(0.9) and $(4.6) in 2010, 2009 and 2008), including gain (loss) on disposal of $0.5, $7.1 and $(77.3) in 2010, 2009 and 2008	0.5	7.1	(84.8)
Income from operations of discontinued variable life insurance and annuity business (net of income tax benefit of $2.9 in 2008), including gain on disposal of $1.3, $4.9 and $8.7 in 2010, 2009 and 2008	1.3	4.9	11.3
Loss from discontinued accident and health business (net of income tax expense of $0.1 and $0.4 in 2010 and 2009)	(0.3)	(2.6)
Income from the operations of AMGRO (net of tax benefit of $1.3 in 2008), including gain on disposal of $11.1 in 2008			10.1
Other discontinued operations	0.1		(0.5)
Net income	$ 154.8	$ 197.2	$ 20.6
Basic:
Income from continuing operations	$ 3.36	$ 3.71	$ 1.65
Discontinued operations:
Gain (loss) from operations of discontinued FAFLIC business (net of income tax benefit (expense) of $0.01, $(0.02) and $(0.09) in 2010, 2009 and 2008), including gain (loss) on disposal of $0.01, $0.14 and $(1.51) in 2010, 2009 and 2008	$ 0.01	$ 0.14	$ (1.66)
Income from operations of discontinued variable life insurance and annuity business (net of income tax benefit of $0.06 in 2008), including gain on disposal of $0.03, $0.10 and $0.17 in 2010, 2009 and 2008	$ 0.03	$ 0.1	$ 0.22
Loss from discontinued accident and health business (net of income tax expense of $0.01 in 2009)	$ (0.01)	$ (0.05)
Income from the operations of AMGRO (net of tax benefit of $0.02 in 2008), including gain on disposal of $0.22 in 2008			$ 0.20
Other discontinued operations			$ (0.01)
Net income per share	$ 3.39	$ 3.90	$ 0.40
Weighted average shares outstanding	45.6	50.6	51.3
Diluted:
Income from continuing operations	$ 3.31	$ 3.68	$ 1.63
Discontinued operations:
Gain (loss) from operations of discontinued FAFLIC business (net of income tax benefit (expense) of $0.01, $(0.02), and $(0.09) in 2010, 2009 and 2008), including gain (loss) on disposal of $0.01, $0.14 and $(1.49) in 2010, 2009 and 2008	$ 0.01	$ 0.14	$ (1.64)
Income from operations of discontinued variable life insurance and annuity business (net of income tax benefit of $0.05 in 2008), including gain on disposal of $0.03, $0.09 and $0.17 in 2010, 2009 and 2008	$ 0.03	$ 0.09	$ 0.22
Loss from discontinued accident and health business (net of income tax expense of $0.01 in 2009)	$ (0.01)	$ (0.05)
Income from the operations of AMGRO (net of tax benefit of $0.02 in 2008), including gain on disposal of $0.21 in 2008			$ 0.20
Other discontinued operations			$ (0.01)
Net income per share	$ 3.34	$ 3.86	$ 0.4
Weighted average shares outstanding	46.3	51.1	51.7

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Consolidated Statements of Shareholders' Equity (USD $) In Millions, unless otherwise specified	Total	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Net Unrealized Appreciation (Depreciation) on Investments and Derivative Instruments [Member]	Defined Benefit Pension and Postretirement Plans [Member]	Total Accumulated Other Comprehensive Income (Loss) [Member]	Retained Earnings [Member]	Treasury Stock [Member]
Balance at Dec. 31, 2007			$ 0.6	$ 1,822.6	$ 5.5	$ (25.9)		$ 946.9	$ (450.7)
Cumulative effect of change in accounting principle, net of tax
Balance at beginning of year, as adjusted					5.5			946.9
Amounts arising in the period	3.1
Amounts arising in the period	(123.8)					(123.8)
Shares purchased at cost									(58.5)
Settlement of accelerated share repurchases
Employee and director stock-based awards and other				(18.8)
Amortization during the period:
Amount recognized as net periodic benefit cost	(3.6)					(3.6)
Benefit (provision) for deferred federal income taxes	44.6					44.6
Total pension and postretirement benefits	(82.8)					(82.8)
Net shares reissued at cost under employee stock-based compensation plans									27.0
Net income	20.6							20.6
Net appreciation (depreciation) during the period:
Other comprehensive income (loss)	(364.4)
Net appreciation (depreciation) on available-for-sale securities and derivative instruments					(284.3)
Benefit for deferred federal income taxes					2.7
Other Comprehensive income (loss)	(281.6)				(281.6)
Dividends to shareholders								(23.0)
Treasury stock issued for less than cost and other								(9.7)
Recognition of share-based compensation								15.0
Balance at Dec. 31, 2008	1,887.2		0.6	1,803.8	(276.1)	(108.7)	(384.8)	949.8	(482.2)
Cumulative effect of change in accounting principle, net of tax					(33.3)			33.3
Balance at beginning of year, as adjusted					(309.4)	(108.7)		983.1
Amounts arising in the period	4.5
Amounts arising in the period	26.0					26.0
Shares purchased at cost									(148.1)
Employee and director stock-based awards and other				4.7
Amortization during the period:
Amount recognized as net periodic benefit cost	19.8					19.8
Benefit (provision) for deferred federal income taxes	(16.0)					(16.0)
Total pension and postretirement benefits	29.8					29.8
Net shares reissued at cost under employee stock-based compensation plans									9.9
Net income	197.2							197.2
Net appreciation (depreciation) during the period:
Other comprehensive income (loss)	446.9
Net appreciation (depreciation) on available-for-sale securities and derivative instruments					415.8
Benefit for deferred federal income taxes					1.3
Other Comprehensive income (loss)	417.1				417.1
Dividends to shareholders								(37.5)
Treasury stock issued for less than cost and other								(5.3)
Recognition of share-based compensation								3.6
Balance at Dec. 31, 2009	2,358.6		0.6	1,808.5	107.7	(78.9)	28.8	1,141.1	(620.4)
Cumulative effect of change in accounting principle, net of tax
Balance at beginning of year, as adjusted					107.7			1,141.1
Amounts arising in the period						(13.9)
Amounts arising in the period	(13.9)
Shares purchased at cost									(126.0)
Settlement of accelerated share repurchases				(8.7)
Employee and director stock-based awards and other				(3.3)
Amortization during the period:
Amount recognized as net periodic benefit cost	9.8					9.8
Benefit (provision) for deferred federal income taxes	1.4					1.4
Total pension and postretirement benefits	(2.7)					(2.7)
Net shares reissued at cost under employee stock-based compensation plans									26.3
Net income	154.8							154.8
Net appreciation (depreciation) during the period:
Other comprehensive income (loss)	107.9
Net appreciation (depreciation) on available-for-sale securities and derivative instruments					104.7
Benefit for deferred federal income taxes					5.9
Other Comprehensive income (loss)	110.6				110.6
Dividends to shareholders								(47.2)
Treasury stock issued for less than cost and other								(9.7)
Recognition of share-based compensation								7.8
Balance at Dec. 31, 2010	$ 2,460.5		$ 0.6	$ 1,796.5	$ 218.3	$ (81.6)	$ 136.7	$ 1,246.8	$ (720.1)

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Schedule V - Valuation and Qualifying Accounts

12 Months Ended

Dec. 31, 2010

Schedule V - Valuation and Qualifying Accounts

Schedule V - Valuation and Qualifying Accounts

SCHEDULE V

THE HANOVER INSURANCE GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS

DECEMBER 31

(In millions)

			Additions
Description	Balance at beginning of period		Charged to costs and expenses		Charged to other accounts		Deductions		Balance at end of period
2010
Mortgage loans	$	0.6	$	—	$	—	$	0.4	$	0.2
Allowance for doubtful accounts		3.9		7.8		—		8.1		3.6
	$	4.5	$	7.8	$	—	$	8.5	$	3.8
2009
Mortgage loans	$	1.0	$	—	$	—	$	0.4	$	0.6
Allowance for doubtful accounts		5.0		7.4		—		8.5		3.9
	$	6.0	$	7.4	$	—	$	8.9	$	4.5
2008
Mortgage loans	$	1.0	$	—	$	—	$	—	$	1.0
Allowance for doubtful accounts		9.2		5.6		—		9.8		5.0
	$	10.2	$	5.6	$	—	$	9.8	$	6.0

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Segment Information

12 Months Ended

Dec. 31, 2010

Segment Information

Segment Information

14. SEGMENT INFORMATION

The Company's primary business operations include insurance products and services in three property and casualty operating segments. These segments are Commercial Lines, Personal Lines, and Other Property and Casualty. Commercial Lines includes commercial multiple peril, commercial automobile, workers' compensation, and other commercial coverages, such as specialty program business, inland marine, bonds, professional liability and management liability, while Personal Lines includes personal automobile, homeowners and other personal coverages. The Other Property and Casualty segment consists of: Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; as well as voluntary pools business which is in run-off. Additionally, prior to the sale of FAFLIC on January 2, 2009, the operations included the results of this run-off life insurance and annuity business as a separate segment. This business is now reflected as discontinued operations. Certain ongoing expenses were also reclassified from this former life segment to the Property and Casualty business. The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company reports interest expense related to its debt separately from the earnings of its operating segments. The Company's debt consists of senior debentures, junior subordinated debentures, advances under the Company's collateralized borrowing program with the FHLBB, capital securities and surplus notes.

Management evaluates the results of the aforementioned segments on a pre-tax basis. Segment income excludes certain items which are included in net income, such as federal income taxes and net realized investment gains and losses, because fluctuations in these gains and losses are determined by interest rates, financial markets and the timing of sales. Also, segment income excludes net gains and losses on disposals of businesses, discontinued operations, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from segment income may be significant components in understanding and assessing the Company's financial performance, management believes that the presentation of segment income enhances an investor's understanding of the Company's results of operations by highlighting net income attributable to the core operations of the business. However, segment income should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles.

Summarized below is financial information with respect to business segments:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Segment revenues:
Property and Casualty:
Commercial Lines	$	1,522.3		$	1,228.8		$	1,154.8
Personal Lines		1,583.8			1,585.3			1,607.4
Other Property and Casualty		21.0			22.6			21.6
Total Property and Casualty		3,127.1			2,836.7			2,783.8
Intersegment revenues		(4.6	)		(4.0	)		(5.6	)
Total segment revenues		3,122.5			2,832.7			2,778.2
Adjustments to segment revenues:
Net realized investment gains (losses)		29.7			1.4			(97.8	)
Total revenues	$	3,152.2		$	2,834.1		$	2,680.4
Segment income before federal income taxes:
Property and Casualty:
Commercial Lines:
GAAP underwriting (loss) income	$	(20.6	)	$	60.9		$	39.8
Net investment income		129.9			125.6			124.4
Other		1.9			3.2			5.5
Commercial Lines segment income		111.2			189.7			169.7
Personal Lines:
GAAP underwriting income (loss)		1.6			(43.6	)		(7.7	)
Net investment income		102.9			109.6			118.9
Other		8.5			10.4			12.3
Personal Lines segment income		113.0			76.4			123.5
Other Property and Casualty:
GAAP underwriting income		0.8			11.7			1.2
Net investment income		14.4			16.5			14.7
Other net expenses		(11.7	)		(24.2	)		(6.9	)
Other Property and Casualty segment income		3.5			4.0			9.0
Total Property and Casualty		227.7			270.1			302.2
Interest on debt		(44.3	)		(35.1	)		(39.9	)
Segment income before federal income taxes		183.4			235.0			262.3
Adjustments to segment income:
Net realized investment gains (losses)		29.7			1.4			(97.8	)
(Loss) gain on retirement of debt		(2.0	)		34.5			—
Other items		—			—			(0.1	)
Income from continuing operations before federal income taxes	$	211.1		$	270.9		$	164.4

DECEMBER 31	2010			2009
(In millions)	Identifiable Assets
Property and Casualty (1)	$	8,449.1		$	7,922.6
Assets of discontinued operations (2)		133.6			130.6
Intersegment eliminations		(12.8	)		(10.5	)
Total	$	8,569.9		$	8,042.7

⁽¹⁾ The Company reviews assets based on the total Property and Casualty Group and does not allocate between the Commercial Lines, Personal Lines and Other Property and Casualty segments.

⁽²⁾ Includes assets related to the Company's discontinued accident and health insurance business.

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Schedule VI Supplementary Information Concerning Property and Casualty Insurance Operations

12 Months Ended

Dec. 31, 2010

Schedule VI Supplementary Information Concerning Property and Casualty Insurance Operations

Schedule VI Supplementary Information Concerning Property and Casualty Insurance Operations

SCHEDULE VI

THE HANOVER INSURANCE GROUP, INC.

SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

(In millions)

Affiliation with Registrant	Deferred policy acquisition costs		Reserves for losses and loss adjustment expenses(2)		Discount, if any, deducted from previous column(1)		Unearned premiums(2)		Net premiums earned		Net investment income
Consolidated Property and Casualty Subsidiaries
2010	$	345.3	$	3,275.8	$	—	$	1,520.3	$	2,841.0	$	247.2
2009	$	286.3	$	3,152.1	$	—	$	1,300.5	$	2,546.4	$	251.7
2008	$	264.8	$	3,201.3	$	—	$	1,246.3	$	2,484.9	$	258.0

	Losses and loss adjustment expenses incurred related to					Amortization of deferred policy acquisition expenses		Paid losses and loss adjustment expenses		Net premiums written
	Current year		Prior years
2010	$	1,966.4	$	(111.1	)	$	669.0	$	1,816.4	$	3,048.0
2009	$	1,793.5	$	(155.3	)	$	581.3	$	1,759.4	$	2,608.7
2008	$	1,784.6	$	(159.0	)	$	556.2	$	1,712.3	$	2,518.0

⁽¹⁾ The Company does not use discounting techniques.

⁽²⁾ Reserves for losses and loss adjustment expenses are shown gross of $1,115.5 million, $1,060.2 million and $988.2 million of reinsurance recoverable on unpaid losses in 2010, 2009 and 2008, respectively. Unearned premiums are shown gross of prepaid premiums of $77.0 million, $70.4 million and $78.3 million in 2010, 2009 and 2008, respectively.

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Reinsurance

12 Months Ended

Dec. 31, 2010

Reinsurance

Reinsurance

16. REINSURANCE

In the normal course of business, the Company seeks to reduce the losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance transactions are accounted for in accordance with the provisions of ASC 944.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company determines the appropriate amount of reinsurance based on evaluations of the risks accepted and analyses prepared by consultants and on market conditions (including the availability and pricing of reinsurance). The Company also believes that the terms of its reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. The Company believes that its reinsurers are financially sound. This belief is based upon an ongoing review of its reinsurers' financial statements, reported financial strength ratings from rating agencies, reputations in the marketplace, and the analysis and guidance of THG's reinsurance advisors.

The Company is subject to concentration of risk with respect to reinsurance ceded to various residual market mechanisms. As a condition to conduct certain business in various states, the Company is required to participate in residual market mechanisms and pooling arrangements which provide insurance coverages to individuals or other entities that are otherwise unable to purchase such coverage voluntarily. These market mechanisms and pooling arrangements include, among others, the Michigan Catastrophic Claims Association ("MCCA"). Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders. The Company ceded to the MCCA premiums earned and losses and LAE of $64.7 million and $135.6 million in 2010, $55.8 million and $97.7 million in 2009 and $60.9 million and $129.8 million in 2008, respectively. MCCA, which represented 60% of the total reinsurance receivable balance at December 31, 2010, is the Company's only reinsurer representing at least 10% of its reinsurance assets.

Reinsurance recoverables related to MCCA were $752.5 million and $672.4 million at December 31, 2010 and 2009, respectively. Because the MCCA is supported by assessments permitted by statute, and there have been no significant uncollectible balances from MCCA identified during the three years ending December 31, 2010, the Company believes that it has no significant exposure to uncollectible reinsurance balances from this entity.

Coincident with the sale of FAFLIC to Commonwealth Annuity on January 2, 2009. Hanover and FAFLIC entered into a reinsurance contract whereby Hanover directly assumed a portion, and reinsured the remainder, of FAFLIC's discontinued accident and health business. Additionally, during 2008 FAFLIC had ceded $106.9 million of its variable universal life insurance and annuity business pursuant to a reinsurance agreement with Commonwealth Annuity (See Note 2 – Discontinued Operations on pages 92 and 94 of this Form 10-K).

The effects of reinsurance were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Property and casualty premiums written:
Direct	$	3,087.9		$	2,883.8		$	2,715.0
Assumed (1)		270.6			8.6			22.6
Ceded		(310.5	)		(283.7	)		(219.6	)
Net premiums written	$	3,048.0		$	2,608.7		$	2,518.0
Property and casualty premiums earned:
Direct	$	2,970.6		$	2,824.3		$	2,700.0
Assumed (1)		174.8			13.8			26.8
Ceded		(304.4	)		(291.7	)		(241.9	)
Net premiums earned	$	2,841.0		$	2,546.4		$	2,484.9
Property and casualty losses and LAE:
Direct	$	2,001.8		$	1,909.1		$	1,790.0
Assumed (1)(2)		96.9			(11.7	)		19.2
Ceded		(242.4	)		(258.2	)		(183.0	)
Net losses and LAE	$	1,856.3		$	1,639.2		$	1,626.2

⁽¹⁾ Assumed reinsurance activity in 2010 primarily related to the OneBeacon renewal rights transaction (See Note 3 – Other Significant Transactions).

⁽²⁾ Assumed reinsurance activity in 2009 primarily related to favorable reserve development on the Excess and Casualty Reinsurance Association ("ECRA") and Massachusetts Commonwealth Automobile Reinsures ("CAR") pools.

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Consolidated Statements of Comprehensive Income (Loss)
Net income	$ 154.8	$ 197.2	$ 20.6
Available-for-sale securities:
Net appreciation (depreciation) during the period	97.8	423.1	(284.9)
Portion of other-than-temporary impairment losses transferred from (to) other comprehensive income	6.9	(7.3)
Benefit for deferred federal income taxes	5.9	1.3	2.9
Total available-for-sale securities	110.6	417.1	(282.0)
Derivative instruments:
Net appreciation during the period			0.6
Provision for deferred federal income taxes			(0.2)
Total derivative instruments			0.4
Other Comprehensive income (loss)	110.6	417.1	(281.6)
Pension and postretirement benefits:
Net actuarial (loss) gain	(13.9)	21.5	(126.9)
Prior service cost		4.5	3.1
Total amounts arising in the period	(13.9)	26.0	(123.8)
Amortization recognized as net periodic benefit costs:
Net actuarial loss	17.2	27.2	3.0
Prior service cost	(5.8)	(5.8)	(4.9)
Transition asset	(1.6)	(1.6)	(1.7)
Total amortization recognized as net periodic pension and postretirement cost (benefit)	9.8	19.8	(3.6)
(Decrease) increase in pension and postretirement benefit costs	(4.1)	45.8	(127.4)
Benefit (provision) for deferred federal income taxes	1.4	(16.0)	44.6
Total pension and postretirement benefits	(2.7)	29.8	(82.8)
Other comprehensive income (loss)	107.9	446.9	(364.4)
Comprehensive income (loss)	$ 262.7	$ 644.1	$ (343.8)

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Consolidated Statements of Income (Parenthetical) (USD $) In Millions, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Consolidated Statements of Income
Gain (loss) from discontinued FAFLIC business, income tax benefit (expense)	$ 0.3	$ (0.9)	$ (4.6)
Gain (loss) from discontinued FAFLIC business, net of income tax benefit (expense), including gain (loss) on disposal	0.5	7.1	(77.3)
Income from operations of discontinued variable life insurance and annuity business, income tax benefit			2.9
Income from operations of discontinued variable life insurance and annuity business, income tax benefit, including gain on disposal	1.3	4.9	8.7
Loss from discontinued accident and health business, income tax expense	0.1	0.4
Income from the operations of AMGRO, tax benefit			1.3
Income from the operations of AMGRO, tax benefit, including gain on disposal			$ 11.1
Gain (loss) from operations of discontinued FAFLIC business, income tax benefit (expense)	$ 0.01	$ (0.02)	$ (0.09)
Gain (loss) from operations of discontinued FAFLIC business net of income tax benefit (expense), including gain (loss) on disposal	$ 0.01	$ 0.14	$ (1.51)
Income from operations of discontinued variable life insurance and annuity business, income tax benefit, including gain on disposal	$ 0.03	$ 0.10	$ 0.17
Loss from discontinued accident and health business, income tax expense		$ 0.01
Income from the operations of AMGRO, tax benefit			$ 0.02
Income from the operations of AMGRO, tax benefit, including gain on disposal			$ 0.22
Gain (loss) from operations of discontinued FAFLIC business, income tax benefit (expense)	$ 0.01	$ (0.02)	$ (0.09)
Gain (loss) from operations of discontinued FAFLIC business net of income tax benefit (expense), including gain (loss) on disposal	$ 0.01	$ 0.14	$ (1.49)
Income from operations of discontinued variable life insurance and annuity business, net of income tax benefit			$ 0.06
Income from operations of discontinued variable life insurance and annuity business, income tax benefit			$ 0.05
Income from operations of discontinued variable life insurance and annuity business, income tax benefit, including gain on disposal	$ 0.03	$ 0.09	$ 0.17
Loss from discontinued accident and health business, income tax expense		$ 0.01
Income from the operations of AMGRO, tax benefit			$ 0.02
Income from the operations of AMGRO, tax benefit, including gain on disposal			$ 0.21

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Pension Plans

12 Months Ended

Dec. 31, 2010

Pension Plans

Pension Plans

9. PENSION PLANS

Defined Benefit Plans

Prior to 2005, THG provided retirement benefits to substantially all of its employees under defined benefit pension plans. These plans were based on a defined benefit cash balance formula, whereby the Company annually provided an allocation to each covered employee based on a percentage of that employee's eligible salary, similar to a defined contribution plan arrangement. In addition to the cash balance allocation, certain transition group employees who had met specified age and service requirements as of December 31, 1994 were eligible for a grandfathered benefit based primarily on the employees' years of service and compensation during their highest five consecutive plan years of employment. The Company's policy for the plans is to fund at least the minimum amount required by the Employee Retirement Income Security Act of 1974 ("ERISA").

As of January 1, 2005, the defined benefit pension plans were frozen and since that date, no further cash balance allocations have been credited to participants. Participants' accounts are credited with interest daily, based upon the General Agreement of Trades and Tariffs ("GATT"). In addition, the grandfathered benefits for the transition group were also frozen at January 1, 2005 levels with an annual transition pension adjustment calculated at an interest rate equal to 5% per year up to 35 years of completed service, and 3% thereafter.

The Company recognizes the funded status of its defined benefit plans in its Consolidated Balance Sheet. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation of the Company's defined benefit plans. ASC 715, Compensation - Retirement Plans ("ASC 715") , requires the aggregation of all overfunded plans separately from all underfunded plans. On January 4, 2010 the Company made a discretionary contribution of $100 million to the qualified defined benefit pension plan. With this contribution, and based on current estimates of plan liabilities and other assumptions, including future returns of plan assets, its qualified defined benefit pension plan is essentially fully funded.

Assumptions

In order to measure the expense associated with these plans, management must make various estimates and assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates, for example. The estimates used by management are based on the Company's historical experience, as well as current facts and circumstances. In addition, the Company uses outside actuaries to assist in measuring the expense and liability associated with these plans.

The Company measures the funded status of its plans as of the date of its year-end statement of financial position. The Company utilizes a measurement date of December 31^st to determine its benefit obligations, consistent with the date of its Consolidated Balance Sheets. Weighted-average assumptions used to determine pension benefit obligations are as follows:

DECEMBER 31	2010			2009			2008
Discount rate (1)		5.63	%		6.13	%		6.63	%
Cash balance interest crediting rate		4.50	%		4.50	%		5.00	%

(1) In 2010 and 2009, the discount rate utilized for the non-qualified plans was 5.50% and 6.00%, respectively. The discount rate for 2008 for the non-qualified plan is consistent with the qualified plan.

The decrease in the interest crediting rate in 2009 reflects a change in expectations regarding long-term interest rate levels due to the current economic impact of the financial markets on the GATT rate.

The Company utilizes a measurement date of January 1st to determine its periodic pension costs. Weighted-average assumptions used to determine net periodic pension costs are as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
Discount rate		6.13	%		6.63	%		6.38	%
Expected return on plan assets		7.00	%		7.50	%		7.75	%
Cash balance interest crediting rate		4.50	%		5.00	%		5.00	%

The expected rate of return was determined by using historical mean returns, adjusted for certain factors believed to have an impact on future returns. Specifically, because the allocation of assets between fixed maturities and equities has changed, as discussed in "Plan Assets" below, the historical mean return was adjusted downward slightly to reflect this asset mix. The adjusted mean returns were weighted to the plan's actual asset allocation at December 31, 2010, resulting in an expected rate of return on plan assets for 2010 of 7.00%. The Company reviews and updates, at least annually, its expected return on plan assets based on changes in the actual assets held by the plan.

Plan Assets

The Company utilizes a target allocation strategy, which focuses on creating a mix of assets that will generate modest growth from equity securities while minimizing volatility in the Company's earnings from changes in the markets and economic environment. Various factors are taken into consideration in determining the appropriate asset mix, such as census data, actuarial valuation information and capital market assumptions. During 2010 and 2009, the plan assets were shifted out of equity securities and into fixed income securities to the current allocation of 74% in fixed income securities and 26% in equity securities. The Company reviews and updates, at least annually, the target allocation and makes changes periodically. The following table provides target allocations and actual invested asset allocations for 2010 and 2009.

DECEMBER 31	2010 TARGET LEVELS			2010			2009
Fixed Income Securities:
Fixed Maturities		73	%		73	%		56	%
Money Market Funds		2	%		1	%		1	%
Total Fixed Income Securities		75	%		74	%		57	%
Equity Securities:
Domestic		18	%		18	%		31	%
International		7	%		7	%		10	%
THG Common Stock		—			1	%		2	%
Total Equity Securities		25	%		26	%		43	%
Total Assets		100	%		100	%		100	%

Included in total plan assets of $547.8 million at December 31, 2010 were $541.7 million of invested assets carried at fair value and $6.1 million of cash and equivalents. Total plan assets at December 31, 2009 of $424.5 million included $421.0 million of invested assets carried at fair value and $3.5 million of cash and equivalents.

The following table presents for each hierarchy level the Plan's investment assets that are measured at fair value at December 31, 2010 and 2009. (Please refer to Note 6 – Fair Value, for a description of the different levels in the Fair Value Hierarchy).

December 31, 2010
(in millions)
	Fair Value
	Total		Level 1		Level 2		Level 3
Description
Fixed Income Securities
Fixed Maturities	$	397.0	$	2.8	$	394.2	$	—
Equity Securities:
Domestic		96.7		0.4		96.3		—
International		41.4		0.2		41.2		—
THG Common Stock		6.6		6.6		—		—
Total Equity Securities		144.7		7.2		137.5		—
Total Investments at Fair Value	$	541.7	$	10.0	$	531.7	$	—

December 31, 2009
(in millions)
	Fair Value
	Total		Level 1		Level 2		Level 3
Description
Fixed Income Securities
Fixed Maturities	$	241.2	$	60.9	$	180.3	$	—
Equity Securities:
Domestic		129.9		0.9		129.0		—
International		43.6		0.4		43.2		—
THG Common Stock		6.3		6.3		—		—
Total Equity Securities		179.8		7.6		172.2		—
Total Investments at Fair Value	$	421.0	$	68.5	$	352.5	$	—

Fixed Income Securities

Securities classified as Level 1 at December 31, 2010 and 2009 include actively traded mutual funds that are publicly traded securities which are valued at quoted market prices. Securities classified as Level 1 in 2009 include a separate investment account, which is invested entirely in the Vanguard Total Bond Market Index Fund, a mutual fund that in turn invests in investment grade fixed maturities.

Securities classified as Level 2 at December 31, 2010 include the aforementioned separate investment account. Additionally, included in Level 2 at December 31, 2010 is a custom fund that invests in commingled pools and investment grade fixed income securities. In 2009, Level 2 securities reflected investments in commingled pools that primarily invest in investment grade fixed income securities. These investments are valued using independent pricing models that incorporate observable inputs related to the aggregated underlying investments.

During 2010, the separate investment account was reclassified from Level 1 in 2009 to Level 2 due to the application of new accounting guidance related to the use of daily pricing as a practical expedient for fair value of these investments.

Equity Securities

Level 1 securities primarily consist of 141,462 shares of THG common stock held by the plan. THG common stock is valued through quoted market prices. Securities also classified as Level 1 at December 31, 2010 and 2009 include actively traded mutual funds that primarily invest in equity securities which are valued at quoted market prices.

Securities classified as Level 2 include investments in commingled pools that primarily invest in publicly traded common stocks and international equities. These pools are valued using independent pricing models that incorporate observable inputs related to the aggregated underlying investments.

Obligations and Funded Status

The Company recognizes the current net underfunded status of its plans in its Consolidated Balance Sheet. Changes in the funded status of the plans are reflected as components of accumulated other comprehensive loss or income. The components of accumulated other comprehensive loss or income are reflected as either a net actuarial gain or loss, a net prior service cost or a net transition asset. The following table reflects the benefit obligations, fair value of plan assets and funded status of the plans at December 31, 2010 and 2009.

DECEMBER 31	Qualified Pension Plans						Non-Qualified Pension Plans
(in millions)
	2010			2009			2010			2009
Accumulated benefit obligation	$	548.0		$	518.4		$	39.1		$	38.2
Change in benefit obligation:
Projected benefit obligation, beginning of year	$	518.4		$	494.1		$	38.2		$	37.9
Service cost – benefits earned during the year		0.1			0.1			—			—
Interest cost		30.4			31.5			2.2			2.4
Actuarial losses		32.0			22.9			2.1			1.2
Benefits paid		(32.9	)		(30.2	)		(3.4	)		(3.3	)
Projected benefit obligation, end of year		548.0			518.4			39.1			38.2
Change in plan assets:
Fair value of plan assets, beginning of year		424.5			338.5			—			—
Actual return on plan assets		56.2			71.0			—			—
Company contribution		100.0			45.2			3.4			3.3
Benefits paid		(32.9	)		(30.2	)		(3.4	)		(3.3	)
Fair value of plan assets, end of year		547.8			424.5			—			—
Funded status of the plans	$	(0.2	)	$	(93.9	)	$	(39.1	)	$	(38.2	)

Components of Net Periodic Pension Cost

The components of net periodic pension cost for pension and other postretirement benefit plans are as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Service cost – benefits earned during the year	$	0.1		$	0.1		$	0.1
Interest cost		32.6			33.9			32.8
Expected return on plan assets		(35.1	)		(25.4	)		(33.8	)
Recognized net actuarial loss		16.8			26.9			2.6
Amortization of transition asset		(1.6	)		(1.6	)		(1.7	)
Amortization of prior service cost		0.1			—			0.1
Net periodic pension cost	$	12.9		$	33.9		$	0.1

The following table reflects the amounts recognized in accumulated other comprehensive income (loss) relating to the Company's defined benefit pension plans as of December 31, 2010 and 2009.

December 31	2010		2009
(In millions)
Net actuarial loss	$	134.4	$	138.1
Net prior service cost		0.1		0.2
Net transition asset		—		(1.6	)
	$	134.5	$	136.7

The following table reflects the estimated amount that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in 2011:

Estimated Amortization in 2011 Expense
(In millions)
Net actuarial gain	$	15.0
Net prior service cost		0.1
	$	15.1

The unrecognized net actuarial gains (losses) which exceed 10% of the greater of the projected benefit obligation or the fair value of plan assets are amortized as a component of net periodic pension cost in future years.

Contributions

On January 4, 2010, the Company made a discretionary contribution of $100.0 million to the qualified defined benefit pension plan. These funds were invested primarily in fixed income investments. With this contribution, and based upon the current estimate of liabilities and certain assumptions regarding investment return and other factors, the Company's qualified defined benefit pension plan is essentially fully funded. In addition, the Company expects to contribute $3.3 million to its non-qualified pension plans to fund 2011 benefit payments. At this time, no additional discretionary contributions are expected to be made to the plans during 2011 and the Company does not expect that any funds will be returned from the plans to the Company during 2011.

Benefit Payments

The Company estimates that benefit payments over the next 10 years will be as follows:

FOR THE YEARS ENDED DECEMBER 31	2011		2012		2013		2014		2015		2016-2020
(In millions)
Qualified pension plans	$	37.1	$	38.1	$	38.3	$	39.5	$	40.2	$	204.2
Non-qualified pension plans	$	3.3	$	3.2	$	3.1	$	3.3	$	3.6	$	14.9

The benefit payments are based on the same assumptions used to measure the Company's benefit obligations at the end of 2010. Benefit payments related to the qualified plans will be made from plan assets, whereas those payments related to the non-qualified plans will be provided for by the Company.

Defined Contribution Plan

In addition to the defined benefit plans, THG provides a defined contribution 401(k) plan for its employees, whereby the Company matches employee elective 401(k) contributions, up to a maximum percentage of 6% in both 2010 and 2009 and 5% in 2008. The Company's expense for this matching provision was $16.5 million, $14.2 million and $12.0 million for 2010, 2009 and 2008, respectively. In addition to this matching provision, the Company can elect to make an annual contribution to employees' accounts. There was no additional contribution in 2010 and the Company's cost for additional contributions in 2009 and 2008 was $2.0 million and $5.4 million, respectively.

XML

Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2010	Feb. 18, 2011	Jun. 30, 2010
Document and Entity Information
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2010
Document Fiscal Year Focus	2010
Document Fiscal Period Focus	FY
Trading Symbol	thg
Entity Registrant Name	HANOVER INSURANCE GROUP, INC.
Entity Central Index Key	0000944695
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		45,247,059
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	Yes
Entity Public Float			$ 1,927,289,946

XML

Other Postretirement Benefit Plans

12 Months Ended

Dec. 31, 2010

Other Postretirement Benefit Plans

Other Postretirement Benefit Plans

10. OTHER POSTRETIREMENT BENEFIT PLANS

In addition to the Company's pension plans, the Company also has postretirement medical and death benefits that it provides to certain full-time employees, former agents and retirees and their dependents. Benefits include hospital, major medical and a payment at death up to retirees' final annual salary with certain limits. Dependent coverage is generally provided for up to two years after death of the retiree. The medical plans have varying co-payments and deductibles, depending on the plan.

Generally, employees who were actively employed on December 31, 1995 became eligible with at least 15 years of service after the age of 40. Effective January 1, 1996, the Company revised these benefits so as to establish limits on future benefit payments to beneficiaries of retired employees and to restrict eligibility to then current employees. In 2009, the Company changed the postretirement medical benefits, only as they relate to current employees who still qualify for participation in the plan under the above formula. For these participants, the plan now provides for only post age 65 benefits. The population of agents receiving postretirement benefits was frozen as of December 31, 2002, when the Company ceased its distribution of proprietary life and annuity products. These plans are unfunded.

The Company applies the guidance in ASC 715 and as such, has recognized the funded status of its postretirement benefit plans in its Consolidated Balance Sheet. Since these plans are unfunded, the amount recognized in the Consolidated Balance Sheet is equal to the accumulated benefit obligation of these plans. The components of accumulated other comprehensive income or loss are reflected as either a net actuarial gain or loss or a net prior service cost. There are no unrecognized transition assets or obligations associated with these plans.

Obligation and Funded Status

The following table reflects the funded status of these plans:

DECEMBER 31	2010			2009
(In millions)
Change in benefit obligation:
Accumulated postretirement benefit obligation, beginning of year	$	44.7		$	50.1
Service cost		0.1			0.2
Interest cost		2.7			2.8
Net actuarial losses		0.8			—
Plan amendments		—			(4.5	)
Benefits paid		(2.5	)		(3.9	)
Accumulated postretirement benefit obligation, end of year		45.8			44.7
Fair value of plan assets, end of year		—			—
Funded status of plans	$	(45.8	)	$	(44.7	)

A plan amendment in 2009 resulted in a benefit of $4.5 million. The amendment modified the level of benefits provided to active participants, resulting in decreased plan costs to the Company.

Benefit Payments

The Company estimates that benefit payments over the next 10 years will be as follows:

FOR THE YEARS ENDED DECEMBER 31
(In millions)
2011	$	4.8
2012		4.6
2013		4.4
2014		4.1
2015		3.9
2016-2020		16.5

The benefit payments are based on the same assumptions used to measure the Company's benefit obligation at the end of 2010 and reflect benefits attributable to estimated future service.

Components of Net Periodic Postretirement (Benefit) Expense

The components of net periodic postretirement (benefit) expense were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Service cost	$	0.1		$	0.2		$	0.5
Interest cost		2.7			2.8			3.2
Recognized net actuarial loss		0.4			0.3			0.4
Amortization of prior service cost		(5.9	)		(5.8	)		(5.0	)
Net periodic postretirement benefit	$	(2.7	)	$	(2.5	)	$	(0.9	)

The following table reflects the balances in Accumulated Other Comprehensive (Income) Loss relating to the Company's postretirement benefit plans:

DECEMBER 31	2010			2009
(In millions)
Net actuarial loss	$	7.7		$	7.3
Net prior service cost		(16.5	)		(22.4	)
	$	(8.8	)	$	(15.1	)

The following table reflects the estimated amortization to be recognized in net periodic benefit cost in 2011:

Estimated Amortization in 2011 Expense (Benefit)
(In millions)
Net actuarial loss	$	0.3
Net prior service cost		(5.3	)
	$	(5.0	)

Assumptions

ASC 715 requires that employers measure the funded status of their plans as of the date of their year-end statement of financial position. As such, the Company has utilized a measurement date of December 31, 2010 and 2009, to determine its postretirement benefit obligations, consistent with the date of its Consolidated Balance Sheets. Weighted-average discount rate assumptions used to determine postretirement benefit obligations and periodic postretirement costs are as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009
Postretirement benefit obligations discount rate		5.50	%		6.00	%
Postretirement benefit cost discount rate		6.00	%		6.63	%

Assumed health care cost trend rates are as follows:

DECEMBER 31	2010			2009
Health care cost trend rate assumed for next year		8	%		9	%
Rate to which the cost trend is assumed to decline (ultimate trend rate)		5	%		5	%
Year the rate reaches the ultimate trend rate		2015			2015

A one-percentage point change in assumed health care cost trend rates in each year would have an immaterial effect on net periodic benefit cost during 2010 and accumulated postretirement benefit obligation at December 31, 2010.

XML

Consolidated Balance Sheets (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2010	Dec. 31, 2009
Investments:
Fixed maturities at fair value (amortized cost of $4,598.8 and $4,520.3)	$ 4,797.9	$ 4,615.6
Equity securities at fair value (cost of $120.7 and $57.3)	128.6	69.2
Other long-term investments	39.4	32.3
Total investments	4,965.9	4,717.1
Cash and cash equivalents	290.4	316.5
Accrued investment income	53.8	52.3
Premiums and accounts receivable, net	772.0	590.8
Reinsurance receivable on paid and unpaid losses, benefits and unearned premiums	1,254.2	1,197.9
Deferred policy acquisition costs	345.3	286.3
Deferred federal income taxes	177.4	228.6
Goodwill	179.2	171.4
Other assets	398.1	351.2
Assets of discontinued operations	133.6	130.6
Total assets	8,569.9	8,042.7
Policy liabilities and accruals:
Losses and loss adjustment expenses	3,277.7	3,153.9
Unearned premiums	1,520.3	1,300.5
Total policy liabilities and accruals	4,798.0	4,454.4
Expenses and taxes payable	541.7	603.2
Reinsurance premiums payable	34.4	58.5
Debt	605.9	433.9
Liabilities of discontinued operations	129.4	134.1
Total liabilities	6,109.4	5,684.1
Commitments and contingencies (Notes 15 and 19)
Shareholders' Equity
Preferred stock, $.01 par value, 20.0 million shares authorized, issued none
Common stock, $.01 par value, 300.0 million shares authorized, 60.5 million shares issued	0.6	0.6
Additional paid-in capital	1,796.5	1,808.5
Accumulated other comprehensive income	136.7	28.8
Retained earnings	1,246.8	1,141.1
Treasury stock at cost (15.6 million and 13.0 million shares)	(720.1)	(620.4)
Total shareholders' equity	2,460.5	2,358.6
Total liabilities and shareholders' equity	$ 8,569.9	$ 8,042.7

XML

Investments

12 Months Ended

Dec. 31, 2010

Investments:

Investments

4. INVESTMENTS

A. FIXED MATURITIES AND EQUITY SECURITIES

The amortized cost and fair value of available-for-sale fixed maturities and equity securities were as follows:

DECEMBER 31, 2010
(In millions)
							Gross Unrealized Losses
	Amortized Cost (1)			Gross Unrealized Gains			Unrealized Losses			OTTI Unrealized Losses(2)			Fair Value
U.S. Treasury securities and U.S. government and agency securities	$	261.4		$	5.0		$	3.2		$	—		$	263.2
States and political subdivisions		963.4			21.5			19.4			—			965.5
Corporate fixed maturities		2,413.7			186.0			11.2			25.4			2,563.1
Residential mortgage-backed securities		725.4			41.9			3.7			8.3			755.3
Commercial mortgage-backed securities		350.7			18.4			1.0			—			368.1
Total fixed maturities, including assets of discontinued operations		4,714.6			272.8			38.5			33.7			4,915.2
Less: fixed maturities of discontinued operations		(115.8	)		(8.1	)		(0.7	)		(5.9	)		(117.3	)
Total fixed maturities, excluding discontinued operations	$	4,598.8		$	264.7		$	37.8		$	27.8		$	4,797.9
Equity securities, excluding discontinued operations	$	120.7		$	9.8		$	1.9		$	—		$	128.6

DECEMBER 31, 2009
(In millions)
							Gross Unrealized Losses
	Amortized Cost (1)			Gross Unrealized Gains			Unrealized Losses			OTTI Unrealized Losses(2)			Fair Value
U.S. Treasury securities and U.S. government and agency securities	$	355.2		$	3.2		$	3.7		$	—		$	354.7
States and political subdivisions		844.7			13.1			25.6			—			832.2
Corporate fixed maturities		2,246.7			131.4			14.3			29.9			2,333.9
Residential mortgage-backed securities		858.8			29.7			3.4			10.7			874.4
Commercial mortgage-backed securities		334.5			10.1			7.4			—			337.2
Total fixed maturities, including assets of discontinued operations		4,639.9			187.5			54.4			40.6			4,732.4
Less: fixed maturities of discontinued operations		(119.6	)		(6.0	)		(2.0	)		(6.8	)		(116.8	)
Total fixed maturities, excluding discontinued operations	$	4,520.3		$	181.5		$	52.4		$	33.8		$	4,615.6
Equity securities, excluding discontinued operations	$	57.3		$	12.2		$	0.3		$	—		$	69.2

(1) Amortized cost for fixed maturities and cost for equity securities.

(2) Represents other-than-temporary impairments recognized in accumulated other comprehensive income. Amount excludes net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date of $40.4 million and $30.1 million as of December 31, 2010 and December 31, 2009, respectively.

The Company participates in a security lending program for the purpose of enhancing income. Securities on loan to various counterparties had a fair value of $65.2 million and $72.8 million at December 31, 2010 and 2009, respectively, and were fully collateralized by cash. The fair value of the loaned securities is monitored on a daily basis, and the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. Securities lending collateral is recorded by the Company in cash and cash equivalents, with an offsetting liability included in expenses and taxes payable.

At December 31, 2010 and 2009, fixed maturities with fair values of $87.3 million and $77.6 million, respectively, and amortized cost of $84.1 million and $76.2 million, respectively, were on deposit with various state and governmental authorities.

The Company enters into various agreements that may require its fixed maturities to be held as collateral by others. At December 31, 2010, fixed maturities with a fair value of $177.5 million were held as collateral for collateralized borrowings and other arrangements. At December 31, 2009, fixed maturities with a fair value of $181.8 million were held as collateral for collateralized borrowings, reinsurance and other arrangements. Of these amounts, $162.7 million and $142.0 million related to the FHLBB collateralized borrowing program at December 31, 2010 and 2009, respectively.

At December 31, 2010, there were contractual investment commitments of up to $77.5 million, consisting primarily of the Company's commitment to invest approximately $58 million in a real estate project. In addition to these investment commitments, the Company has contractual obligations to purchase tax credits of up to $18.8 million.

The amortized cost and fair value by maturity periods for fixed maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Company may have the right to put or sell the obligations back to the issuers. Mortgage-backed securities are included in the category representing their stated maturity.

DECEMBER 31	2010
(In millions)
	Amortized Cost			Fair Value
Due in one year or less	$	178.2		$	181.4
Due after one year through five years		1,211.1			1,287.9
Due after five years through ten years		1,636.7			1,720.0
Due after ten years		1,688.6			1,725.9
Total fixed maturities including assets of discontinued operations		4,714.6			4,915.2
Less: fixed maturities of discontinued operations		(115.8	)		(117.3	)
Total fixed maturities, excluding assets of discontinued operations	$	4,598.8		$	4,797.9

B. UNREALIZED GAINS AND LOSSES

Unrealized gains and losses on available-for-sale and other securities are summarized in the following table.

FOR THE YEARS ENDED DECEMBER 31
(In millions)
2010	Fixed Maturities			Equity Securities And Other (1)			Total
Net appreciation, beginning of year	$	97.8		$	9.9		$	107.7
Net appreciation (depreciation) on available-for-sale securities		101.1			(3.3	)		97.8
Portion of OTTI losses transferred from other comprehensive income		6.9			—			6.9
Benefit for deferred federal income taxes		4.5			1.4			5.9
		112.5			(1.9	)		110.6
Net appreciation, end of year	$	210.3		$	8.0		$	218.3
2009
Net depreciation, beginning of year	$	(266.0	)	$	(10.1	)	$	(276.1	)
Cumulative effect of change in accounting principle		(33.3	)		—			(33.3	)
Balance at beginning of year, as adjusted		(299.3	)		(10.1	)		(309.4	)
Net appreciation on available-for-sale securities		403.2			19.9			423.1
Portion of OTTI losses transferred to other comprehensive income		(7.3	)		—			(7.3	)
Benefit for deferred federal income taxes		1.2			0.1			1.3
		397.1			20.0			417.1
Net appreciation, end of year	$	97.8		$	9.9		$	107.7
2008
Net (depreciation) appreciation, beginning of year	$	(3.1	)	$	8.6		$	5.5
Net depreciation on available-for-sale securities		(267.9	)		(19.1	)		(287.0	)
Net appreciation from the effect on policy liabilities		2.7			—			2.7
Benefit for deferred federal income taxes		2.3			0.4			2.7
		(262.9	)		(18.7	)		(281.6	)
Net depreciation, end of year	$	(266.0	)	$	(10.1	)	$	(276.1	)

⁽¹⁾ Equity securities and other balances at December 31, 2010, 2009 and 2008 include after-tax net appreciation on other invested assets of $0.7 million, $1.3 million and $1.4 million, respectively.

C. SECURITIES IN AN UNREALIZED LOSS POSITION

The following tables provide information about the Company's fixed maturities and equity securities that are in an unrealized loss position at December 31, 2010 and 2009:

DECEMBER 31, 2010
(In millions)	12 months or less				Greater than 12 months				Total
	Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI (1)		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S. government and agency securities	$	2.7	$	85.1	$	0.5	$	16.4	$	3.2	$	101.5
States and political subdivisions		10.4		292.3		9.0		86.7		19.4		379.0
Corporate fixed maturities		6.7		256.9		14.0		78.3		20.7		335.2
Residential mortgage-backed securities		3.2		103.8		8.8		31.0		12.0		134.8
Commercial mortgage-backed securities		0.1		13.1		0.9		7.3		1.0		20.4
Total investment grade		23.1		751.2		33.2		219.7		56.3		970.9
Below investment grade (2):
Corporate fixed maturities		1.1		56.8		14.8		102.5		15.9		159.3
Total fixed maturities		24.2		808.0		48.0		322.2		72.2		1,130.2
Equity securities:
Common equity securities		1.9		45.8		—		—		1.9		45.8
Total (3)	$	26.1	$	853.8	$	48.0	$	322.2	$	74.1	$	1,176.0

(1) Includes $33.7 million unrealized loss related to other-than-temporary impairment losses recognized in other comprehensive income, of which $14.8 million are below investment grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss had been rated by the National Association of Insurance Commissioners ("NAIC"), Standard & Poor's or Moody's at December 31, 2010.

(3) Includes discontinued accident and health business of $6.6 million in gross unrealized losses with $48.6 million in fair value at December 31, 2010.

DECEMBER 31, 2009
(In millions)
	12 months or less				Greater than 12 months				Total
	Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI (1)		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S. government and agency securities	$	3.7	$	170.8	$	—	$	—	$	3.7	$	170.8
States and political subdivisions		9.0		275.2		15.6		176.5		24.6		451.7
Corporate fixed maturities		3.4		115.8		13.3		152.7		16.7		268.5
Residential mortgage-backed securities		6.6		89.1		7.5		62.6		14.1		151.7
Commercial mortgage-backed securities		0.4		13.5		7.0		30.0		7.4		43.5
Total investment grade		23.1		664.4		43.4		421.8		66.5		1,086.2
Below investment grade (2):
States and political subdivisions		0.2		8.7		0.8		8.2		1.0		16.9
Corporate fixed maturities		10.6		84.1		16.9		150.1		27.5		234.2
Total below investment grade		10.8		92.8		17.7		158.3		28.5		251.1
Total fixed maturities		33.9		757.2		61.1		580.1		95.0		1,337.3
Equity securities:
Common equity securities		—		—		0.3		1.4		0.3		1.4
Total (3)	$	33.9	$	757.2	$	61.4	$	581.5	$	95.3	$	1,338.7

(1) Includes $40.6 million unrealized loss related to other-than-temporary impairment losses recognized in other comprehensive income, of which $14.8 million are below investment grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss had been rated by the NAIC, Standard & Poor's or Moody's at December 31, 2009.

(3) Includes discontinued accident and health business of $8.8 million in gross unrealized losses with $55.0 million in fair value at December 31, 2009.

The Company employs a systematic methodology to evaluate declines in fair value below amortized cost for fixed maturity securities or cost for equity securities. In determining other-than-temporary impairments of fixed maturity and equity securities, the Company evaluates several factors and circumstances, including the issuer's overall financial condition; the issuer's credit and financial strength ratings; the issuer's financial performance, including earnings trends, dividend payments and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the length of time and the degree to which the fair value of an issuer's securities remains below the Company's cost. With respect to fixed maturity investments, the Company considers any factors that might raise doubt about the issuer's ability to pay all amounts due according to the contractual terms and whether the Company expects to recover the entire amortized cost basis of the security. With respect to equity securities, the Company considers its ability and intent to hold the investment for a period of time to allow for a recovery in value. The Company applies these factors to all securities.

The following tables provide information on the Company's gross unrealized losses of fixed maturity securities by credit ratings, including ratings of securities with third party guarantees, as of December 31, 2010 and 2009.

DECEMBER 31	2010
(In millions)
	AAA			AA			A			BBB			Total investment grade			BB			B			CCC and below			Total below investment grade			Total
U.S. Treasury securities and U.S government and agency securities	$	3.2		$	—		$	—		$	—		$	3.2		$	—		$	—		$	—		$	—		$	3.2
States and political subdivisions		4.0			6.2			1.5			7.7			19.4			—			—			—			—			19.4
Corporate fixed maturities		0.3			1.1			6.5			12.8			20.7			5.6			5.7			4.6			15.9			36.6
Residential mortgage-backed securities		3.7			0.6			—			7.7			12.0			—			—			—			—			12.0
Commercial mortgage-backed securities		—			—			1.0			—			1.0			—			—			—			—			1.0
Total fixed maturities, including discontinued operations		11.2			7.9			9.0			28.2			56.3			5.6			5.7			4.6			15.9			72.2
Less: losses included in discontinued operations		(0.2	)		—			(0.4	)		(3.1	)		(3.7	)		(2.3	)		(0.2	)		(0.4	)		(2.9	)		(6.6	)
Total fixed maturities, excluding discontinued operations	$	11.0		$	7.9		$	8.6		$	25.1		$	52.6		$	3.3		$	5.5		$	4.2		$	13.0		$	65.6
DECEMBER 31	2009
(In millions)
	AAA			AA			A			BBB			Total investment grade			BB			B			CCC and below			Total below investment grade			Total
U.S. Treasury securities and U.S government and agency securities	$	3.7		$	—		$	—		$	—		$	3.7		$	—		$	—		$	—		$	—		$	3.7
States and political subdivisions		4.1			7.3			4.8			8.4			24.6			0.8			—			0.2			1.0			25.6
Corporate fixed maturities		—			1.4			7.1			8.2			16.7			11.8			9.7			6.0			27.5			44.2
Residential mortgage-backed securities		2.4			1.4			7.9			2.4			14.1			—			—			—			—			14.1
Commercial mortgage-backed securities		0.5			0.8			6.1			—			7.4			—			—			—			—			7.4
Total fixed maturities, including discontinued operations		10.7			10.9			25.9			19.0			66.5			12.6			9.7			6.2			28.5			95.0
Less: losses included in discontinued operations		—			(0.2	)		(1.4	)		(3.2	)		(4.8	)		(0.5	)		(2.8	)		(0.7	)		(4.0	)		(8.8	)
Total fixed maturities, excluding discontinued operations	$	10.7		$	10.7		$	24.5		$	15.8		$	61.7		$	12.1		$	6.9		$	5.5		$	24.5		$	86.2

D. OTHER

The Company had no concentration of investments in a single investee that exceeded 10% of shareholders' equity except as follows:

DECEMBER 31	2010		2009
(in millions)
	Fair Value
Fixed maturities:
Federal Home Loan Mortgage Corp. (1)	$	445.5	$	574.0
Federal National Mortgage Association (2)	$	205.4	$	260.3

(1) Includes securities of discontinued operations of $6.4 million and $27.7 million at December 31, 2010 and 2009, respectively.

(2) Holdings in Federal National Mortgage Association at December 31, 2010 were less than 10% of shareholders' equity but are included for comparative purposes.

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Other Significant Transactions

12 Months Ended

Dec. 31, 2010

Other Significant Transactions

Other Significant Transactions

3. OTHER SIGNIFICANT TRANSACTIONS

During 2010, the Company paid quarterly dividends of 25 cents per share to its shareholders. Total dividends paid in the quarters ended December 31, 2010, September 30, 2010, June 30, 2010 and March 31, 2010 were $11.3 million, $11.6 million, $12.0 million and $12.3 million, respectively. The Company's dividend payments in 2010 represented a 33% increase over the annual dividend payment of 75 cents per share in 2009.

Since October 2007 and through December 2010, the Company's Board of Directors has authorized aggregate repurchases of the Company's common stock of up to $500 million, including a $100 million increase in the program in the fourth quarter of 2010. Under the repurchase authorizations, the Company may repurchase its common stock from time to time, in amounts and prices and at such times as deemed appropriate, subject to market conditions and other considerations. The Company's repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. The Company is not required to purchase any specific number of shares or to make purchases by any certain date under this program. On March 30, 2010 and December 8, 2009, the Company entered into accelerated share repurchase agreements with Barclays Bank PLC, acting through its agent Barclays Capital, Inc., for the immediate repurchase of 2.3 million and 2.4 million shares, respectively, of the Company's common stock at a cost of $105.0 million and $105.2 million, respectively. Total repurchases under the program as of December 31, 2010 were 7.9 million shares at a cost of $342.9 million, for an average price per share of $43.27.

On June 14, 2010, the Company purchased approximately 11 acres of developable land in Worcester, Massachusetts for $5 million. A portion of the land will be developed with the construction of a new 200,000 square foot office building and the redevelopment of an adjacent parking garage (the "City Square Project"). In addition, the Company signed a 17 year lease agreement with a tenant for the new building and garage. The tenant is an unaffiliated public company with an investment grade credit rating. Through December 31, 2010, the Company capitalized $8.3 million in related lease acquisition, legal, architectural and associated costs. Development costs are estimated between $65 million and $70 million and the project will be financed, in part, through the issuance of collateralized debt through the Company's membership in the FHLBB. In July 2010, Hanover Insurance committed to borrow $46.3 million from the FHLBB to finance the project. These borrowings will be drawn in several increments from July 2010 to January 2012. During 2010, Hanover Insurance received an advance of $9.5 million from this commitment. Amounts drawn from the $46.3 million mature on July 20, 2020 and carry fixed interest rates with a weighted average of 3.88%. (See also below for further information related to participation in the FHLBB's collateralized borrowing program).

On March 31, 2010, the Company acquired Campania for a cash purchase price of approximately $24 million, subject to various terms and conditions. Campania specializes in insurance solutions for portions of the healthcare industry.

On February 23, 2010, the Company issued $200.0 million aggregate principal amount of 7.50% senior unsecured notes due March 1, 2020. The senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of capital stock of restricted subsidiaries and limitations on liens. These debentures pay interest semi-annually on March 1 and September 1.

On December 3, 2009, the Company entered into a renewal rights agreement with OneBeacon Insurance Group, LTD. ("OneBeacon"). Through this agreement, the Company acquired access to a portion of OneBeacon's small and middle market commercial business at renewal, including industry programs and middle market niches. This transaction included consideration of approximately $23 million, plus certain potential additional consideration estimated to total approximately $11 million, primarily representing purchased renewal rights intangible assets which are included as other assets in the Consolidated Balance Sheets. The agreement was effective for renewals beginning January 1, 2010.

On September 25, 2009, Hanover Insurance received an advance of $125 million through its membership in the FHLBB as part of a collateralized borrowing program. This advance bears interest at a fixed rate of 5.50% per annum over a twenty-year term. The proceeds from the borrowing were used by Hanover Insurance to acquire AIX and its subsidiaries from the holding company. As collateral to the FHLBB for all advances received, including those relating to the City Square Project, as of December 31, 2010, Hanover Insurance has pledged government agency securities with a fair value of $162.7 million. Collateral pledged to the FHLBB totaled $142.0 million as of December 31, 2009. The fair value of the collateral pledged must be maintained at certain specified levels of the borrowed amount, which can vary depending on the type of assets pledged. If the fair value of this collateral declines below these specified levels, Hanover Insurance would be required to pledge additional collateral or repay outstanding borrowings. Hanover Insurance is permitted to voluntarily repay the outstanding borrowings at any time, subject to a repayment fee. As a requirement of membership in the FHLBB, Hanover Insurance acquired $2.5 million of FHLBB stock, and as a condition to participating in the FHLBB's collateralized borrowing program, it was required to purchase additional shares of FHLBB stock in an amount equal to 4.5% of its outstanding borrowings. These additional purchases totaled $6.1 million through December 31, 2010.

The Company liquidated AFC Capital Trust I (the "Trust") on July 30, 2009. Each holder of 8.207% Series B Capital Securities ("Capital Securities") as of that date received a principal amount of the Company's Series B 8.207% Junior Subordinated Deferrable Interest Debentures ("Junior Debentures") due February 3, 2027 equal to the liquidation amount of the Capital Securities held by such holder. The liquidation of the Trust did not have a material effect on the Company's results of operations or financial position. On June 29, 2009, prior to liquidating the Trust, the Company completed a cash tender offer to repurchase a portion of its Capital Securities that were issued by the Trust (subsequently redeemed and exchanged for Junior Debentures) and a portion of its 7.625% Senior Debentures ("Senior Debentures") due in 2025 that were issued by THG. As of that date, $69.3 million of Capital Securities were tendered at a price equal to $800 per $1,000 of face value. In addition, the Company accepted for tender a principal amount of $77.3 million of Senior Debentures. Depending on the time of tender, holders of the Senior Debentures accepted for purchase received a price of either $870 or $900 per $1,000 of face value. Separately, the Company held $65.0 million of Capital Securities previously repurchased at a discount in the open market prior to the tender offer, and $1.1 million of Senior Debentures. The Company recognized a pre-tax gain of $34.5 million in 2009 as a result of such purchases. In 2010, the Company repurchased $36.5 million of Junior Subordinated Debentures at a cost of $38.5 million, resulting in a $2.0 million loss on the repurchase. On February 15, 2011, the Company repurchased an additional $48.0 million of Junior Subordinated Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million on the repurchase. As of February 15, 2011 and December 31, 2010, a net principal amount of $81.2 million and $129.2 million, respectively, of the Company's Junior Debentures remained outstanding. As of December 31, 2010, $121.4 million of the Company's Senior Debentures remained outstanding.

On November 28, 2008, the Company acquired AIX for approximately $100 million, subject to various terms and conditions. AIX is a specialty property and casualty insurer that underwrites and manages program business.

On June 2, 2008, the Company completed the sale of its premium financing subsidiary, AMGRO, Inc. to Premium Financing Specialists, Inc. The Company recorded a gain of $11.1 million related to this sale, which was reflected in the Consolidated Statement of Income as part of discontinued operations.

On March 14, 2008, the Company acquired all of the outstanding shares of Verlan Holdings, Inc. ("Verlan") for $29.0 million. Verlan, now referred to as Hanover Specialty Industrial, is a specialty company providing property insurance to chemical, paint, solvent and other manufacturing and distribution companies.

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Lease Commitments

12 Months Ended

Dec. 31, 2010

Lease Commitments

Lease Commitments

15. LEASE COMMITMENTS

Rental expenses for operating leases amounted to $17.2 million, $15.4 million and $16.9 million in 2010, 2009 and 2008, respectively. These expenses relate primarily to building leases of the Company. At December 31, 2010, future minimum rental payments under non-cancelable operating leases were approximately $42.9 million, payable as follows: 2011 - $14.1 million; 2012 - $10.8 million; 2013 - $8.8 million; 2014 - $5.8 million and $3.4 million thereafter. It is expected that in the normal course of business, leases that expire may be renewed or replaced by leases on other property and equipment.

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Stock-based Compensation Plans

12 Months Ended

Dec. 31, 2010

Stock-based Compensation Plans

Stock-based Compensation Plans

11. STOCK-BASED COMPENSATION PLANS

On May 16, 2006, the shareholders approved the adoption of The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan (the "Plan"). Key employees, directors and certain consultants of the Company and its subsidiaries are eligible for awards pursuant to the Plan, which is administered by the Compensation Committee of the Board of Directors (the "Committee") of the Company. Under the Plan, awards may be granted in the form of non-qualified or incentive stock options, stock appreciation rights, performance awards, restricted stock, unrestricted stock, stock units, or any other award that is convertible into or otherwise based on the Company's stock, subject to certain limits. The Plan authorizes the issuance of 3,000,000 new shares that may be used for awards. In addition, shares of stock underlying any award granted and outstanding under the Company's Amended Long-Term Stock Incentive Plan (the "1996 Plan") as of the adoption date of the Plan that are forfeited or cancelled, or expire or terminate, after the adoption date without the issuance of stock become available for future grants under the Plan. As of December 31, 2010, there were 1,856,704 shares available for grants under the Plan. The Company utilizes shares of stock held in the treasury account for option exercises and other awards granted under both plans.

Compensation cost totaled $11.1 million for 2010 and $11.6 million for both 2009 and 2008. Related tax benefits were $3.9 million for 2010 and $4.1 million for both 2009 and 2008.

Stock Options

Under the Plan (or the 1996 Plan, as applicable), options may be granted to eligible employees, directors or consultants at an exercise price equal to the market price of the Company's common stock on the date of grant. Option shares may be exercised subject to the terms prescribed by the Committee at the time of grant. Options granted in 2008 generally vest over three years with a 25% vesting rate in each of the first two years and a 50% vesting rate in the final year. Options granted in 2009 and 2010 generally vest over 4 years with a 50% vesting rate in the third year and a 50% vesting rate in the final year. Options must be exercised not later than ten years from the date of grant.

Information on the Company's stock option plans is summarized below.

For the years ended December 31	2010					2009					2008
(In whole shares and dollars)	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding, beginning of year		3,131,142		$	39.16		2,998,821		$	41.02		3,268,912		$	41.15
Granted		412,250			42.72		530,000			34.13		126,159			44.81
Exercised		(326,823	)		36.88		(87,469	)		35.68		(228,512	)		35.84
Forfeited or cancelled		(247,260	)		44.49		(126,110	)		45.81		(44,338	)		53.23
Expired		(125,400	)		44.91		(184,100	)		52.07		(123,400	)		53.32
Outstanding, end of year		2,843,909		$	39.22		3,131,142		$	39.16		2,998,821		$	41.02
Exercisable, end of year		2,037,159		$	39.74		2,398,725		$	39.39		2,550,797		$	39.96

Cash received for options exercised for the years ended December 31, 2010, 2009 and 2008 was $12.1 million, $3.1 million and $8.2 million, respectively. The intrinsic value of options exercised for the years ended December 31, 2010, 2009 and 2008 was $2.6 million, $0.6 million and $2.5 million, respectively.

The excess tax expense realized from options exercised for both the years ended December 31, 2010 and 2009 was $0.1 million. There was no excess tax benefit or expense realized from options exercised for the year ended December 31, 2008. The aggregate intrinsic value at December 31, 2010 for shares outstanding and shares exercisable was $24.4 million and $17.4 million, respectively. At December 31, 2010, the weighted average remaining contractual life for shares outstanding and shares exercisable was 4.8 years and 3.2 years, respectively. Additional information about employee options outstanding and exercisable at December 31, 2010 is included in the following table:

	Options Outstanding						Options Currently Exercisable
Range of Exercise Prices	Number		Weighted Average Remaining Contractual Lives		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
$14.94 to $28.88		359,308		2.58	$	22.32		359,308	$	22.32
$30.29 to $35.56		454,800		8.05	$	34.12		10,800	$	34.11
$35.86 to $38.16		759,250		3.59	$	36.52		759,250	$	36.52
$41.05 to $44.05		526,557		6.01	$	42.86		211,307	$	43.92
$44.62 to $48.46		487,744		6.19	$	47.46		440,244	$	47.59
$57.00		256,250		0.13	$	57.00		256,250	$	57.00

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. For all options granted through December 31, 2010, the exercise price equaled the market price on the grant date. Compensation cost related to options is based upon the grant date fair value and expensed on a straight-line basis over the service period for each separately vesting portion of the option as if the option was, in substance, multiple awards.

The weighted average grant date fair value of options granted during the years ended December 31, 2010, 2009 and 2008 was $11.48, $9.51 and $10.72, respectively.

The following significant assumptions were used to determine the fair value for options granted in the years indicated.

	2010	2009	2008
Dividend yield	1.68% to 2.37%	1.31% to 1.48%	0.88% to 0.96%
Expected volatility	32.45% to 39.18%	32.40% to 34.28%	22.43% to 30.25%
Weighted average expected volatility	33.50%	32.72%	26.12%
Risk-free interest rate	0.87% to 2.70%	1.54% to 2.24%	2.23% to 3.97%
Expected term, in years	2.5 to 5.5	4.5 to 5.5	2.5 to 6

The expected dividend yield is based on the Company's dividend payout rate(s), in the year noted. Expected volatility is based on the Company's historical daily stock price volatility. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted represents the period of time that options are expected to be outstanding and is derived using historical exercise, forfeit and cancellation behavior, along with certain other factors expected to differ from historical data.

The fair value of shares that vested during the years ended December 31, 2010 and 2009 was lower than the value of these shares on their grant date. The vesting date fair value of shares that vested during the year ended December 31, 2008 was $3.7 million. As of December 31, 2010, the Company had unrecognized compensation expense of $5.4 million related to unvested stock options that is expected to be recognized over a weighted average period of 2.7 years.

Restricted Stock and Restricted Stock Units

Stock grants may be awarded to eligible employees at a price established by the Committee (which may be zero). Under the Plan, the Company may award shares of restricted stock, restricted stock units, as well as shares of unrestricted stock. Restricted stock grants may vest based upon performance criteria or continued employment and be in the form of shares or units. Vesting periods are established by the Committee.

In 2010 and 2009, the Company granted performance-based restricted share units to certain employees. These share units vest after the achievement of certain corporate goals at a rate of 50% after three years and the remaining 50% after four years of continued employment. The Company also granted restricted stock units to eligible employees that generally vest at a rate of 50% after three years and the remaining 50% after 4 years of continued employment. In 2008, the Company granted performance-based restricted stock units to certain employees that vested after the achievement of certain corporate goals and after three years of continued employment. The Company also granted restricted stock units to eligible employees that generally vested after three years of continued employment. The following table summarizes information about employee nonvested stock, restricted stock units and performance-based restricted share units.

For the years ended December 31	2010					2009					2008
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Restricted stock and restricted stock units:
Outstanding, beginning of year		700,904		$	41.12		470,905		$	45.41		179,416		$	46.79
Granted		367,197			42.77		304,680			34.74		334,555			44.50
Vested		(118,730	)		47.92		(13,169	)		45.21		(17,588	)		38.27
Forfeited		(111,242	)		40.73		(61,512	)		42.10		(25,478	)		46.56
Outstanding, end of year		838,129		$	40.93		700,904		$	41.12		470,905		$	45.41
Performance-based restricted stock units:
Outstanding, beginning of year (1)		145,635		$	42.79		164,442		$	46.10		402,929		$	44.16
Granted (1)		41,250			42.15		47,375			34.19		127,624			42.40
Vested		(31,558	)		48.46		(63,432	)		43.65		(363,313	)		44.15
Forfeited (2)		(53,647	)		44.97		(2,750	)		34.19		(2,798	)		46.04
Outstanding, end of year (1)		101,680		$	39.62		145,635		$	42.79		164,442		$	46.10

(1) Performance based restricted stock units are based upon the achievement of the performance metric at 100%. These units have the potential to range from 0% to 150% of the shares disclosed, which varies based on grant year and individual participation level. Increases to the 100% target level are reflected as granted in the period in which performance-based stock unit goals are achieved. Decreases to the 100% target level are reflected as forfeited. In 2008, 26,004 and 43,640 performance-based stock units were included as granted due to completion levels in excess of 100% for units originally granted in 2006 and 2005, respectively. The weighted average grant date fair value for these awards was $46.28 and $36.34 for 2006 and 2005 grants, respectively. There were 57,980 shares awarded as new grants in 2008, which have a weighted average grant date fair value of $45.21, respectively.

(2) In 2010, 11,472 performance-based stock units were included as forfeited due to completion levels less than 100% for units originally granted in 2007. The weighted average grant date fair value for these awards was $48.46. Additionally, in 2010, 25,055 performance- based stock units were included as forfeited due to estimated completion levels of less than 100% for units originally granted in 2008. The weighted average grant date fair value for this award was $45.21.

The intrinsic value, which is equal to the fair value for restricted stock and for restricted stock units that vested during the year ended December 31, 2010 was $5.0 million and the intrinsic value of performance-based restricted stock units that vested during 2010 was $1.3 million. The intrinsic value of restricted stock units and performance-based restricted units that vested during the year ended December 31, 2009 were $0.5 million and $2.5 million, respectively. The intrinsic value of restricted stock units and performance-based restricted units that vested during the year ended December 31, 2008 were $0.8 million and $15.9 million, respectively.

At December 31, 2010, the aggregate intrinsic value of restricted stock and restricted stock units was $39.2 million and the weighted average remaining contractual life was 2.0 years. The aggregate intrinsic value of performance based restricted stock units was $4.8 million and the weighted average remaining contractual life was 2.0 years. As of December 31, 2010, there was $19.0 million of total unrecognized compensation cost related to unvested restricted stock units and performance-based restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.3 years. Compensation cost associated with restricted stock, restricted stock units and performance-based restricted stock units is generally calculated based upon grant date fair value, which is determined using current market prices.

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Debt

12 Months Ended

Dec. 31, 2010

Debt

Debt

7. DEBT

Debt consists of the following:

DECEMBER 31	2010		2009
(In millions)
Senior debentures (unsecured) maturing March 1, 2020	$	199.3	$	—
Senior debentures (unsecured) maturing October 16, 2025		121.4		121.4
Holding company junior debentures		129.2		165.7
FHLBB borrowing		134.5		125.0
Capital securities		17.5		17.8
Surplus notes		4.0		4.0
	$	605.9	$	433.9

On February 23, 2010, the Company issued $200.0 million aggregate principal amount of 7.50% senior unsecured notes due March 1, 2020. These senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of capital stock of restricted subsidiaries and limitations on liens. These debentures pay interest semi-annually (See also Note 3 – Other Significant Transactions). The Company is in compliance with the covenants associated with this indenture.

The Company also issued senior unsecured notes with a face value of $200.0 million on October 16, 1995. In 2009, the Company repurchased a portion of these senior debentures with a face value of $78.4 million (See also Note 3 – Other Significant Transactions). The remaining senior debentures have a $121.6 million face value, pay interest semi-annually at a rate of 7.625% and mature on October 16, 2025. The senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of stock of restricted subsidiaries and limitations on liens. The Company is in compliance with the covenants associated with this indenture.

The Company established a business trust in 1997, AFC Capital Trust I, for the sole purpose of issuing mandatorily redeemable preferred securities to investors. Through the trust, the Company issued $300.0 million of Series B Capital Securities, which were registered under the Securities Act of 1933, the proceeds of which were used to purchase related junior subordinated debentures from the holding company. The Company liquidated the Trust on July 30, 2009. Each holder of Capital Securities as of that date received a principal amount of the Company's Series B Junior Debentures equal to the liquidation amount of the Capital Securities held by such holder. In 2010 and 2009, the Company repurchased a portion of these debentures with a face value of $36.5 million and $134.3 million, respectively. These junior subordinated debentures have a face value of $129.2 million and $165.7 million as of December 31, 2010 and December 31, 2009, respectively. Consistent with the Capital Securities, these debentures pay cumulative dividends semi-annually at 8.207% and mature February 3, 2027 (See also Note 3 – Other Significant Transactions). On February 15, 2011, the Company repurchased an additional $48.0 million of Junior Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million on the repurchase.

On November 28, 2008, the Company acquired all of the outstanding shares of AIX. Prior to this acquisition, AIX Group Trust issued $15.0 million floating rate preferred capital securities and $0.5 million floating rate preferred common securities. The proceeds were used to purchase $15.5 million floating rate subordinated debentures issued by AIX. Coincident with the issuances, AIX issued $0.5 million of the floating rate subordinate debentures to purchase all of the common stock of AIX Group Trust. The Company carries the debt issued by this trust as a component of its debt. The Company also has $4.0 million of surplus notes outstanding related to AIX.

On September 14, 2007, the Company acquired all of the outstanding shares of PDI. Prior to this acquisition, Professionals Direct Statutory Trust II issued $3.0 million of preferred securities in 2005, the proceeds of which were used to purchase junior subordinated debentures issued by PDI. Coincident with the issuance of the preferred securities, PDI issued $0.1 million of junior subordinated debentures to purchase all of the common stock of Professionals Direct Statutory Trust II.

In September 2009, Hanover Insurance received an advance of $125.0 million through its membership in the FHLBB as part of a collateralized borrowing program. This advance bears interest at a fixed rate of 5.50% per annum over a twenty-year term. In July 2010, the Company committed to borrow an additional $46.3 million from FHLBB to finance the development of the City Square Project. These borrowings will be drawn in several increments from July 2010 to January 2012. All amounts mature on July 20, 2020 and carry fixed interest rates with a weighted average of 3.88%. Through December 31, 2010, the Company has borrowed $9.5 million under this arrangement. All interest associated with this additional $46.3 million will be capitalized through the construction phase of the City Square Project. As collateral to FHLBB, Hanover Insurance has pledged government agency securities with a fair value of $162.7 million and $142.0 million as of December 31, 2010 and 2009, respectively (See also Note 3 – Other Significant Transactions). The Company is in compliance with the covenants associated with these borrowings.

In June 2007, the Company entered into a $150.0 million committed syndicated credit agreement which expired in June 2010. There were no borrowings under this agreement. The agreement provided for several covenants; all of which the Company was in compliance with for the duration of the contract. The Company did not renew or replace this syndicated credit agreement upon expiration. Additionally, the Company had no commercial paper borrowings as of December 31, 2010.

Interest expense was $44.3 million in 2010, $35.5 million in 2009 and $41.0 million in 2008, and included interest related to the Company's senior debentures, junior subordinated debentures, FHLBB borrowing, capital securities and surplus notes. All interest expense is recorded in other operating expenses.

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Investment Income and Gains and Losses

12 Months Ended

Dec. 31, 2010

Investment Income and Gains and Losses

Investment Income and Gains and Losses

5. INVESTMENT INCOME AND GAINS AND LOSSES

A. NET INVESTMENT INCOME

The components of net investment income were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Fixed maturities	$	248.6		$	249.3		$	251.3
Equity securities		4.5			5.2			4.7
Mortgage loans		0.7			2.3			0.9
Other long-term investments		0.1			(0.1	)		2.2
Short-term investments		0.2			2.0			4.5
Gross investment income		254.1			258.7			263.6
Less investment expenses		(6.9	)		(6.6	)		(4.9	)
Net investment income	$	247.2		$	252.1		$	258.7

The carrying value of non-income producing fixed maturities, as well as the carrying value of fixed maturity securities on non-accrual status, at December 31, 2010 and 2009 was not material. The effect of non-accruals for the years ended December 31, 2010, 2009 and 2008, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, was a reduction in net investment income of $2.3 million, $3.1 million and $2.1 million, respectively.

B. NET REALIZED INVESTMENT GAINS AND LOSSES

Net realized gains (losses) on investments were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Fixed maturities	$	17.7		$	5.3		$	(90.8	)
Equity securities		13.0			(4.3	)		(7.6	)
Other investments		(1.0	)		0.4			0.6
Net realized investment gains (losses)	$	29.7		$	1.4		$	(97.8	)

Included in the net realized investment gains (losses) were other-than-temporary impairments of investment securities recognized in earnings totaling $13.9 million, $32.9 million and $113.1 million in 2010, 2009 and 2008, respectively.

Other-than-temporary-impairments

As of April 1, 2009, the Company adopted the guidance included in ASC 320, which modified the assessment of OTTI on fixed maturity securities, as well as the method of recording and reporting OTTI. Under the new guidance, if a company intends to sell or more likely than not will be required to sell a fixed maturity security before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings. If a company does not intend to sell the debt security, or more likely than not will not be required to sell it, the company is required to separate the other-than-temporary impairment into the portion which represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings and the amount related to non-credit factors is recognized in other comprehensive income, net of applicable taxes.

ASC 320 requires a cumulative effect adjustment upon adoption to reclassify the non-credit component of previously recognized impairments from retained earnings to other comprehensive income. The Company reviewed previously recognized OTTI recorded through realized losses on securities held at April 1, 2009, which was approximately $121 million, and determined that $33.3 million of these OTTI were related to non-credit factors, such as interest rates and market conditions. Accordingly, the Company increased the amortized cost basis of these debt securities and recorded a cumulative effect adjustment of $33.3 million within shareholders' equity. The cumulative effect adjustment had no effect on total shareholders' equity as it increased retained earnings and reduced accumulated other comprehensive income.

For 2010, total OTTI were $9.4 million. Of this amount, $13.9 million was recognized in earnings, including $4.5 million that was transferred from unrealized losses in accumulated other comprehensive income. Of the $13.9 million recorded in earnings, $4.4 million related to certain low-income housing tax credit limited partnerships, $4.3 million was estimated credit losses on fixed maturity securities, $3.3 million related to fixed maturity securities that the Company intends to sell and $1.9 million related to common stocks. Other-than-temporary impairments recognized on fixed maturity securities during 2010 primarily included $2.9 million on below investment grade corporate bonds principally in the industrial and utilities sectors, $2.7 million on investment grade residential mortgage-backed securities and $1.2 million on investment grade corporate bonds in the industrial sector.

For 2009, total OTTI were $42.2 million. Of this amount, $32.9 million was recognized in earnings and the remaining $9.3 million was recorded as unrealized losses in accumulated other comprehensive income. Of the OTTI recognized in earnings, $15.7 million related primarily to below investment grade corporate bonds in the industrial sector that the Company intended to sell and $9.6 million were from equities, including perpetual preferred securities primarily in the financial sector. In addition, the Company recorded OTTI of $7.6 million that was estimated credit losses, primarily on below investment grade fixed maturity securities, including $4.1 million on corporate bonds, $2.1 million on residential mortgage-backed securities and $1.4 million on a municipal bond.

The methodology and significant inputs used to measure the amount of credit losses on fixed maturities in 2010 and 2009 are as follows:

Corporate bonds - the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating and asset duration and loss-given-default factors based on security type. These factors are based on historical data provided by an independent third-party rating agency.

Asset-backed securities, including commercial and residential mortgage backed securities - the Company utilized cash flow estimates based on bond specific facts and circumstances that include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayment speeds and structural support, including subordination and guarantees.

Municipals - the Company utilized cash flow estimates based on bond specific facts and circumstances that may include the political subdivision's taxing authority, the issuer's ability to adjust user fees or other sources of revenue to satisfy its debt obligations and the ability to access insurance or guarantees.

The following table provides rollforwards of the cumulative amounts related to the Company's credit loss portion of the OTTI losses on fixed maturity securities for which the non-credit portion of the loss is included in other comprehensive income.

FOR THE YEARS ENDED DECEMBER 31	2010			2009 (1)
(In millions)
Credit losses as of the beginning of the period	$	22.1		$	17.3
Credit losses for which an OTTI was not previously recognized		1.2			4.0
Additional credit losses on securities for which an OTTI was previously recognized		3.1			3.6
Reductions for securities sold, matured or called during the period		(8.3	)		(1.4	)
Reductions for securities reclassified as intend to sell		(0.4	)		(1.4	)
Credit losses as of the end of the year	$	17.7		$	22.1

(1) The effective date of the section of ASC 320 requiring this disclosure was April 1, 2009, therefore the period represented is April 1, 2009 through December 31, 2009.

The proceeds from voluntary sales of available-for-sale securities and the gross realized gains and gross realized losses on those sales, excluding discontinued operations, are provided in the following table for the periods indicated:

FOR THE YEARS ENDED DECEMBER 31
(In millions)
2010	Proceeds from Voluntary Sales		Gross Gains		Gross Losses
Fixed maturities	$	456.2	$	24.1	$	2.2
Equity securities	$	112.1	$	13.5	$	—
2009
Fixed maturities	$	1,522.4	$	40.4	$	14.2
Equity securities	$	44.6	$	7.6	$	2.6
2008
Fixed maturities	$	498.1	$	16.4	$	7.8
Equity securities	$	1.1	$	0.2	$	—

C. OTHER COMPREHENSIVE INCOME (LOSS) RECONCILIATION

The following table provides a reconciliation of gross unrealized investment gains (losses) to the net balance shown in the Consolidated Statements of Comprehensive Income (Loss).

FOR THE YEARS ENDED DECEMBER 31	2010		2009			2008
(In millions)
Unrealized appreciation (depreciation) on available-for-sale securities:
Unrealized holding gains (losses) arising during period, net of income tax benefit of $9.1, $1.3 and $2.9 in 2010, 2009 and 2008.	$	139.8	$	414.9		$	(397.0	)
Less: reclassification adjustment for gains (losses) included in net income		29.2		(2.2	)		(115.0	)
Total available-for-sale securities		110.6		417.1			(282.0	)
Unrealized depreciation on derivative instruments:
Unrealized holding losses arising during period, net of income tax benefit of $1.7 in 2008.		—		—			(3.2	)
Less: reclassification adjustment for losses included in net income, net of income tax benefit of $1.9 in 2008.		—		—			(3.6	)
Total derivative instruments		—		—			0.4
Other comprehensive income (loss)	$	110.6	$	417.1		$	(281.6	)

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Fair Value

12 Months Ended

Dec. 31, 2010

Fair Value

Fair Value

6. FAIR VALUE

The Company follows the guidance in ASC 820, as it relates to the fair value of its financial assets and liabilities. ASC 820 provides for a standard definition of fair value to be used in new and existing pronouncements. This guidance requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet. The fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants and also provides a hierarchy for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1 as these are the most reliable, and the lowest priority given to Level 3.

Level 1 – Quoted prices in active markets for identical assets.

Level 2 – Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.

Level 3 – Unobservable inputs that are supported by little or no market activity.

When more than one level of input is used to determine fair value, the financial instrument is classified as Level 2 or 3 according to the lowest level input that has a significant impact on the fair value measurement.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments and have not changed during the year:

Cash and Cash Equivalents

For these short-term investments, the carrying amount approximates fair value.

Fixed Maturities

Level 1 securities generally include U.S. Treasury issues and other securities that are highly liquid and for which quoted market prices are available. Level 2 securities are valued using pricing for similar securities and pricing models that incorporate observable inputs including, but not limited to yield curves and issuer spreads. Level 3 securities include issues for which little observable data can be obtained, primarily due to the illiquid nature of the securities, and for which significant inputs used to determine fair value are based on the Company's own assumptions. Non-binding broker quotes are also included in Level 3.

The Company utilizes a third party pricing service for the valuation of the majority of its fixed maturity securities and receives one quote per security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value for those securities using pricing applications based on a market approach. Inputs into the fair value pricing applications which are common to all asset classes include benchmark U.S. Treasury security yield curves, reported trades of identical or similar fixed maturity securities, broker/dealer quotes of identical or similar fixed maturity securities and structural characteristics of the security, such as maturity date, coupon, mandatory principal payment dates, frequency of interest and principal payments and optional principal redemption features. Inputs into the fair value applications that are unique by asset class include, but are not limited to:

• Corporate fixed maturities - overall credit quality, including assessments of the level and variability of: industry economic sensitivity; company financial policies; quality of management; regulatory environment; competitive position; indenture restrictive covenants; and security or collateral.

• States and political subdivisions - overall credit quality, including assessments of the level and variability of: sources of payment such as income, sales or property taxes, levies or user fees; credit support such as insurance; state or local economic and political base; natural resource availability; and susceptibility to natural or man-made catastrophic events such as hurricanes, earthquakes or acts of terrorism.

• Residential mortgage-backed securities, U.S. agency pass-thrus and collateralized mortgage obligations ("CMOs") - estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; U.S. government support programs; tax policies; and delinquency/default trends.

• Residential mortgage-backed securities, non-agency CMOs - estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; U.S. government support programs; tax policies; delinquency/default trends; and severity of loss upon default and length of time to recover proceeds following default.

• Commercial mortgage-backed securities - overall credit quality, including assessments of the level and variability of: collateral type such as office, retail, residential, lodging, or other; geographic concentration by region, state, metropolitan statistical area and locale; vintage year; historical collateral performance including defeasance, delinquency, default and special servicer trends; and capital structure support features.

Generally, all prices provided by the pricing service, except actively traded securities with quoted market prices, are reported as Level 2.

The Company holds privately placed fixed maturity securities and certain other fixed maturity securities that do not have an active market and for which the pricing service cannot provide fair values. The Company determines fair values for these securities using either matrix pricing utilizing the market approach or broker quotes. The Company will use observable market data as inputs into the fair value applications, as discussed in the determination of Level 2 fair values, to the extent it is available, but is also required to use a certain amount of unobservable judgment due to the illiquid nature of the securities involved. Unobservable judgment reflected in the Company's matrix model accounts for estimates of additional spread required by market participants for factors such as issue size, structural complexity, high bond coupon, long maturity term or other unique features. These matrix-priced securities are reported as Level 2 or Level 3, depending on the significance of the impact of unobservable judgment on the security's value. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.

Equity Securities

Level 1 includes publicly traded securities valued at quoted market prices. Level 2 includes securities that are valued using pricing for similar securities and pricing models that incorporate observable inputs. Level 3 consists of common stock of private companies for which observable inputs are not available.

The Company utilizes a third party pricing service for the valuation of the majority of its equity securities and receives one quote for each equity security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Generally, all prices provided by the pricing service, except quoted market prices, are reported as Level 2. Occasionally, the Company may obtain non-binding broker quotes which are reported as Level 3.

Mortgage Loans

Fair values are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.

Legal Indemnities

Fair values are estimated using probability-weighted discounted cash flow analyses.

Debt

The fair value of debt was estimated based on quoted market prices. If a quoted market price is not available, fair values are estimated using discounted cash flows that are based on current interest rates and yield curves for debt issuances with maturities and credit risks consistent with the debt being valued.

The estimated fair values of the financial instruments were as follows:

DECEMBER 31	2010						2009
(In millions)
	Carrying Value			Fair Value			Carrying Value			Fair Value
Financial Assets
Cash and cash equivalents	$	292.9		$	292.9		$	316.7		$	316.7
Fixed maturities		4,915.2			4,915.2			4,732.4			4,732.4
Equity securities		128.6			128.6			69.3			69.3
Mortgage loans		5.5			5.8			14.1			15.0
Total financial assets, including financial assets of discontinued operations		5,342.2			5,342.5			5,132.5			5,133.4
Less: financial assets of discontinued operations		(119.8	)		(119.8	)		(117.1	)		(117.1	)
Total financial assets of continuing operations	$	5,222.4		$	5,222.7		$	5,015.4		$	5,016.3
Financial Liabilities
Client claim funds	$	—		$	—		$	2.0		$	2.0
Legal indemnities		5.4			5.4			7.0			7.0
Debt		605.9			603.9			433.9			387.9
Total financial liabilities of continuing operations (1)	$	611.3		$	609.3		$	442.9		$	396.9

(1) There were no financial liabilities associated with the discontinued operations.

The Company performs a review of the fair value hierarchy classifications and of prices received from its third party pricing service on a quarterly basis. The Company reviews the pricing services' policy describing its processes, practices and inputs, including various financial models used to value securities. Also, the Company reviews the portfolio pricing. Securities with changes in prices that exceed a defined threshold are verified to independent sources such as Bloomberg. If upon review, the Company is not satisfied with the validity of a given price, a pricing challenge would be submitted to the pricing service along with supporting documentation for its review. The Company does not adjust quotes or prices obtained from the pricing service unless the pricing service agrees with the Company's challenge. During 2010 and 2009, the Company did not adjust any prices received from brokers or its pricing service.

Changes in the observability of valuation inputs may result in a reclassification of certain financial assets within the fair value hierarchy. Reclassifications between levels of the fair value hierarchy are reported as of the beginning of the period in which the reclassification occurs. As previously discussed, the Company utilizes a third party pricing service for the valuation of the majority of its fixed maturities and equity securities. The pricing service has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company will use observable market data to the extent it is available, but may also be required to make assumptions for market based inputs that are unavailable due to market conditions.

The Company currently holds fixed maturity securities and equity securities for which fair value is determined on a recurring basis. The following tables present for each hierarchy level, the Company's assets that were measured at fair value at December 31, 2010 and 2009.

December 31, 2010
(In millions)
	Fair Value
	Total			Level 1			Level 2			Level 3
Fixed maturities:
U.S. Treasury securities and U.S. government and agency securities	$	263.2		$	124.9		$	138.3		$	—
States and political subdivisions		965.5			—			948.9			16.6
Corporate fixed maturities		2,563.1			—			2,520.9			42.2
Residential mortgage-backed securities, U.S. agency backed		621.6			—			621.6			—
Residential mortgage-backed securities, non-agency		133.7			—			132.9			0.8
Commercial mortgage-backed securities		368.1			—			362.6			5.5
Total fixed maturities		4,915.2			124.9			4,725.2			65.1
Equity securities (1)		120.0			106.6			10.5			2.9
Total investment assets at fair value, including assets of discontinued operations		5,035.2			231.5			4,735.7			68.0
Investment assets of discontinued operations at fair value		(117.3	)		(0.9	)		(115.9	)		(0.5	)
Total investment assets of continuing operations at fair value	$	4,917.9		$	230.6		$	4,619.8		$	67.5
December 31, 2009
(In millions)
Fixed maturities:
U.S. Treasury securities and U.S. government and agency securities	$	354.7		$	100.6		$	254.1		$	—
States and political subdivisions		832.2			—			816.7			15.5
Foreign governments		3.0			—			3.0			—
Corporate fixed maturities		2,330.9			—			2,292.8			38.1
Residential mortgage-backed securities, U.S. agency backed		689.0			—			689.0			—
Residential mortgage-backed securities, non-agency		185.4			—			185.4			—
Commercial mortgage-backed securities		337.2			—			331.0			6.2
Total fixed maturities		4,732.4			100.6			4,572.0			59.8
Equity securities (1)		60.6			51.0			6.8			2.8
Total investment assets at fair value, including assets of discontinued operations		4,793.0			151.6			4,578.8			62.6
Investment assets of discontinued operations at fair value		(116.9	)		(0.3	)		(116.6	)		—
Total investment assets of continuing operations at fair value	$	4,676.1		$	151.3		$	4,462.2		$	62.6

(1) Excludes equities carried at cost of $8.6 million at December 31, 2010 and $8.7 million at December 31, 2009, which consists primarily of Federal Home Loan Bank common stock.

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

YEAR ENDED DECEMBER 31, 2010
(In millions)
	Fixed Maturities
	States and political subdivisions			Corporate			Residential mortgage backed securities, non- agency			Commercial mortgage backed securities			Total			Equities			Total Assets
Balance at beginning of year	$	15.5		$	38.1		$	—		$	6.2		$	59.8		$	2.8		$	62.6
Transfers into Level 3		—			17.3			—			—			17.3			—			17.3
Transfers out of Level 3		—			(4.7	)		—			—			(4.7	)		—			(4.7	)
Total gains (losses):
Included in earnings		—			0.7			—			—			0.7			(0.3	)		0.4
Included in other comprehensive income		(0.5	)		0.4			—			—			(0.1	)		(0.6	)		(0.7	)
Purchases and sales:
Purchases		3.0			5.3			1.4			—			9.7			1.0			10.7
Sales		(1.4	)		(14.9	)		(0.6	)		(0.7	)		(17.6	)		—			(17.6	)
Balance at end of year	$	16.6		$	42.2		$	0.8		$	5.5		$	65.1		$	2.9		$	68.0

YEAR ENDED DECEMBER 31, 2009
(In millions)
	Fixed Maturities
	States and political subdivisions			Corporate			Residential mortgage backed securities, non- agency			Commercial mortgage backed securities			Total			Equities		Total Assets
Balance at beginning of year	$	18.2		$	44.5		$	6.9		$	19.5		$	89.1		$	1.2	$	90.3
Assets of discontinued operations sold with FAFLIC		(0.1	)		(3.4	)		—			(2.3	)		(5.8	)		—		(5.8	)
Transfers into Level 3		—			1.4			—			—			1.4			1.6		3.0
Transfers out of Level 3		(3.1	)		(20.2	)		—			(14.6	)		(37.9	)		—		(37.9	)
Total (losses) gains:
Included in earnings		(0.3	)		(0.5	)		0.2			—			(0.6	)		—		(0.6	)
Included in other comprehensive income		(1.0	)		3.6			—			1.0			3.6			—		3.6
Purchases and sales:
Purchases		3.2			17.5			—			3.2			23.9			—		23.9
Sales		(1.4	)		(4.8	)		(7.1	)		(0.6	)		(13.9	)		—		(13.9	)
Balance at end of year	$	15.5		$	38.1		$	—		$	6.2		$	59.8		$	2.8	$	62.6

During the twelve months ended December 31, 2010 and 2009, the Company transferred fixed maturities between Level 2 and Level 3 primarily a result of assessing the significance of unobservable inputs on the fair value measurement. There were no transfers between Level 1 and Level 2 during 2010.

The following table summarizes gains and losses due to changes in fair value that are recorded in net income for Level 3 assets.

Years Ended December 31	2010								2009
(In millions)
	Other-than- temporary impairments			Net realized investment gains (losses)		Total			Other-than- temporary impairments			Net realized investment gains (losses)			Total
Level 3 Assets:
Fixed maturities:
States and political subdivisions	$	—		$	—	$	—		$	—		$	(0.3	)	$	(0.3	)
Corporate fixed maturities		—			0.7		0.7			(1.1	)		0.6			(0.5	)
Residential mortgage backed securities, U.S. agency backed		—			—		—			—			0.2			0.2
Total fixed maturities		—			0.7		0.7			(1.1	)		0.5			(0.6	)
Equity securities		(0.3	)		—		(0.3	)		—			—			—
Total assets	$	(0.3	)	$	0.7	$	0.4		$	(1.1	)	$	0.5		$	(0.6	)

There were no Level 3 liabilities held by the Company for the years ended December 31, 2010 and 2009.

XML

Federal Income Taxes

12 Months Ended

Dec. 31, 2010

Federal Income Taxes

Federal Income Taxes

8. FEDERAL INCOME TAXES

Provisions for federal income taxes have been calculated in accordance with the provisions of ASC 740. A summary of the federal income tax expense in the Consolidated Statements of Income is shown below:

FOR THE YEARS ENDED DECEMBER 31	2010		2009		2008
(In millions)
Federal income tax expense:
Current	$	5.7	$	51.2	$	17.5
Deferred		52.2		31.9		62.4
	$	57.9	$	83.1	$	79.9

The federal income tax expense attributable to the consolidated results of operations is different from the amount determined by multiplying income before federal income taxes by the statutory federal income tax rate of 35%. The sources of the difference and the tax effects of each were as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Expected federal income tax expense	$	73.9		$	94.8		$	57.5
Change in valuation allowance		(57.1	)		(6.9	)		34.2
Expired capital loss carryforward		47.4			—			—
Tax difference related to investment disposals and maturities		(3.2	)		—			—
Tax-exempt interest		(2.2	)		(3.1	)		(3.9	)
Dividend received deduction		(0.8	)		(0.8	)		(0.6	)
Tax credits		(0.4	)		(1.5	)		(2.1	)
Prior years' federal income tax settlement		—			(0.3	)		(6.4	)
Changes in other tax estimates		—			—			(0.2	)
Other, net		0.3			0.9			1.4
Federal income tax expense	$	57.9		$	83.1		$	79.9
Effective tax rate		27.4	%		30.7	%		48.6	%

The following are the components of the Company's deferred tax assets and liabilities (excluding those associated with discontinued operations).

DECEMBER 31	2010			2009
(In millions)
Deferred tax assets (liabilities)
Insurance reserves	$	171.8		$	157.3
Deferred acquisition costs		(120.9	)		(100.8	)
Tax credit carryforwards		111.1			112.1
Capital losses		69.2			228.6
Employee benefit plans		38.3			70.0
Software capitalization		(28.3	)		(27.0	)
Investments, net		23.4			(28.1	)
Other, net		4.3			11.0
Gross deferred tax asset		268.9			423.1
Valuation allowance		(91.5	)		(194.5	)
Deferred tax asset, net	$	177.4		$	228.6

Gross deferred income tax assets totaled approximately $1.2 billion at December 31, 2010 and 2009. Gross deferred income tax liabilities totaled approximately $1.0 billion at December 31, 2010 and 2009.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized.

In January, July, September, and December 2010, the Company completed transactions which resulted in the realization, for tax purposes only, of unrealized gains in its investment portfolio of $98.4 million, $37.1 million, $31.1 million, and $120.8 million, respectively. These transactions enabled the Company to realize capital loss carryforwards to offset these gains, and resulted in the release of $66.2 million and $34.4 million, in 2010 and 2009, respectively, of the valuation allowance held against the deferred tax asset related to these capital loss carryforwards. The total release of $100.6 million was accounted for as an increase in income from continuing operations of $3.2 million and $6.0 million in 2010 and 2009, respectively, with the remaining $91.4 million reflected as a benefit in accumulated other comprehensive income at December 31, 2010. This amount will be released into income from continuing operations related to non-segment income in future years, as the investment securities subject to these transactions are sold or mature.

In 2010, the Company reduced its valuation allowance, for both continuing and discontinued operations, related to its deferred tax assets by $104.1 million, from $195.6 million to $91.5 million. There were four principal components to this reduction. First, the Company reduced the valuation allowance by $66.2 million as a result of the aforementioned transactions, which utilized the capital loss carryforwards. Second, the Company increased its valuation allowance by $20.3 million for certain tax basis unrealized losses which the Company does not believe it can utilize. This increase was reflected as a decrease in accumulated other comprehensive income. Third, $135.5 million of the capital loss carryforwards expired in 2010. As a result, the Company released $47.4 million of its valuation allowance attributable to these expirations with an equal and offsetting reduction in the related deferred tax asset. Fourth, as a result of $29.7 million in net realized gains during 2010, the Company decreased its valuation allowance by $9.7 million as an increase to income from continuing operations, since these gains utilized the Company's capital loss carryforwards. The remaining $1.1 million decrease was attributable to other items reflected as income from discontinued operations.

During 2009, the Company reduced the valuation allowance, for both continuing and discontinued operations, related to its deferred tax assets by $152.6 million, from $348.2 million to $195.6 million. There were two principal components to this reduction. First, the Company reversed through other comprehensive income, the $118.4 million valuation allowance that was recognized at December 31, 2008 associated with the tax benefit related to net unrealized depreciation in the Company's investment portfolio at that time. During 2009, appreciation in the portfolio changed the nature of the tax attribute from that of an asset to that of a liability, and thus there was no longer a need for that portion of the valuation allowance. Second, as a result of the aforementioned transactions, the Company reversed $28.4 million of the valuation allowance as an adjustment to other comprehensive income and $6.0 million of the valuation allowance as an adjustment to income from continuing operations. The remaining $0.2 million net increase in the valuation allowance was attributable to other items, and reflected as a $0.9 million increase in income from continuing operations and a $1.1 million decrease in income from discontinued operations.

At December 31, 2010, the Company's pre-tax capital loss carryforwards are $197.8 million, including $176.5 million resulting from the sale of FAFLIC in 2009. At December 31, 2010, the Company has recorded a full valuation allowance against this asset, since it is the Company's opinion that it is more likely than not that the asset will not be realized. The Company's estimate of the gross amount and likely realization of capital loss carryforwards may change over time.

At December 31, 2010, the Company has a deferred tax asset of $111.1 million of alternative minimum tax credit carryforwards. The alternative minimum tax credit carryforwards have no expiration date. The Company may utilize the credits to offset regular federal income taxes due from future income, and although the Company believes that these assets are fully recoverable, there can be no certainty that future events will not affect their recoverability. The Company believes, based on objective evidence, the remaining deferred tax assets will be realized.

The table below provides a reconciliation of the beginning and ending reserves for uncertain tax positions as follows:

FOR THE YEARS ENDED DECEMBER 31	2010		2009		2008
(In millions)
Liability at beginning of year, net	$	0.8	$	0.8	$	27.7
Additions based on tax positions related to the current year		—		—		0.1
Additions for tax positions of prior years		—		—		0.3
Reductions for tax positions of prior years		—		—		(8.2	)
Settlements		—		—		(19.1	)
Liability at end of year, net	$	0.8	$	0.8	$	0.8

Included in the December 31, 2010 balance is a receivable of $3.6 million for tax positions, for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, a change in the timing of deductions would not impact the annual effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in federal income tax expense. In 2008, as part of the settlement of the 1995 through 2001 audit period, the Company reduced its accrued interest by $34.8 million. The Company had accrued interest of $1.0 million and $0.8 million as of December 31, 2010 and 2009, respectively. The Company has not recognized any penalties associated with unrecognized tax benefits.

The Company or its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2005. In 2008, the Company received written notification from the IRS Appeals Division that the Joint Committee on Taxation had completed its review of tax years 1995 through 2001 and found no exceptions. This settlement resulted in a tax benefit of $8.3 million recorded as a component of Net Income in the Consolidated Statement of Income and is comprised of a $6.4 million adjustment to Federal Income Tax Expense and a $1.9 million benefit to Discontinued Operations. Additionally, in 2009, the Company received a Revenue Agents Report for the 2005 and 2006 IRS audit. The Company has agreed to all proposed adjustments other than a disallowance of Separate Account Dividends Received Deductions for which the Company has requested an Appeals conference. Due to available net operating loss carryovers and the 2005 sale of Allmerica Financial Life Insurance and Annuity Company, the effects of the proposed adjustments do not materially affect the Company's financial position. The IRS audits of the years 2007 and 2008 commenced in April 2010. The Company and its subsidiaries are still subject to U.S. state income tax examinations by tax authorities for years after 1998.

A corporation is entitled to a tax deduction from gross income for a portion of any dividend which was received from a domestic corporation that is subject to income tax. This is referred to as a "dividends received deduction." In prior years, the Company has taken this dividends received deduction when filing its federal income tax return. Many separate accounts held by life insurance companies receive dividends from such domestic corporations, and therefore, were regarded as entitled to this dividends received deduction. In its Revenue Ruling 2007-61, issued on September 25, 2007, the IRS announced its intention to issue regulations with respect to certain computational aspects of the dividends received deduction on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are not yet known, but they could result in the elimination of some or all of the separate account dividends received deduction tax benefit that the Company receives. Management believes that it is more likely than not that any such regulation would apply prospectively only, and application of this regulation is not expected to be material to the Company's results of operations in any future annual period. However, there can be no assurance that the outcome of the revenue ruling will be as anticipated. The Company believes that retroactive application would not materially affect the Company's financial position or results of operations. In September 2009, as part of the audit of 2005 and 2006, the IRS disallowed the dividends received deduction related to separate account assets for both 2005 and 2006. The Company has challenged the disallowance by filing a formal protest, and has requested an IRS Appeals Conference. As discussed above, should the Company ultimately be unsuccessful in its challenge, due to tax attributes and the sale of Allmerica Financial Life Insurance and Annuity Company, the effects of this proposed adjustment would not be material to the Company's financial position or results of operations.

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Schedule IV - Reinsurance

12 Months Ended

Dec. 31, 2010

Schedule IV - Reinsurance

Schedule IV - Reinsurance

SCHEDULE IV

THE HANOVER INSURANCE GROUP, INC.

REINSURANCE

DECEMBER 31

(In millions)

	Gross amount		Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
2010 (1)
Premiums:
Property and casualty insurance	$	2,970.6	$	304.4	$	174.8	$	2,841.0		6.15	%
2009 (2)
Premiums:
Property and casualty insurance	$	2,824.3	$	291.7	$	13.8	$	2,546.4		0.54	%
2008 (2)
Premiums:
Property and casualty insurance	$	2,700.0	$	241.9	$	26.8	$	2,484.9		1.08	%

(1) The increase in assumed reinsurance activity in 2010 primarily related to the OneBeacon renewal rights transaction.

(2) Premiums related to our former life insurance business have been reclassified to Discontinued Operations due to the sale of FAFLIC on January 2, 2009.

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Dividend Restrictions

12 Months Ended

Dec. 31, 2010

Dividend Restrictions

Dividend Restrictions

13. DIVIDEND RESTRICTIONS

The individual law of all states, including New Hampshire, Michigan and Massachusetts, restrict the payment of dividends to stockholders by insurers. These laws affect the dividend paying ability of Hanover Insurance and Citizens, and prior to its sale in January 2009, FAFLIC.

Pursuant to New Hampshire's statute, the maximum dividends and other distributions that an insurer may pay in any twelve month period, without prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of such insurer's statutory policyholder surplus as of the preceding December 31. Hanover Insurance declared dividends to its parent totaling $75.0 million, $153.7 million, and $166.0 million in 2010, 2009 and 2008, respectively. Hanover Insurance can pay additional dividends to its parent without prior approval of $98.7 million until December 2011. If no dividends are declared prior to December 2011, the maximum dividend payable without prior approval would increase at that time to $174.3 million.

Pursuant to Michigan's statute, the maximum dividends and other distributions that an insurer may pay in any twelve month period, without prior approval of the Michigan Insurance Commissioner, is limited to the greater of 10% of policyholders' surplus as of December 31 of the immediately preceding year or the statutory net income less net realized gains, for the immediately preceding calendar year. Citizens declared dividends to its parent, Hanover Insurance, totaling $70.0 million, $72.0 million and $116.0 million in 2010, 2009 and 2008, respectively. Citizens cannot pay a further dividend to its parent without prior approval until July 2011, at which time the maximum dividend payable without prior approval would be $69.8 million.

In connection with the sale of FAFLIC to Commonwealth Annuity, the Massachusetts Division of Insurance approved a pre-close net dividend from FAFLIC consisting of designated assets with a statutory book value of $130.0 million. This dividend was paid January 2, 2009. Prior to the sale of FAFLIC to Commonwealth Annuity, FAFLIC had no statutory unassigned funds, and therefore could not pay dividends without prior approval from the Massachusetts Commissioner of Insurance. In January 2008, with permission from the Massachusetts Commissioner of Insurance, FAFLIC declared a dividend of $17.0 million to its parent, THG.

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Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses

12 Months Ended

Dec. 31, 2010

Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses

Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses

18. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in results of operations as adjustments to losses and LAE. Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and loss event occurred. These types of subsequent adjustments are described as "prior year reserve development". Such development can be either favorable or unfavorable to the Company's financial results and may vary by line of business.

The table below provides a reconciliation of the beginning and ending reserve for the Company's property and casualty unpaid losses and LAE as follows:

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Reserve for losses and LAE, beginning of year	$	3,152.1		$	3,201.3		$	3,165.8
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of current year (1)		1,966.4			1,793.5			1,784.6
Decrease in provision for insured events of prior years		(111.1	)		(155.3	)		(159.0	)
Total incurred losses and LAE		1,855.3			1,638.2			1,625.6
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year		1,077.8			970.9			999.9
Losses and LAE attributable to insured events of prior years		738.6			788.5			712.4
Total payments		1,816.4			1,759.4			1,712.3
Change in reinsurance recoverable on unpaid losses		48.3			72.0			(11.9	)
Purchase of Verlan Fire Insurance Company		—			—			4.2
Purchase of AIX Holdings, Inc.		—			—			129.9
Purchase of Campania Holding Company, Inc.		36.5			—			—
Reserve for losses and LAE, end of year	$	3,275.8		$	3,152.1		$	3,201.3

(1) Includes unfavorable reserve development related to catastrophe losses of $4.1 million, $7.0 million and $0.7 million in 2010, 2009 and 2008, respectively.

As part of an ongoing process, the reserves have been re-estimated for all prior accident years and were decreased by $111.1 million, $155.3 million and $159.0 million in 2010, 2009 and 2008, respectively. Prior year loss reserve development in 2010, 2009 and 2008 was favorable by $88.5 million, $133.1 million and $154.4 million, respectively. Prior year LAE reserve development was favorable by $22.6 million, $22.2 million and $4.6 million in 2010, 2009 and 2008, respectively.

The favorable loss reserve development during the year ended December 31, 2010 is primarily the result of lower than expected severity in the personal automobile line across all coverages and lower frequency in the personal automobile line in property coverages, primarily related to the 2009 accident year, and lower than expected frequency in the workers' compensation line, primarily related to the 2008 and 2009 accident years. In addition, lower than expected severity in the commercial multiple peril line in liability coverages, primarily related to the 2007 through 2009 accident years and in the commercial umbrella line related to the 2007 through 2009 accident years contributed to the favorable development, partially offset by unfavorable development in our bond line, primarily related to the 2009 accident year.

The favorable loss reserve development during the year ended December 31, 2009 is primarily the result of lower than expected severity of bodily injury in the personal automobile line, primarily in the 2005 through 2008 accident years, lower than expected severity in the workers' compensation line, primarily in the 2000 through 2008 accident years and lower than expected severity in the commercial multiple peril line, primarily in the 2005 through 2007 accident years. In addition, lower than expected severity in the bond line, lower projected losses in our run-off voluntary pools and lower projected exposures to asbestos and environmental liability for our direct written business contributed to the favorable development. Partially offsetting the favorable development was unfavorable non-catastrophe weather-related property loss development, primarily related to our homeowners, commercial property and personal automobile physical damage lines, which developed unfavorably by $6.8 million, $6.7 million, and $1.6 million, respectively.

The favorable loss reserve development during the year ended December 31, 2008 is primarily the result of lower than expected severity of bodily injury in the personal automobile line, primarily in the 2003 through 2007 accident years, and lower than expected severity of liability claims in the commercial multiple peril line for the 2002 through 2007 accident years. In addition, lower than expected severity in the workers' compensation line, primarily in the 2003 through 2007 accident years, contributed to the favorable development.

During the years ended December 31, 2010, 2009 and 2008, estimated LAE reserves for claims occurring in prior years developed favorably by $22.6 million, $22.2 and $4.6 million, respectively. The 2010 amount includes $9.8 million of favorable development resulting from a change in the cost factors used for establishing unallocated loss adjustment expense reserves. The favorable LAE development in 2010 is also attributable to improvements in ultimate loss activity on prior accident years, primarily in the commercial multiple peril, personal automobile, and workers' compensation lines. In 2009, the Company changed its unallocated loss adjustment expense reserving methodology from that based on cash payments to that based on unit costs, which resulted in a $20.0 million benefit, of which $16.0 million related to prior years. The Company believes that the methodology based on unit costs is more representative of its future costs of settling existing claims. The favorable LAE development in 2008 is primarily attributable to improvements in ultimate loss activity on prior accident years, primarily in the commercial multiple peril line.

The Company may be required to defend claims related to policies that include environmental damage and toxic tort liability. The table below summarizes direct business asbestos and environmental reserves (net of reinsurance and excluding pools).

FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
(In millions)
Reserves for losses and LAE, beginning of year	$	11.3		$	18.5		$	19.4
Reductions in losses and LAE		(0.4	)		(7.1	)		(2.3	)
(Paid) reimbursed losses and LAE		(0.8	)		(0.1	)		1.4
Reserves for losses and LAE, end of year	$	10.1		$	11.3		$	18.5

Ending loss and LAE reserves for all direct business written by the Company's property and casualty companies related to asbestos and environmental damage liability, included in the reserve for losses and LAE, were $10.1 million, $11.3 million and $18.5 million, net of reinsurance of $19.9 million for both 2010 and 2009, and $13.9 million in 2008. During 2010, the Company reduced its asbestos and environmental reserves by $1.2 million due to several small settlements. In recent years, average asbestos and environmental payments have declined modestly. As a result of the declining payments, the Company's actuarial indicated point estimate of asbestos and environmental liability reserves was lowered resulting in favorable reserve development of $7.1 million during the year ended December 31, 2009. During 2008, our asbestos and environmental reserves decreased by $0.9 million, primarily due to a favorable cash recovery from a reinsurer on a prior year environmental claim. As a result of our historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos and environmental damage liability loss experience has remained minimal in relation to our total loss and LAE incurred experience.

In addition, and not included in the numbers above, the Company has established loss and LAE reserves for assumed reinsurance pool business with asbestos and environmental damage liability of $33.9 million, $45.6 million and $58.4 million at December 31, 2010, 2009 and 2008, respectively. These reserves relate to pools in which the Company has terminated its participation; however, the Company continues to be subject to claims related to years in which we were a participant. Results of operations from these pools are included in the Company's Other Property and Casualty segment. The $11.7 million decrease in these reserves during 2010 was primarily due to a large claim settlement within these pools. A significant part of our pool reserves relates to the Company's participation in the ECRA voluntary pool from 1950 to 1982. In 1982, the pool was dissolved and since that time, the business has been in runoff. The Company's percentage of the total pool liabilities varied from 1% to 6% during these years. The Company's participation in this pool has resulted in average paid losses of approximately $2 million annually over the past ten years. During the year ended December 31, 2009, the Company's ECRA pool reserves were lowered by $6.3 million as the result of an actuarial study completed by the ECRA pool manager. Management reviewed the ECRA actuarial study, concurred that the study was reasonable, and adopted its actuarial point estimate. In addition, during the year, management recorded favorable development of $4.3 million on a separate large claim settlement within these pools. Because of the inherent uncertainty regarding the types of claims in these pools, the Company cannot provide assurance that our reserves will be sufficient.

The Company estimates its ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, assumed reinsurance and pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. The Company believes that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. The asbestos, environmental and toxic tort liability could be revised in the near term if the estimates used in determining the liability are revised, and any such revisions could have a material adverse effect on our results of operations for a particular quarterly or annual period or on our financial position.

On January 2, 2009, the Company sold its remaining life insurance subsidiary, FAFLIC, to Commonwealth Annuity, a subsidiary of Goldman Sachs. Coincident with the sale transaction, Hanover Insurance and FAFLIC entered into a reinsurance contract whereby Hanover Insurance assumed FAFLIC's discontinued accident and health insurance business. In addition to the property and casualty reserves, the Company also has liabilities for future policy benefits, other policy liabilities and outstanding claims, losses and LAE as well as the related reinsurance recoverables, all of which relates to the Company's assumed accident and health business in 2009, as well as for a majority of these liabilities in 2008. These reserves are reflected in the balance sheet as liabilities and assets of discontinued operations. The cumulative liability, excluding the effect of reinsurance that consists of the Company's exited individual health business and its discontinued accident and health business, was $129.7 million and $130.5 million at December 31, 2010 and 2009, respectively. Reinsurance recoverables related to this business were $6.8 million and $6.6 million in 2010 and 2009, respectively.

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Consolidated Balance Sheets (Parenthetical) (USD $) In Millions, except Per Share data, unless otherwise specified	Dec. 31, 2010	Dec. 31, 2009
Consolidated Balance Sheets
Fixed maturities, amortized cost	$ 4,598.8	$ 4,520.3
Equity securities, cost	$ 120.7	$ 57.3
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	20.0	20.0
Preferred stock, issued	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	300.0	300.0
Common stock, shares issued	60.5	60.5
Treasury stock, shares	15.6	13.0

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Discontinued Operations

12 Months Ended

Dec. 31, 2010

Discontinued Operations

Discontinued Operations

2. DISCONTINUED OPERATIONS

Discontinued operations consist of: (i) Discontinued FAFLIC Business, including both the loss associated with the sale of FAFLIC on January 2, 2009 and the loss or income resulting from its prior business operations; (ii) Discontinued Operations of the Company's Variable Life Insurance and Annuity Business in 2005; and (iii) Discontinued Accident and Health Business.

Discontinued FAFLIC Business

On January 2, 2009, THG sold its remaining life insurance subsidiary, FAFLIC, to Commonwealth Annuity, a subsidiary of Goldman Sachs. Approval was obtained from the Massachusetts Division of Insurance for a pre-close dividend from FAFLIC consisting of designated assets with a statutory book value of approximately $130 million. Total proceeds from the sale, including the dividend, were approximately $230 million, net of transaction costs. Additionally, coincident with the sale transaction, Hanover Insurance and FAFLIC entered into a reinsurance contract whereby Hanover Insurance assumed FAFLIC's discontinued accident and health insurance business. THG has also indemnified Commonwealth Annuity for certain litigation, regulatory matters and other liabilities related to the pre-closing activities of the business transferred.

At December 31, 2008, the Company reflected FAFLIC at its fair value less estimated disposition costs. This resulted in the recognition of a $77.3 million impairment as of December 31, 2008 for the asset group that was being disposed of in the sale transaction. Of this amount, $48.5 million related to depreciated securities and was reflected as an adjustment to accumulated other comprehensive income and $26.0 million was reflected as a valuation allowance against the FAFLIC assets. The loss is presented in the Consolidated Statements of Income as a component of income from operations of discontinued FAFLIC business. In addition, the operating results of FAFLIC during 2008 are also reflected as income from operations of discontinued FAFLIC business.

The following table summarizes the results for this discontinued business for the periods indicated:

For the Years Ended December 31	2010		2009		2008
(In millions)
Gain (loss) on sale of FAFLIC, net of taxes	$	0.5	$	7.1	$	(77.3	)
Loss from operations of FAFLIC business, net of income tax expense of $4.6 in 2008		—		—		(7.5	)
Gain (loss) from discontinued FAFLIC business, net of taxes	$	0.5	$	7.1	$	(84.8	)

Gain (Loss) on Sale of FAFLIC

The following table summarizes the components of the loss recognized in 2008 related to the sale of FAFLIC.

For the Year Ended December 31	2008
(In millions)
Carrying value of FAFLIC before pre-close dividend	$	267.7	(1)
Pre-close net dividend		(129.8	)(2)
		137.9
Proceeds from sale		105.8	(3)
Loss on sale before impact of transaction and other costs		(32.1	)
Transaction costs		(3.9	)(4)
Liability for certain legal indemnities and employee-related costs		(8.2	)(5)
Other miscellaneous adjustments		(33.1	)(6)
Net loss	$	(77.3	)

⁽¹⁾ Shareholder's equity in the FAFLIC business, prior to the impact of the sale transaction.

⁽²⁾ Net pre-close dividends.

⁽³⁾ Proceeds to THG from Commonwealth Annuity.

⁽⁴⁾ Transaction costs include legal, actuarial and other professional fees.

⁽⁵⁾ Liability for expected contractual indemnities of FAFLIC recorded at December 31, 2008. These costs also include severance and retention payments anticipated to result from this transaction.

⁽⁶⁾ Included in other miscellaneous adjustments are investment losses of $48.5 million, as well as favorable reserve adjustments related to the accident and health business of $15.6 million.

In 2010 and 2009, the Company recognized a gain of $0.5 million and $7.1 million, respectively, related to the sale of FAFLIC. These gains were primarily due to the change in the estimate of indemnification liabilities related to the sale. The gain in 2009 also reflects the release of sale-related accruals and a tax adjustment relating to FAFLIC's operations in prior tax years.

In connection with the sales transaction, the Company agreed to indemnify Commonwealth Annuity for certain legal, regulatory and other matters that existed as of the sale. Accordingly, the Company established a gross liability for these guarantees and indemnifications of $9.9 million. As of December 31, 2010, the Company's total gross liability related to these guarantees was $1.2 million. The Company regularly reviews and updates this liability for legal and regulatory matter indemnities. Although the Company believes its current estimate for this liability is appropriate, there can be no assurance that these estimates will not materially increase in the future. Adjustments to this reserve are recorded in the results of the Company in the period in which they are determined.

Loss from Operations of FAFLIC Business

The table below shows the discontinued operating results related to FAFLIC.

For the Years Ended December 31	2008
(In millions)
Total revenues	$	76.7
Loss included in discontinued operations before federal income taxes, including net realized losses of $14.4	$	(2.9	)

Discontinued Operations of the Company's Variable Life Insurance and Annuity Business

On December 30, 2005, the Company sold its variable life insurance and annuity business to Goldman Sachs, including the reinsurance of 100% of the variable business of FAFLIC. THG agreed to indemnify Goldman Sachs for certain litigation, regulatory matters and other liabilities relating to the pre-closing activities of the business that was sold.

In 2010 and 2009, the Company recorded gains of $1.3 million and $4.9 million, net of tax, respectively, related to the disposal of the Company's variable life insurance and annuity business, primarily due to a change in the estimate of liabilities for certain contractual indemnities to Goldman Sachs relating to pre-sale activities of the business sold.

In 2008, the Company recognized a $11.3 million adjustment to its loss on disposal of variable life insurance and annuity business, including $8.6 million related to a release of liabilities associated with the Company's estimated liability for certain contractual indemnities to Goldman Sachs relating to the pre-sale activities of the business sold and $2.7 million tax benefit from a settlement with the Internal Revenue Service ("IRS") related to tax years 1995 through 2001 (See Note 8 – Federal Income Taxes for further discussion).

As of December 31, 2010, the Company's total gross liability related to its guarantees associated with the disposal of its variable life insurance and annuity business was $4.2 million. The Company regularly reviews and updates this liability for legal and regulatory matter indemnities. Although the Company believes its current estimate for this liability is appropriate, there can be no assurance that these estimates will not materially increase in the future. Adjustments to this reserve are recorded in the results of the Company in the period in which they are determined.

Discontinued Accident and Health Insurance Business

During 1999, the Company exited its accident and health insurance business, consisting of its Employee Benefit Services business, its Affinity Group Underwriters business and its accident and health assumed reinsurance pool business. Prior to 1999, these businesses comprised substantially all of the former Corporate Risk Management Services segment. Accordingly, the operating results of the discontinued segment have been reported in accordance with Accounting Principles Board Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB Opinion No. 30"). On January 2, 2009, Hanover Insurance directly assumed a portion of the accident and health business; and therefore continues to apply APB Opinion No. 30 to this business. In addition, the remainder of the FAFLIC accident and health business was reinsured also by Hanover Insurance and has been reported in accordance with ASC 205.

In 2010 and 2009, the Company recorded losses of $0.3 million and $2.6 million, net of tax, respectively, related to the disposal of its accident and health insurance business. Losses in 2010 were driven by increased reserves resulting from the Company's current interpretation of the provisions of the Patient Protection and Affordable Care Act, as well as realized investment losses due to impairments, which were partially offset by net investment income. Losses in 2009 primarily reflect realized investment losses due to impairments.

At December 31, 2010 and 2009, the portion of the discontinued accident and health business that was directly assumed had assets of $59.3 million and $54.0 million, respectively, consisting primarily of invested assets and reinsurance recoverables, and liabilities of approximately $53.2 million and $48.7 million, respectively, consisting primarily of policy liabilities. At December 31, 2010 and 2009, the assets and liabilities of this business, as well as those of the reinsured portion of the accident and health business are classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2010

Commitments and Contingencies

Commitments and Contingencies

19. COMMITMENTS AND CONTINGENCIES

LITIGATION

Durand Litigation

On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named plaintiff, a former employee who received a lump sum distribution from the Company's Cash Balance Plan (the "Plan") at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, the Company understated the accrued benefit in the calculation. The Company filed a Motion to Dismiss on the basis that the Plaintiff failed to exhaust administrative remedies, which motion was granted without prejudice in a decision dated November 7, 2007. This decision was reversed by an order dated March 24, 2009 issued by the United States Court of Appeals for the Sixth Circuit, and the case was remanded to the district court.

The Plaintiff filed an Amended Complaint on December 11, 2009. In response, the Company filed a Motion to Dismiss on January 30, 2010. In addition to the pending calculation of the lump sum distribution claim, the Amended Complaint includes: (a) a claim that the Plan failed to calculate participants' account balances properly because interest credits were based solely upon the performance of each participant's selection from among various hypothetical investment options (as the Plan provided) rather than crediting the greater of that performance or the 30 year Treasury rate; (b) a claim that the 2004 Plan amendment, which changed interest crediting for all participants from the performance of participant's investment selections to the 30 year Treasury rate, reduced benefits in violation of the ERISA for participants who had account balances as of the amendment date by not continuing to provide them performance-based interest crediting on those balances; and (c) claims for breach of fiduciary duty and ERISA notice requirements for not properly informing participants of the various interest crediting and lump sum distribution matters of which Plaintiffs complain. In the Company's judgment, the outcome is not expected to be material to its financial position, although it could have a material effect on the results of operations for a particular quarter or annual period and on the funding of the Plan.

Hurricane Katrina Litigation

In August 2007, the State of Louisiana filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including the Company, and asserts a right to benefit payments from insurers on behalf of current and former Louisiana citizens who have applied for and received or will receive funds through Louisiana's "Road Home" program. The case was thereafter removed to the Federal District Court for the Eastern District of Louisiana.

On March 5, 2009, the court issued an Order granting in part and denying in part a Motion to Dismiss filed by Defendants. The court dismissed all claims for bad faith and breach of fiduciary duty and all claims for flood damages under policies with flood exclusions or asserted under Louisiana's Valued Policy Law, but rejected the insurers' arguments that the purported assignments from individual claimants to the state were barred by anti-assignment provisions in the insurers' policies. On April 30, 2009, Defendants filed a Petition for Permission to Appeal to the United States Court of Appeals for the Fifth Circuit (the "Fifth Circuit"), which was granted. On July 28, 2010, the Fifth Circuit certified the anti-assignment issue to the Louisiana Supreme Court. Oral arguments have been scheduled to be heard by the Louisiana Supreme Court on March 14, 2011.

The Company has established its total loss and LAE reserves on the assumption that it will not have any liability under the "Road Home" or similar litigation, and that it will otherwise prevail in litigation as the cause of certain large losses and not incur extracontractual or punitive damages.

Certain Regulatory and Industry Developments

Unfavorable economic conditions may contribute to an increase in the number of insurance companies that are under regulatory supervision. This may result in an increase in mandatory assessments by state guaranty funds, or voluntary payments by solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. The Company is not able to reasonably estimate the potential impact of any such future assessments or voluntary payments.

Over the past several years, state-sponsored insurers, reinsurers and involuntary pools have increased significantly, particularly in those states which have Atlantic or Gulf Coast exposures. As a result, the potential assessment exposure of insurers doing business in such states and the attendant collection risks have increased, particularly, in the Company's case, in the states of Massachusetts, Louisiana and Florida. Such actions and related regulatory restrictions on rate increases, underwriting and the ability to non-renew business may limit the Company's ability to reduce the potential exposure to hurricane related losses. At this time, the Company is unable to predict the likelihood or impact of any such potential assessments or other actions.

On August 1, 2010, the Michigan Supreme Court issued a decision in a case captioned McCormick v. Carrier, et. al, overturning the so-called Kreiner decision, and in so doing, the Company believes that the Court significantly expanded the circumstances under which claimants can sue for non-economic losses resulting from automobile accidents in Michigan. Although the full implications and application of the McCormick decision are not yet understood and may evolve in the future, the Company believes that the revised standard will adversely affect both past claims which are not finally resolved, as well as future claims. Although the Company's reserves reflect the Company's best estimate of the impact of this decision, in light of evolving law and the uncertain application of this new standard, the Company cannot be certain as to the adequacy of these reserves or of the Company's ability to raise rates for liability coverage of Michigan commercial and personal automobile polices to reflect the additional losses it expects to incur.

From time to time, proposals have been made to establish a federal based insurance regulatory system and to allow insurers to elect either federal or state-based regulation ("optional federal chartering"). In light of the economic environment and the focus on increased regulatory controls, particularly with regard to financial institutions, there has been renewed interest in such proposals.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Financial Reform Act") was enacted. The Financial Reform Act includes a provision to establish a Federal Insurance Office, with the primary purpose of collecting information to better understand insurance issues at the federal level and to monitor the extent to which traditional underserved communities and consumers, minorities and low and moderate income persons have access to affordable insurance products. The Financial Reform Act also contains provisions affecting financial institutions, credit rating agencies and other commercial and consumer businesses.

Other Matters

The Company has been named a defendant in various other legal proceedings arising in the normal course of business. In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry or investigation, and its ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. In the Company's opinion, based on the advice of legal counsel, the ultimate resolutions of such proceedings will not have a material effect on its financial position, although they could have a material effect on the results of operations for a particular quarter or annual period.

Residual Markets

The Company is required to participate in residual markets in various states, which generally pertain to high risk insureds, disrupted markets or lines of business or geographic areas where rates are regarded as excessive. The results of the residual markets are not subject to the predictability associated with the Company's own managed business, and are significant to the workers' compensation line of business, the homeowners line of business and both the commercial and personal automobile lines of business.

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Earnings per Share

12 Months Ended

Dec. 31, 2010

Earnings per Share

Earnings per Share

12. EARNINGS PER SHARE

The following table provides share information used in the calculation of the Company's basic and diluted earnings per share:

DECEMBER 31	2010			2009			2008
(In millions, except per share data)
Basic shares used in the calculation of earnings per share		45.6			50.6			51.3
Dilutive effect of securities:
Employee stock options		0.3			0.2			0.3
Non-vested stock grants		0.4			0.3			0.1
Diluted shares used in the calculation of earnings per share		46.3			51.1			51.7
Per share effect of dilutive securities on income from continuing operations	$	(0.05	)	$	(0.03	)	$	(0.02	)
Per share effect of dilutive securities on net income	$	(0.05	)	$	(0.04	)	$	—

Diluted earnings per share during 2010, 2009 and 2008 excludes 1.4 million, 2.1 million and 1.7 million, respectively, of common shares issuable under the Company's stock compensation plans, because their effect would be antidilutive.