UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

¨ 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)

(508) 855-1000

(Registrant’s telephone number, including area code)

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 “large accelerated filer,” “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 Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock was 44,012,080 as of April 26, 2013.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Shareholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Interim Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	50
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 6.	Exhibits	54
SIGNATURES		55

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

THE HANOVER INSURANCE GROUP, INC. AND SUSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended
	March 31,
(In millions, except per share data)	2013			2012
Revenues
Premiums	$	1,094.3		$	1,035.6
Net investment income		67.3			68.8
Net realized investment gains (losses):
Net realized gains from sales and other		8.6			5.0
Net other – than – temporary impairment losses on investments recognized in earnings		(0.5	)		(1.9	)
Total net realized investment gains		8.1			3.1
Fees and other income		10.6			14.3
Total revenues		1,180.3			1,121.8
Losses and expenses
Losses and loss adjustment expenses		683.4			661.4
Amortization of deferred acquisition costs		242.5			228.1
Interest expense		14.7			16.2
Other operating expenses		150.8			145.3
Total losses and expenses		1,091.4			1,051.0
Income before income taxes		88.9			70.8
Income tax expense (benefit):
Current		4.0			39.0
Deferred		18.5			(18.9	)
Total income tax expense (benefit)		22.5			20.1
Income from continuing operations		66.4			50.7
Net loss from discontinued operations (net of income tax benefit of $0.1 for the three months ended March 31, 2013 and 2012)		(0.2	)		(1.0	)
Net income	$	66.2		$	49.7
Earnings per common share:
Basic:
Income from continuing operations	$	1.49		$	1.13
Net loss from discontinued operations		—			(0.02	)
Net income per share	$	1.49		$	1.11
Weighted average shares outstanding		44.6			44.9
Diluted:
Income from continuing operations	$	1.47		$	1.11
Net loss from discontinued operations		(0.01	)		(0.02	)
Net income per share	$	1.46		$	1.09
Weighted average shares outstanding		45.3			45.5

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

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended
	March 31,
(In millions)	2013			2012
Net income	$	66.2		$	49.7
Other comprehensive income (loss), net of tax:
Available-for-sale securities and derivative instruments:
Net appreciation during the period		5.5			40.9
Portion of other-than-temporary impairment losses transferred from (to) other comprehensive income		(0.1	)		3.0
Total available-for-sale securities and derivative instruments		5.4			43.9
Pension and postretirement benefits:
Amortization recognized as net periodic benefit and postretirement cost		1.9			1.5
Cumulative foreign currency translation adjustment:
Amount recognized as cumulative foreign currency translation during the period		(10.0	)		9.3
Total other comprehensive income (loss), net of tax		(2.7	)		54.7
Comprehensive income	$	63.5		$	104.4

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

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31,			December 31,
(In millions, except share data)	2013			2012
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $6,310.6 and $6,529.5)	$	6,723.5		$	6,952.2
Equity securities, at fair value (cost of $391.2 and $299.0)		435.0			315.8
Other investments		207.5			210.3
Total investments		7,366.0			7,478.3
Cash and cash equivalents		691.0			564.8
Accrued investment income		68.9			69.0
Premiums and accounts receivable, net		1,318.1			1,308.8
Reinsurance recoverable on paid and unpaid losses and unearned premiums		2,435.5			2,479.7
Deferred acquisition costs		494.7			489.5
Deferred income taxes		238.5			267.6
Goodwill		184.4			184.9
Other assets		524.4			511.8
Assets of discontinued operations		120.6			130.5
Total assets	$	13,442.1		$	13,484.9
Liabilities
Loss and loss adjustment expense reserves	$	6,092.5		$	6,197.0
Unearned premiums		2,488.1			2,474.8
Expenses and taxes payable		660.3			775.8
Reinsurance premiums payable		475.9			466.2
Debt		978.1			849.4
Liabilities of discontinued operations		123.2			126.3
Total liabilities		10,818.1			10,889.5
Commitments and contingencies
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		1,785.3			1,787.1
Accumulated other comprehensive income		323.1			325.8
Retained earnings		1,252.8			1,211.6
Treasury stock at cost (16.5 and 16.2 million shares)		(737.8	)		(729.7	)
Total shareholders’ equity		2,624.0			2,595.4
Total liabilities and shareholders’ equity	$	13,442.1		$	13,484.9

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

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

	Three Months Ended
	March 31,
(In millions)	2013			2012
Preferred Stock
Balance at beginning and end of period	$	—		$	—
Common Stock
Balance at beginning and end of period		0.6			0.6
Additional Paid-in Capital
Balance at beginning of period		1,787.1			1,784.8
Employee and director stock-based awards and other		(1.8	)		(4.7	)
Balance at end of period		1,785.3			1,780.1
Accumulated Other Comprehensive Income (Loss), net of tax
Net Unrealized Appreciation (Depreciation) on Investments and Derivative Instruments:
Balance at beginning of period		426.0			308.7
Net appreciation during the period:
Net appreciation on available-for-sale securities and derivative instruments		5.4			43.9
Balance at end of period		431.4			352.6
Defined Benefit Pension and Postretirement Plans:
Balance at beginning of period		(96.6	)		(86.8	)
Amortization recognized as net periodic benefit cost		1.9			1.5
Balance at end of period		(94.7	)		(85.3	)
Cumulative Foreign Currency Translation Adjustment:
Balance at beginning of period		(3.6	)		(11.5	)
Amount recognized as cumulative foreign currency translation during the period		(10.0	)		9.3
Balance at end of period		(13.6	)		(2.2	)
Total accumulated other comprehensive income		323.1			265.1
Retained Earnings
Balance at beginning of period		1,211.6			1,211.3
Net income		66.2			49.7
Dividends to shareholders		(14.8	)		(13.5	)
Stock-based compensation		(10.2	)		1.3
Balance at end of period		1,252.8			1,248.8
Treasury Stock
Balance at beginning of period		(729.7	)		(723.1	)
Shares purchased at cost		(25.2	)		—
Net shares reissued at cost under employee stock-based compensation plans		17.1			7.5
Balance at end of period		(737.8	)		(715.6	)
Total shareholders’ equity	$	2,624.0		$	2,579.0

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

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended
	March 31,
(In millions)	2013			2012
Cash Flows From Operating Activities
Net income	$	66.2		$	49.7
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains		(8.1	)		(2.3	)
Net amortization and depreciation		8.4			9.1
Stock-based compensation expense		3.6			4.1
Amortization of defined benefit plan costs		2.9			2.3
Deferred income taxes expense (benefit)		18.4			(18.9	)
Change in deferred acquisition costs		(5.2	)		(9.4	)
Change in premiums receivable, net of reinsurance premiums payable		0.3			49.3
Change in loss, loss adjustment expense and unearned premium reserves		(24.3	)		109.9
Change in reinsurance recoverable		19.6			(158.4	)
Change in expenses and taxes payable		(101.4	)		(28.2	)
Other, net		2.1			5.5
Net cash provided by (used in) operating activities		(17.5	)		12.7
Cash Flows From Investing Activities
Proceeds from disposals and maturities of fixed maturities		400.2			550.9
Proceeds from disposals of equity securities and other investments		36.7			2.6
Purchase of fixed maturities		(223.9	)		(663.0	)
Purchase of equity securities and other investments		(123.8	)		(98.4	)
Capital expenditures		(5.7	)		(3.2	)
Net cash provided by (used in) investing activities		83.5			(211.1	)
Cash Flows From Financing Activities
Proceeds from exercise of employee stock options		4.5			1.1
Proceeds from debt borrowings, net		169.5			7.4
Decrease in cash collateral related to securities lending program		(19.8	)		(7.8	)
Dividends paid to shareholders		(14.8	)		(13.5	)
Repurchases of debt		(46.3	)		(0.8	)
Repurchases of common stock		(25.2	)		—
Other financing activities		(1.0	)		(0.2	)
Net cash provided by (used in) financing activities		66.9			(13.8	)
Effect of exchange rate changes on cash		(6.2	)		20.1
Net change in cash and cash equivalents		126.7			(192.1	)
Net change in cash related to discontinued operations		(0.5	)		—
Cash and cash equivalents, beginning of period		564.8			820.4
Cash and cash equivalents, end of period	$	691.0		$	628.3

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

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THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of The Hanover Insurance Group, Inc. and subsidiaries (“THG” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the requirements of Form 10-Q. Certain financial information that is provided in annual financial statements, but is not required in interim reports, has been omitted.

The interim consolidated financial statements of THG include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America, THG’s principal U.S. domiciled property and casualty companies; Chaucer Holdings plc (“Chaucer”), a specialist insurance underwriting group which operates through the Society and Corporation of Lloyd’s (“Lloyd’s”) and certain other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 9 – “Segment Information”. Additionally, the interim consolidated financial statements include the Company’s discontinued operations, consisting primarily of the Company’s former life insurance businesses, its accident and health business and its third party administrator. All intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with U.S. GAAP 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.

In the opinion of the Company’s management, the accompanying interim consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair presentation of the financial position and results of operations. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 26, 2013.

2. New Accounting Pronouncements

Recently Implemented Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Update No. 2013-02 (Topic 220) Comprehensive Income Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) either on the face of the Statement of Income or in the Notes to the Consolidated Financial Statements. Significant amounts reclassified out of AOCI should be provided by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified in its entirety to net income in the same reporting period. For amounts not required to be reclassified in their entirety to net income, a cross-reference to other disclosures provided for in accordance with U.S. GAAP is required. This guidance is applicable for reporting periods beginning after December 15, 2012. The Company implemented the guidance effective January 1, 2013. The effect of implementing the guidance relates to financial statement presentation and disclosures. (See disclosures in Note 8 – Other Comprehensive Income.)

In July 2012, the FASB issued ASC Update No. 2012-02 (Topic 350) Testing Indefinite – Lived Intangible Assets for Impairment. This ASC update allows an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite – lived intangible asset is impaired. This assessment should be used as a basis for determining whether it is necessary to perform the quantitative impairment test. An entity would not be required to calculate the fair value of the intangible asset and perform the quantitative test unless the entity determines, based upon its qualitative assessment, that it is more likely than not that its fair value is less than its carrying value. The update further improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of an indefinite – lived intangible asset is less than its carrying amount. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. This ASC update is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted. The Company implemented this guidance effective October 1, 2012. 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 March 2013, the FASB issued ASC Update No. 2013-05 (Topic 830) Foreign Currency Matters-Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force). This ASC update clarifies the applicable guidance for the release of the cumulative translation adjustment into net income when a parent either sells all or a portion of its investment in a foreign entity. This guidance is also required to be applied when an entity no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity (with certain exceptions). Additionally, this update clarifies that the sale of an investment in a foreign entity includes events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date in a business combination achieved in stages. This ASC update is effective for annual and interim periods beginning after December 15, 2013, with early adoption permitted, and is to be applied prospectively to derecognition events occurring after the effective date. The Company does not expect the adoption of ASC Update 2013-05 to have a material impact on its financial position or results of operations.

3. Income Taxes

Income tax expense for the three months ended March 31, 2013 and 2012 has been computed using estimated effective tax rates. These rates are revised, if necessary, at the end of each successive interim period to reflect current estimates of the annual effective tax rates.

For the three months ended March 31, 2013, the tax provision is comprised of a $13.2 million U.S. federal income tax expense and $9.3 million foreign income tax expense. For the three months ended March 31, 2012, the tax provision was comprised of a $12.1 million U.S. federal income tax expense and $8.0 million in foreign income tax expense.

Although most of the Company’s non – U.S. income is subject to U.S. federal income tax, certain of its non – U.S. income is not subject to U.S. federal income tax until repatriated. Foreign taxes on this non – U.S. income are accrued at the local foreign tax rate, as opposed to the higher U.S. statutory rate, since these earnings currently are expected to be permanently reinvested overseas. This assumption could change, as a result of a sale of the subsidiaries, the receipt of dividends from the subsidiaries, a change in management’s intentions, or as a result of various other events. The Company has not made a provision for U.S. taxes on $6.4 million of non-U.S. income for the three months ended March 31, 2013. All of the Company’s non-U.S. income was subject to U.S. taxes during the same period in 2012.

The Company or its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions, as well as foreign 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 2007. The IRS audits of the years 2009 and 2010 commenced in June 2012. The Company and its subsidiaries are still subject to U.S. state income tax examinations by tax authorities for years after 2006 and foreign examinations for years after 2010.

4. Debt

Debt consists of the following:

	March 31,			December 31,
(in millions)	2013			2012
Senior debentures maturing June 15, 2021	$	300.0		$	300.0
Senior debentures maturing March 1, 2020		200.0			200.0
Senior debentures maturing October 15, 2025		120.9			120.9
Subordinated debentures maturing March 30, 2053		175.0			—
Subordinated debentures maturing February 3, 2027		59.7			59.7
FHLBB borrowings (secured)		125.0			171.3
Total principal debt	$	980.6		$	851.9
Unamortized debt discount		(2.5	)		(2.5	)
Total	$	978.1		$	849.4

On March 20, 2013, the Company issued $175.0 million aggregate principal amount of 6.35% subordinated unsecured debentures due March 30, 2053. These debentures pay interest quarterly. The Company may redeem these debentures in whole at any time, or in part from time to time, on or after March 30, 2018, at a redemption price equal to their principal amount plus accrued and unpaid interest. If the debentures are not redeemed in whole, at least $25.0 million aggregate principal amount of the debentures must remain outstanding. In addition, in certain circumstances, the Company may redeem the debentures in whole, but not in part, prior to March 30, 2018.

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In 2009, the Company received a $125.0 million Federal Home Loan Bank of Boston (“FHLBB”) advance through the Company’s membership in the FHLBB. This collateralized advance bears interest at a fixed rate of 5.50% per annum over a twenty-year term. In July 2010, the Company committed to an additional $46.3 million of FHLBB advances. These advances were drawn in several increments from July 2010 to January 2012 and carried fixed interest rates with a weighted average of 3.88%. In January 2013, the Company repaid the $46.3 million of FHLBB advances plus prepayment fees of $7.8 million for a total payment of $54.1 million. These advances would have matured on July 30, 2020.

As collateral to FHLBB, Hanover Insurance pledged government agency securities with a fair value of $145.3 million and $200.8 million, for the aggregate borrowings of $125.0 million and $171.3 million as of March 31, 2013 and December 31, 2012, respectively. The amount of required collateral decreased in conjunction with the repayment of the $46.3 million of FHLBB advances. 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 maintains a certain level of investment in FHLBB stock. Total holdings of FHLBB stock were $9.3 million and $9.7 million at March 31, 2013 and December 31, 2012, respectively.

At March 31, 2013, the Company was in compliance with the covenants associated with all of its debt indentures and credit arrangements.

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5. Investments

A. Fixed maturities and equity securities

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

	March 31, 2013
(in millions)	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI Unrealized Losses
Fixed maturities:
U.S. Treasury and government agencies	$	314.0	$	8.1	$	0.6	$	321.5	$	—
Foreign government		299.7		6.0		0.1		305.6		—
Municipal		988.2		89.3		1.4		1,076.1		—
Corporate		3,443.3		268.8		13.3		3,698.8		9.2
Residential mortgage-backed		720.3		37.3		3.3		754.3		2.0
Commercial mortgage-backed		340.6		18.8		0.6		358.8		—
Asset-backed		204.5		3.9		—		208.4		—
Total fixed maturities	$	6,310.6	$	432.2	$	19.3	$	6,723.5	$	11.2
Equity securities	$	391.2	$	46.0	$	2.2	$	435.0	$	—

	December 31, 2012
(in millions)	Amortized Cost  or Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI Unrealized Losses
Fixed maturities:
U.S. Treasury and government agencies	$	317.2	$	8.8	$	0.4	$	325.6	$	—
Foreign government		348.5		4.6		0.2		352.9		—
Municipal		1,010.2		87.2		1.1		1,096.3		—
Corporate		3,512.8		275.4		14.8		3,773.4		9.3
Residential mortgage-backed		769.0		39.4		3.2		805.2		1.7
Commercial mortgage-backed		373.3		23.2		0.3		396.2		—
Asset-backed		198.5		4.1		—		202.6		—
Total fixed maturities	$	6,529.5	$	442.7	$	20.0	$	6,952.2	$	11.0
Equity securities	$	299.0	$	21.6	$	4.8	$	315.8	$	—

Other-than-temporary impairments (“OTTI”) unrealized losses in the tables above represent OTTI recognized in accumulated other comprehensive income. This amount excludes net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date of $20.4 million and $20.5 million as of March 31, 2013 and December 31, 2012, respectively.

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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.

(in millions)	March 31, 2013
	Amortized		Fair
	Cost		Value
Due in one year or less	$	430.2	$	437.4
Due after one year through five years		2,216.7		2,344.4
Due after five years through ten years		1,718.1		1,879.3
Due after ten years		680.2		740.9
		5,045.2		5,402.0
Mortgage-backed and asset-backed securities		1,265.4		1,321.5
Total fixed maturities	$	6,310.6	$	6,723.5

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B. Securities in an unrealized loss position

The following tables provide information about the Company’s fixed maturities and equity securities that were in an unrealized loss position at March 31, 2013 and December 31, 2012.

	March 31, 2013
	12 months or less				Greater than 12 months				Total
(in millions)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury and government agencies	$	0.5	$	98.1	$	0.1	$	6.5	$	0.6	$	104.6
Foreign governments		—		23.9		0.1		0.4		0.1		24.3
Municipal		0.7		65.5		0.6		16.3		1.3		81.8
Corporate		2.1		181.3		6.9		34.4		9.0		215.7
Residential mortgage-backed		0.8		66.7		2.0		9.5		2.8		76.2
Commercial mortgage-backed		0.5		52.4		0.1		4.9		0.6		57.3
Asset-backed		—		24.0		—		0.2		—		24.2
Total investment grade		4.6		511.9		9.8		72.2		14.4		584.1
Below investment grade:
Municipal		—		—		0.1		3.4		0.1		3.4
Corporate		0.9		30.0		3.4		35.5		4.3		65.5
Residential mortgage-backed		0.1		0.8		0.4		2.2		0.5		3.0
Total below investment grade		1.0		30.8		3.9		41.1		4.9		71.9
Total fixed maturities		5.6		542.7		13.7		113.3		19.3		656.0
Equity securities		1.4		15.4		0.8		7.9		2.2		23.3
Total	$	7.0	$	558.1	$	14.5	$	121.2	$	21.5	$	679.3

	December 31, 2012
	12 months or less				Greater than 12 months				Total
(in millions)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury and government agencies	$	0.2	$	89.5	$	0.2	$	8.5	$	0.4	$	98.0
Foreign governments		0.2		81.2		—		0.4		0.2		81.6
Municipal		0.5		61.9		0.6		24.0		1.1		85.9
Corporate		1.8		224.8		6.6		59.0		8.4		283.8
Residential mortgage-backed		0.5		47.3		2.0		9.4		2.5		56.7
Commercial mortgage-backed		0.2		29.9		0.1		4.9		0.3		34.8
Asset-backed		—		11.4		—		0.3		—		11.7
Total investment grade		3.4		546.0		9.5		106.5		12.9		652.5
Below investment grade:
Municipal		—		—		—		2.0		—		2.0
Corporate		1.1		26.6		5.3		50.6		6.4		77.2
Residential mortgage-backed		0.1		1.6		0.6		2.5		0.7		4.1
Total below investment grade		1.2		28.2		5.9		55.1		7.1		83.3
Total fixed maturities		4.6		574.2		15.4		161.6		20.0		735.8
Equity securities		4.8		74.4		—		—		4.8		74.4
Total	$	9.4	$	648.6	$	15.4	$	161.6	$	24.8	$	810.2

The Company views the gross unrealized losses on fixed maturities and equity securities as being temporary since it is its assessment that these securities will recover in the near term, allowing the Company to realize the anticipated long-term economic value. 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 OTTI 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

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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 make contractual payments as they come due 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.

C. Proceeds from sales

The proceeds from sales of available-for-sale securities and gross realized gains and losses on those sales, were as follows:

	Three Months Ended March 31,
	2013						2012
(in millions)	Proceeds from Sales		Gross Gains		Gross Losses		Proceeds from Sales		Gross Gains		Gross Losses
Fixed maturities	$	137.2	$	1.6	$	0.6	$	279.2	$	4.7	$	1.1
Equity securities	$	34.5	$	6.6	$	—	$	0.7	$	—	$	0.2

D. Other-than-temporary impairments

For the three months ended March 31, 2013, total OTTI of fixed maturities were $0.7 million. Of this amount, $0.5 million was recognized in earnings and the remaining $0.2 million was recorded as unrealized losses in accumulated other comprehensive income.

For the three months ended March 31, 2012, total OTTI of fixed maturities were $1.6 million. Of this amount, $1.9 million was recognized in earnings, including $0.3 million that was transferred from unrealized losses in accumulated other comprehensive income.

The methodology and significant inputs used to measure the amount of credit losses on fixed maturities in 2013 and 2012 were as follows:

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.

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.

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.

	Three Months Ended March 31,
(in millions)	2013			2012
Credit losses at beginning of period	$	8.6		$	14.5
Credit losses for which an OTTI was not previously recognized		0.2			0.1
Additional credit losses on securities for which an OTTI was previously recognized		0.2			0.3
Reductions for securities sold, matured or called		(0.4	)		(1.4	)
Credit losses at end of period	$	8.6		$	13.5

E. Funds at Lloyd’s

In accordance with Lloyd’s operating guidelines, the Company deposits funds at Lloyd’s to support underwriting operations. These funds are available only to fund claim obligations. These assets consisted of approximately $468 million of fixed maturities and $3 million of cash and cash equivalents as of March 31, 2013. The Company also deposits funds with various state and governmental authorities in the U.S. For a discussion of the Company’s deposits with state and governmental authorities, see also Note 3 – “Investments” of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.

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6. Fair Value

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. The Company emphasizes the use of observable market data whenever available in determining fair value. 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. A hierarchy of the three broad levels of fair value are as follows, with the highest priority given to Level 1 as these are the most observable, and the lowest priority given to Level 3:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities 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 since last year.

Cash and Cash Equivalents

The carrying amount approximates fair value. Cash equivalents primarily consist of money market instruments, which are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and are classified as Level 1.

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 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 such as maturity date, coupon, mandatory principal payment dates, frequency of interest and principal payments, and optional redemption features. Inputs into the fair value applications that are unique by asset class include, but are not limited to:

• U.S. government agencies – determination of direct versus indirect government support and whether any contingencies exist with respect to the timely payment of principal and interest.

• Foreign government – estimates of appropriate market spread versus underlying related sovereign treasury curve(s) dependent on liquidity and direct or contingent support.

• Municipals – 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.

• Corporate fixed maturities – overall credit quality, including assessments of the level and variability of: economic sensitivity; liquidity; corporate financial policies; management quality; regulatory environment; competitive position; ownership; restrictive covenants; and security or collateral.

• Residential mortgage-backed securities – 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; government or monetary authority support programs; tax policies; delinquency/default trends; and, in the case of non-agency collateralized mortgage obligations, severity of loss upon default and length of time to recover proceeds following default.

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• Commercial mortgage-backed securities – overall credit quality, including assessments of the value and supply/demand characteristics 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.

• Asset-backed securities – overall credit quality, including assessments of the underlying collateral type such as credit card receivables, auto loan receivables and equipment lease receivables; geographic diversification; vintage year; historical collateral performance including delinquency, default and casualty trends; economic conditions influencing use rates and resale values; and contract structural 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 consists of publicly traded securities, including exchange traded funds, 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 2 also includes fair values obtained from net asset values provided by mutual fund investment managers, upon which subscriptions and redemptions can be executed. Level 3 consists of common or preferred stock of private companies for which observable inputs are not available. 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 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. The Company holds certain equity securities that have been issued by privately-held entities that do not have an active market and for which the pricing service cannot provide fair values. Generally, the Company estimates fair value for these securities based on the issuer’s book value and market multiples. These securities are reported as Level 3 as market multiples represent significant unobservable inputs.

Other Investments

Other investments consist primarily of overseas trust funds, for which fair values are provided by the investment manager based on quoted prices for similar instruments in active markets and are reported as Level 2. Also included in other investments are cost basis limited partnerships and mortgage loans. Cost basis limited partnerships’ fair values are based on the net asset value provided by the general partner and recent financial information and 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 and are reported as Level 2.

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. Debt is reported as Level 2.

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The estimated fair value of the financial instruments were as follows:

(in millions)	March 31, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial Assets
Cash and cash equivalents	$	691.0	$	691.0	$	564.8	$	564.8
Fixed maturities		6,723.5		6,723.5		6,952.2		6,952.2
Equity securities		435.0		435.0		315.8		315.8
Other investments		186.5		186.8		188.9		189.4
Total financial assets	$	8,036.0	$	8,036.3	$	8,021.7	$	8,022.2
Financial Liabilities
Debt	$	978.1	$	1,116.7	$	849.4	$	995.2

The Company has processes designed to ensure that the values received from its third party pricing service are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. The Company performs a review of the fair value hierarchy classifications and of prices received from its pricing service on a quarterly basis. The Company reviews the pricing services’ policies describing its methodology, processes, practices and inputs, including various financial models used to value securities. Also, the Company reviews the portfolio pricing, including securities with changes in prices that exceed a defined threshold are verified to independent sources, if available. 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 2013 and 2012, 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 or liabilities 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.

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The following tables provide, for each hierarchy level, the Company’s assets at March 31, 2013 and December 31, 2012 that are measured at fair value on a recurring basis.

	March 31, 2013
(in millions)	Total		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Treasury and government agencies	$	321.5	$	142.3	$	179.2	$	—
Foreign government		305.6		48.5		257.1		—
Municipal		1,076.1		—		1,047.3		28.8
Corporate		3,698.8		—		3,676.0		22.8
Residential mortgage-backed, U.S. agency backed		568.2		—		568.2		—
Residential mortgage-backed, non-agency		186.1		—		185.5		0.6
Commercial mortgage-backed		358.8		—		334.0		24.8
Asset-backed		208.4		—		208.4		—
Total fixed maturities		6,723.5		190.8		6,455.7		77.0
Equity securities		425.7		365.5		35.2		25.0
Other investments		172.1		—		168.5		3.6
Total investment assets at fair value	$	7,321.3	$	556.3	$	6,659.4	$	105.6

	December 31, 2012
(in millions)	Total		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Treasury and government agencies	$	325.6	$	144.2	$	181.4	$	—
Foreign government		352.9		60.9		292.0		—
Municipal		1,096.3		—		1,076.9		19.4
Corporate		3,773.4		—		3,747.0		26.4
Residential mortgage-backed, U.S. agency backed		610.8		—		610.8		—
Residential mortgage-backed, non-agency		194.4		—		193.7		0.7
Commercial mortgage-backed		396.2		—		369.5		26.7
Asset-backed		202.6		—		201.1		1.5
Total fixed maturities		6,952.2		205.1		6,672.4		74.7
Equity securities		306.1		226.9		54.8		24.4
Other investments		172.8		—		169.2		3.6
Total investment assets at fair value	$	7,431.1	$	432.0	$	6,896.4	$	102.7

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The following table provides, for each hierarchy level, the Company’s estimated fair values of financial instruments that are not carried at fair value:

	March 31, 2013
(in millions)	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	691.0	$	691.0	$	—	$	—
Equity securities		9.3		—		9.3		—
Other investments		14.7		—		4.0		10.7
Liabilities:
Debt	$	1,116.7	$	—	$	1,116.7	$	—

	December 31, 2012
(in millions)	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	564.8	$	564.8	$	—	$	—
Equity securities		9.7		—		9.7		—
Other investments		16.6		—		4.8		11.8
Liabilities:
Debt	$	995.2	$	—	$	995.2	$	—

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The tables below provide a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

	Fixed Maturities
(in millions)	Municipal			Corporate			Residential mortgage- backed, non- agency			Commercial mortgage- backed			Asset-backed			Total			Equity and Other			Total Assets
Three Months Ended
March 31, 2013
Balance January 1, 2013	$	19.4		$	26.4		$	0.7		$	26.7		$	1.5		$	74.7		$	28.0		$	102.7
Transfers into Level 3		9.7			0.2			—			—			—			9.9			—			9.9
Transfers out of Level 3		—			—			—			—			(1.5	)		(1.5	)		(0.9	)		(2.4	)
Total gains (losses):
Included in earnings		—			0.4			—			—			—			0.4			—			0.4
Included in other comprehensive income-net appreciation (depreciation) on available-for-sale securities		0.1			(0.1	)		—			(0.5	)		—			(0.5	)		1.5			1.0
Purchases and sales:
Purchases		—			—			—			—			—			—			—			—
Sales		(0.4	)		(4.1	)		(0.1	)		(1.4	)		—			(6.0	)		—			(6.0	)
Balance March 31, 2013	$	28.8		$	22.8		$	0.6		$	24.8		$	—		$	77.0		$	28.6		$	105.6
Three Months Ended
March 31, 2012
Balance January 1, 2012	$	13.6		$	23.8		$	5.2		$	23.7		$	9.2		$	75.5		$	27.0		$	102.5
Transfers into Level 3		—			4.3			—			—			—			4.3			0.1			4.4
Transfers out of Level 3		—			—			—			—			(7.7	)		(7.7	)		—			(7.7	)
Total gains (losses):
Included in earnings		—			0.1			—			—			(0.1	)		—			(0.2	)		(0.2	)
Included in other comprehensive income-net appreciation (depreciation) on available-for-sale securities		0.6			0.8			0.1			(1.0	)		—			0.5			(1.2	)		(0.7	)
Purchases and sales:
Purchases		3.0			—			—			5.2			—			8.2			—			8.2
Sales		(0.2	)		(0.3	)		(4.6	)		(0.4	)		(0.1	)		(5.6	)		(0.7	)		(6.3	)
Balance March 31, 2012	$	17.0		$	28.7		$	0.7		$	27.5		$	1.3		$	75.2		$	25.0		$	100.2

During the three months ended March 31, 2013 and 2012, the Company transferred fixed maturities between Level 2 and Level 3 primarily as 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 the three months ended March 31, 2013 or 2012.

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The following table summarizes gains and losses due to changes in fair value that are recorded in net income for Level 3 assets.

	Three Months Ended March 31,
	2013		2012
(in millions)	Net realized investment gains		Other-than- temporary impairments			Net realized investment gains (losses)			Total
Level 3 Assets:
Fixed maturities:
Corporate	$	0.4	$	—		$	0.1		$	0.1
Asset-backed		—		(0.1	)		—			(0.1	)
Total fixed maturities		0.4		(0.1	)		0.1			—
Equity securities		—		—			(0.2	)		(0.2	)
Total assets	$	0.4	$	(0.1	)	$	(0.1	)	$	(0.2	)

There were no Level 3 liabilities held by the Company for the three months ended March 31, 2013 and 2012.

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The following table provides quantitative information about the significant unobservable inputs used by the Company in the fair value measurements of Level 3 assets as of March 31, 2013. Where discounted cash flows are used in the valuation of fixed maturities, the internally-developed discount rate is adjusted by the significant unobservable inputs shown in the table. Valuations for securities based on broker quotes for which there is a lack of transparency as to inputs used to develop the valuations have been excluded.

			March 31, 2013			December 31, 2012
	Valuation	Significant	Fair		Range	Fair		Range
(in millions)	Technique	Unobservable Inputs	Value		(Wtd Average)	Value		(Wtd Average)
Fixed maturities:
Municipal	Discounted	Discount for:	$	28.8		$	19.4
	cash flow	Small issue size			1.0-4.0% (2.4%)			1.0-4.0% (3.1%)
		Above-market coupon			0.3-1.0% (0.5%)			0.3-1.0% (0.5%)
		Long maturity			0.1-0.6% (0.3%)			0.5% (0.5%)
Corporate	Discounted	Discount for:		22.6			26.4
	cash flow	Credit stress			3.0% (3.0%)			1.0-3.0% (1.1%)
		Above-market coupon			0.3-1.0% (0.7%)			0.3-1.0% (0.7%)
		Small issue size			0.3-3.0% (0.6%)			0.3-3.0% (0.5%)
		Long maturity			0.1% (0.1%)			0.5% (0.5%)
Residential mortgage-backed, non-agency	Discounted	Discount for:		0.6			0.7
	cash flow	Small issue size			0.5% (0.5%)			0.5% (0.5%)
Commercial mortgage-backed	Discounted	Discount for:		24.8			26.7
	cash flow	Credit stress			1.0% (1.0%)			1.0% (1.0%)
		Small issue size			0.5% (0.5%)			0.5% (0.5%)
		Above-market coupon			0.3-0.8% (0.4%)			0.3-0.8% (0.4%)
		Long maturity			0.2-0.5% (0.4%)			0.5-0.8% (0.7%)
		Lease structure			0.3% (0.3%)			0.3% (0.3%)
Asset backed	Discounted	Discount for:		—			1.5
	cash flow	Small issue size			NA			0.7-2.0% (1.6%)
Equity securities	Market	Net tangible asset		24.9			24.3
	comparables	market multiples			1.0X (1.0X)			0.9X (0.9X)
Other	Discounted	Discount rate		3.6	18.0% (18.0%)		3.6	18.0% (18.0%)
	cash flow

Significant increases (decreases) in any of the above inputs in isolation would result in a significantly lower (higher) fair value measurement. There are no interrelationships between these inputs which might magnify or mitigate the effect of changes in unobservable inputs on the fair value measurement.

7. Pension and Other Postretirement Benefit Plans

The components of net periodic pension cost for defined benefit pension and other postretirement benefit plans included in the Company’s results of operations are as follows:

	Three Months Ended March 31,
(in millions)	2013			2012			2013			2012
	Pension Plans						Postretirement Plans
Service cost – benefits earned during the period	$	0.4		$	0.4		$	—		$	—
Interest cost		7.9			8.8			0.5			0.5
Expected return on plan assets		(8.9	)		(9.7	)		—			—
Recognized net actuarial loss		3.7			3.2			0.1			—
Amortization of prior service cost		—			—			(0.9	)		(0.9	)
Net periodic pension cost (benefit)	$	3.1		$	2.7		$	(0.3	)	$	(0.4	)

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8. Other Comprehensive Income

The following table provides changes in other comprehensive income.

	Three Months Ended March 31,
	2013									2012
(in millions)	Pre-Tax			Tax Benefit (Expense)			Net of Tax			Pre-Tax			Tax Benefit (Expense)			Net of Tax
Unrealized gains on available-for-sale securities and derivative instruments:
Unrealized gains arising during period	$	25.0		$	(8.8	)	$	16.2		$	70.0		$	(20.9	)	$	49.1
Less:
Amount of realized gains from sales and other		8.8			2.3			11.1			4.7			2.7			7.4
Portion of other-than-temporary impairment losses recognized in earnings		(0.5	)		0.2			(0.3	)		(2.9	)		0.7			(2.2	)
Net unrealized gains		16.7			(11.3	)		5.4			68.2			(24.3	)		43.9
Pension and postretirement benefits:
Amortization of net actuarial loss and prior service cost recognized as net periodic benefit cost		2.9			(1.0	)		1.9			2.3			(0.8	)		1.5
Cumulative foreign currency translation adjustment:
Foreign currency translation recognized during the period		(15.4	)		5.4			(10.0	)		14.3			(5.0	)		9.3
Other comprehensive income (loss)	$	4.2		$	(6.9	)	$	(2.7	)	$	84.8		$	(30.1	)	$	54.7

Reclassifications out of accumulated other comprehensive income were as follows:

	For the Three Months Ended
	March 31,
(in millions)	2013			2012
	Amount Reclassified from
Details about Accumulated Other Comprehensive Income Components	Accumulated Other Comprehensive Income						Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains on available-for-sale	$	8.7		$	4.6		Net realized gains from sales and other
securities and derivative instruments							Net other-than-temporary impairment losses on
		(0.5	)		(1.9	)	investments recognized in earnings
Other		0.1			—
		8.3			2.7		Total before tax
		2.5			3.4		Tax benefit (expense)
		10.8			6.1
		—			(0.9	)	Discontinued operations, net of tax
		10.8			5.2		Net of tax
Amortization of defined benefit pension
and postretirement plans		2.9			2.3		Loss adjustment expenses and other operating expenses
		(1.0	)		(0.8	)	Tax benefit (expense)
		1.9			1.5		Net of tax
Total reclassifications for the period	$	12.7		$	6.7		Net of tax

The amount reclassified from accumulated other comprehensive income for the pension and postretirement benefits was allocated approximately 40% to loss adjustment expenses and 60% to other operating expenses.

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9. Segment Information

The Company’s primary business operations include insurance products and services provided through four operating segments. These operating segments are Commercial Lines, Personal Lines, Chaucer and Other. Commercial Lines includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial coverages, such as specialty program business, inland marine, management and professional liability and surety. Personal Lines includes personal automobile, homeowners and other personal coverages. Chaucer includes marine and aviation, energy, property, U.K. motor, and casualty and other coverages (which includes international liability, specialist coverages, and syndicate participations). Included in Other are Opus Investment Management, Inc., 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. The separate financial information 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. This consists of interest on the Company’s senior debentures, subordinated debentures, collateralized borrowings with the Federal Home Loan Bank of Boston, and letter of credit facility. Management evaluates the results of the aforementioned segments based on operating income before taxes (formerly referred to as segment income) which also excludes interest expense on debt. Operating income (loss) before taxes excludes certain items which are included in net income (loss), such as net realized investment gains and losses, including gains and losses from certain derivative instruments. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income (loss) before taxes excludes net gains and losses on disposals of businesses, discontinued operations, costs to acquire businesses, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income (loss) before taxes may be significant components in understanding and assessing the Company’s financial performance, management believes that the presentation of operating income (loss) before taxes enhances an investor’s understanding of the Company’s results of operations by highlighting net income (loss) attributable to the core operations of the business. However, operating income (loss) before taxes should not be construed as a substitute for income (loss) before income taxes and operating income (loss) should not be construed as a substitute for net income (loss).

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Summarized below is financial information with respect to the Company’s business segments.

	Three Months Ended
	March 31,
(in millions)	2013			2012
Operating revenues:
Commercial Lines	$	514.7		$	475.7
Personal Lines		391.1			388.4
Chaucer		263.9			251.7
Other		2.5			2.9
Total		1,172.2			1,118.7
Net realized investment gains		8.1			3.1
Total revenues	$	1,180.3		$	1,121.8
Operating income (loss) before income taxes:
Commercial Lines:
GAAP underwriting loss	$	(3.1	)	$	(2.5	)
Net investment income		36.1			35.7
Other income		—			0.7
Commercial Lines operating income		33.0			33.9
Personal Lines:
GAAP underwriting income		10.1			4.2
Net investment income		19.0			21.6
Other income		1.4			1.7
Personal Lines operating income		30.5			27.5
Chaucer:
GAAP underwriting income		33.0			14.7
Net investment income		10.5			9.4
Other income (loss)		(2.6	)		1.4
Chaucer operating income		40.9			25.5
Other:
GAAP underwriting loss		(1.1	)		(0.4	)
Net investment income		1.7			2.1
Other net expenses		(2.8	)		(2.9	)
Other operating loss		(2.2	)		(1.2	)
Operating income before interest expense and income taxes		102.2			85.7
Interest on debt		(14.7	)		(16.2	)
Operating income before income taxes		87.5			69.5
Adjustments to operating income:
Net realized investment gains		8.1			3.1
Net loss from repayment of advances		(7.8	)		—
Net benefit (costs) related to acquired businesses		0.4			(1.5	)
Net foreign exchange gains (losses)		0.7			(0.3	)
Income before income taxes	$	88.9		$	70.8

The Company recognized $2.1 million in net foreign currency transaction losses in the Statement of Income during the three months ended March 31, 2013 compared to $2.9 million in net foreign currency gains during the three months ended March 31, 2012.

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The following table provides identifiable assets for the Company’s business segments and discontinued operations:

	March 31,		December 31,
(in millions)	2013		2012
	Identifiable Assets
U.S. Companies	$	8,908.5	$	8,909.6
Chaucer		4,413.0		4,444.8
Discontinued operations		120.6		130.5
Total	$	13,442.1	$	13,484.9

The Company reviews the assets of its U.S. Companies collectively and does not allocate them between the Commercial Lines, Personal Lines and Other segments.

10. Stock-based Compensation

Compensation cost and the related tax benefits were as follows:

	Three Months Ended
	March 31,
(in millions)	2013			2012
Stock-based compensation expense	$	3.6		$	4.1
Tax benefit		(1.3	)		(1.4	)
Stock-based compensation expense, net of taxes	$	2.3		$	2.7

Stock Options

Information on the Company’s stock option plans is summarized below.

	Three Months Ended March 31,
	2013					2012
(in whole shares and dollars)	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, beginning of period		2,892,882		$	38.28		2,715,430		$	38.57
Granted		535,300			42.49		517,500			36.81
Exercised		(213,645	)		30.26		(33,224	)		32.24
Expired		—			—		(158,850	)		44.04
Outstanding, end of period		3,214,537			39.52		3,040,856			38.06

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Restricted Stock Units

The following tables summarize activity information about employee restricted stock units:

	Three Months Ended March 31,
	2013					2012
(in whole shares and dollars)	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Time-based restricted stock units:
Outstanding, beginning of period		750,837		$	40.15		768,529		$	40.17
Granted		124,850			42.49		168,750			36.93
Vested		(245,185	)		39.42		(117,522	)		35.27
Forfeited		(1,625	)		39.32		(10,309	)		39.67
Outstanding, end of period		628,877			40.90		809,448			40.21
Performance-based and market-based restricted stock units:
Outstanding, beginning of period		132,775		$	39.97		69,500		$	45.37
Granted		79,850			41.67		99,500			36.61
Outstanding, end of period		212,625			40.61		169,000			40.21

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 200% of the shares disclosed, which varies based on grant year and individual award. Increases above the 100% target level are reflected as granted in the period in which performance-based stock unit goals are achieved. Decreases below the 100% target level are reflected as forfeited.

In the first three months of 2013 and 2012, the Company granted market-based awards totaling 76,175 and 90,250, respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity. The vesting of these stock units is based on the relative total shareholder return (“TSR”) of the Company. This metric is generally based on a three-year average relative TSR as compared to a Property and Casualty Index of peer companies. The fair value of market based awards was estimated at the date of grant using a valuation model. These units have the potential to range from 0% to 150% of the shares disclosed.

11. Earnings Per Share and Shareholders’ Equity Transactions

The following table provides weighted average share information used in the calculation of the Company’s basic and diluted earnings per share:

	Three Months Ended
	March 31,
(in millions, except per share data)	2013			2012
Basic shares used in the calculation of earnings per share		44.6			44.9
Dilutive effect of securities:
Employee stock options		0.3			0.2
Non-vested stock grants		0.4			0.4
Diluted shares used in the calculation of earnings per share		45.3			45.5
Per share effect of dilutive securities on income from continuing operations	$	(0.02	)	$	(0.02	)
Per share effect of dilutive securities on income from net income	$	(0.03	)	$	(0.02	)

Diluted earnings per share for the three months ended March 31, 2013 and 2012 excludes 1.3 million and 1.8 million, respectively, of common shares issuable under the Company’s stock compensation plans, because their effect would be antidilutive.

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Since October 2007 and through March 2013, the Company’s Board of Directors has authorized aggregate repurchases of the Company’s common stock of up to $500 million. As of March 31, 2013, the Company has $90.0 million available for repurchases under these repurchase authorizations. 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. During the first three months of 2013, the Company purchased 0.5 million shares of the Company’s common stock through a privately negotiated transaction and open market purchases at a cost of $25.2 million. Total repurchases under this program as of March 31, 2013 were 9.6 million shares at a cost of $410.0 million.

12. Commitments and Contingencies

Legal Proceedings

Durand Litigation

On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., and 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 plaintiff claims that the Plan understated her distributions and those of similarly situated participants by failing to pay an additional so-called “whipsaw” amount reflecting the present value of an estimate of future interest credits from the date of the lump sum distribution to each participant’s retirement age of 65 discounted by applicable IRS rates.

The Plaintiff filed an Amended Complaint adding two new named plaintiffs and additional claims on December 11, 2009. In response, the Company filed a Motion to Dismiss on January 30, 2010. In addition to the pending claim challenging the calculation of lump sum distributions, the Amended Complaint included: (a) a claim that the Plan failed to calculate participants’ account balances and lump sum payments 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 against the Company for breach of fiduciary duty and ERISA notice requirements arising from the various interest crediting and lump sum distribution matters of which Plaintiffs complain. The District Court granted the Company’s Motion to Dismiss the additional claims on statute of limitations grounds by a Memorandum Opinion dated March 31, 2011, leaving the claims substantially as set forth in the original March 12, 2007 complaint. Plaintiffs filed a Motion for Reconsideration of the District Court’s decision to dismiss the additional claims, which was denied with respect to the claims set forth in (a) and (b) above; however, the Court did allow the fiduciary duty claim regarding plaintiffs’ “whipsaw” claim to stand. On June 22, 2012, the Company and the Plan filed a Motion for Summary Judgment to dismiss the claims of one of the plaintiffs who received his lump sum distribution after December 31, 2003, on the basis that certain amendments to the Plan effective January 1, 2004 eliminated any basis for payment of an additional “whipsaw” amount to participants who received lump sum distributions after December 31, 2003. On December 13, 2012, the Court held this motion in abeyance pending a ruling on Plaintiffs’ Motion for Class Certification. Plaintiffs filed their Motion for Class Certification on January 14, 2013. On February 8, 2013, the Company and the Plan informed the Court that they did not oppose the certification of a class.

At this time, the Company is unable to provide a reasonable estimate of the potential range of ultimate liability if the outcome of the suit is unfavorable. The extent to which any of the Plaintiffs’ multiple theories of liability, some of which are overlapping and others of which are quite complex and novel, are accepted and upheld on appeal will significantly affect the Plan’s or the Company’s potential liability. The statute of limitations applicable to the alleged class has not yet been finally determined and the extent of potential liability, if any, will depend on this final determination. In addition, assuming for these purposes that the Plaintiffs prevail with respect to claims that benefits accrued or payable under the Plan were understated, then there are numerous possible theories and other variables upon which any revised calculation of benefits as requested under Plaintiffs’ claims could be based. Any adverse judgment in this case against the Plan would be expected to create a liability for the Plan, with resulting effects on the Plan’s assets available to pay benefits. The Company’s future required funding of the Plan could also be impacted by such a liability.

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

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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. The ultimate resolutions of such proceedings are not expected to 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.

13. Subsequent Events

There were no subsequent events requiring adjustment to the financial statements and no additional disclosures required in the notes to the interim consolidated financial statements.

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PART I

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

Introduction	30
Executive Overview	30
Description of Operating Segments	31
Results of Operations – Net Income	31
Results of Operations – Segments	33
Investments	38
Other Items	44
Income Taxes	44
Critical Accounting Estimates	45
Statutory Surplus of U.S. Insurance Subsidiaries	45
Lloyd’s Capital Requirement	45
Liquidity and Capital Resources	46
Off – Balance Sheet Arrangements	48
Contingencies and Regulatory Matters	48
Risks and Forward – Looking Statements	48

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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 interim consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and its subsidiaries (“THG”). Consolidated results of operations and financial condition are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2013.

Results of operations include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), our principal U.S. domiciled property and casualty companies; Chaucer Holdings plc (“Chaucer”), our United Kingdom (U.K.) domiciled specialist insurance underwriting group which operates through the Society and Corporation of Lloyd’s (“Lloyd’s”), and certain other insurance and non-insurance subsidiaries. Additionally, results of operations include our discontinued operations, consisting primarily of our former life insurance businesses, accident and health business and third party administration business.

Executive Overview

Business operations consist of four operating segments: Commercial Lines, Personal Lines, Chaucer and Other.

Operating income (formerly referred to as segment income) excluding income taxes and interest was $102.2 million for the three months ended March 31, 2013 compared to $85.7 million in the same period in 2012, an increase of $16.5 million. This increase is primarily due to lower catastrophe and non-catastrophe related losses in the first three months of 2013, partially offset by lower favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves (“prior years’ loss reserves”). Pre-tax catastrophe losses were $21.7 million for the three months ended March 31, 2013 compared to $40.6 million in the same period in 2012, a decrease of $18.9 million. Favorable development on prior years’ loss reserves was $6.9 million for the three months ended March 31, 2013, compared to favorable development of $17.2 million in the same period in 2012.

In several recent years, weather-related catastrophe and non-catastrophe losses have been in excess of longer term averages for the insurance industry. Pricing in our Commercial and Personal Lines and certain lines in Chaucer, continues to improve as the industry responds to these increased weather-related losses, as well as to the earnings impact of reduced investment income as a result of low interest rates, and other factors. We are continuing efforts to improve our underwriting results in both our Commercial and Personal Lines, including through rate increases and improvements to our mix of business.

Commercial Lines

We believe our unique approach to the small commercial market, distinctiveness in the middle market, and continued development of specialty lines provides us with a diversified portfolio of products and delivers significant value to agents and policyholders. The small commercial and middle market businesses are expected to contribute to premium growth in Commercial Lines over the next several years as we continue to pursue our core strategy of developing strong partnerships with agents, distinctive products, franchise value through limited distribution, and industry segmentation. Growth in our specialty lines continues to be an important part of our strategy, with the expansion of our product offerings in these lines supported by several acquisitions of specialized business.

We believe these efforts have driven, and will continue to drive, improvement in our overall mix of business and ultimately our underwriting profitability. Commercial Lines net written premium grew by 3.1% in the first three months of 2013, driven by both our core commercial businesses and specialty businesses. This growth is primarily due to rate increases, strong retention and targeted new business expansion. Underwriting results in the first three months of 2013 were relatively consistent with the same period in 2012, primarily due to increased current year non-catastrophe weather-related losses and LAE, partially offset by a decrease in catastrophe related losses. In addition, the current quarter’s results benefited from growth in earned premium and the resulting positive effect on our expense ratio.

The competitive nature of the Commercial Lines market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins. Also, we continue to seek rate increases across our lines of business. Rate actions in our commercial automobile and workers ‘compensation lines, and our property coverages in our commercial multiple peril line have been supported by industry wide loss trends and severity. In our surety business, we continue to shift the business mix toward commercial surety from contract surety, and to enhance the underwriting tools and standards that we employ.

Personal Lines

In our Personal Lines business, we focus on partnering with high quality, value-added agencies that deliver consultative selling and stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and additional

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coverages). Approximately 72% of our policies in force are account business. We are focused on making investments that help maintain profitability, build a distinctive position in the market, help diversify us geographically from our historical core states of Michigan, Massachusetts, New York and New Jersey, and provide us with profitable growth opportunities.

Underwriting results improved in the first three months of 2013, as compared to the same period in 2012, primarily due to decreased catastrophe related losses, partially offset by increased non-catastrophe weather-related losses and unfavorable development on prior years’ loss reserves. Unfavorable development on prior years’ loss reserves for the three months ended March 31, 2013 was $5.6 million, compared to unfavorable development of $3.8 million for the three months ended March 31, 2012. Similar to our strategy in Commercial Lines, we continue to seek additional rate increases, subject to regulatory considerations, in our personal automobile line, particularly as a result of recent trends of higher loss severity in bodily injury and homeowners lines as a result of the catastrophe and non-catastrophe weather-related losses that the industry experienced in recent years.

Chaucer

In our Chaucer business, we deploy specialist underwriters in over 30 major insurance and reinsurance classes, including energy, marine and aviation, U.K. motor, property, and casualty and other coverages. We obtain business through Lloyd’s, the leading international insurance and reinsurance market, which provides us with access to specialist business in over 200 countries and territories worldwide through its international licenses, brand reputation and strong security rating. Our underwriting strength, diverse portfolio and Lloyd’s membership underpin our ability to actively manage the scale, composition and profitable development of this business.

Underwriting results improved in the first three months of 2013, as compared to the same period in 2012, primarily due to lower loss activity in most lines and an absence of significant man-made and natural catastrophe losses. Chaucer net written premium increased by 25.6% in the first three months of 2013, primarily due to our decision to increase our economic interest in Syndicate 1084 to 98% for 2013, up from 84% in 2012, primarily resulting from the non-renewal of the capital provision reinsurance treaty with Flagstone Re. Additionally, changes to our 2013 ceded reinsurance program, including increased net retentions for certain major lines, increased net written premiums. We also benefited from favorable rates in our marine and property lines, following recent high levels of insured market losses. The energy market began to experience reduced rate increases following an absence of major losses in 2012, and pricing in the aviation and casualty markets remained under pressure as a result of low loss activity, the challenging economic environment and continuing industry over-capacity. U.K. motor market rates continued to decline modestly, following the significant increases in 2010 and 2011.

The focus of our capital and underwriting capabilities remains in those areas where we expect rates to be more favorable, in particular, for catastrophe-exposed marine and property risks, with emphasis away from business where rates are currently under most pressure, notably casualty and aviation.

Description of Operating Segments

Primary business operations include insurance products and services currently provided through four operating segments. Our domestic operating segments are Commercial Lines, Personal Lines and Other. Our international operating segment is Chaucer. Commercial Lines includes commercial multiple peril, commercial automobile, workers’ compensation and other commercial coverages, such as specialty program business, inland marine, management and professional liability and surety. Personal Lines includes personal automobile, homeowners and other personal coverages. Chaucer includes marine and aviation, energy, property, U.K. motor, and casualty and other coverages (which includes international liability, specialist coverages, and syndicate participations). Included in Other are Opus Investment Management, Inc., 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. 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. This consists of interest on our senior debentures, junior debentures, subordinated debentures, collateralized borrowings with the Federal Home Loan Bank of Boston (“FHLBB”), and letter of credit facility.

Results of Operations – Net Income

Consolidated net income includes the results of our four operating segments (operating income (loss)), which we evaluate on a pre-tax basis and we exclude interest expense on debt. Operating income (loss) before taxes (formerly referred to as segment income (loss)) excludes certain other items which we believe are not indicative of our core operations, such as net realized investment gains and losses, including net gains and losses on certain derivative instruments. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income (loss) before taxes excludes net gains and losses on

- 31 -

disposals of businesses, discontinued operations, costs to acquire businesses, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income (loss) before taxes may be significant components in understanding and assessing our financial performance, we believe a discussion of operating income before taxes enhances an investor’s understanding of our results of operations by segregating income attributable to the core operations of the business. However, operating income (loss) before taxes should not be construed as a substitute for income (loss) before income taxes and operating income (loss) should not be construed as a substitute for net income (loss).

Catastrophe losses and prior years’ reserve development are significant components in understanding and assessing the financial performance of our business. Management reviews and evaluates catastrophes and prior years’ reserve development separately from the other components of earnings. Catastrophes and prior years’ reserve development are not predictable as to timing or the amount that will affect the results of our operations and have affected our results in the past few years. Management believes that providing certain financial metrics and trends excluding the effects of catastrophes and prior years’ reserve development helps investors to understand the variability in periodic earnings and to evaluate the underlying performance of our operations.

Consolidated net income for the three months ended March 31, 2013 was $66.2 million, compared to $49.7 million for the three months ended March 31, 2012. The $16.5 million increase is primarily due to improved operating results after taxes, which was principally attributable to an improvement in underwriting results primarily due to decrease in catastrophe losses.

The following table reflects operating income (loss) for each operating segment and a reconciliation of operating income to consolidated net income.

	Three Months Ended
	March 31,
(in millions)	2013			2012
Operating income (loss) before interest expense and income taxes:
Commercial Lines	$	33.0		$	33.9
Personal Lines		30.5			27.5
Chaucer		40.9			25.5
Other		(2.2	)		(1.2	)
Operating income before interest expense and income taxes		102.2			85.7
Interest expense on debt		(14.7	)		(16.2	)
Operating income before income taxes		87.5			69.5
Income tax expense on operating income		(27.6	)		(23.5	)
Operating income		59.9			46.0
Net realized investment gains		8.1			3.1
Net loss from repayment of advances		(7.8	)		—
Net benefit (costs) related to acquired businesses		0.4			(1.5	)
Net foreign exchange gains (losses)		0.7			(0.3	)
Income tax benefit on non-operating items		5.1			3.4
Income from continuing operations, net of taxes		66.4			50.7
Net loss from discontinued operations, net of taxes		(0.2	)		(1.0	)
Net income	$	66.2		$	49.7

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Results of Operations – Segments

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

The following table summarizes the results of operations for the periods indicated:

	Three Months Ended
	March 31,
(in millions)	2013		2012
Operating revenues
Net premiums written	$	1,076.7	$	1,016.8
Net premiums earned		1,094.3		1,035.6
Net investment income		67.3		68.8
Other income		10.6		15.9
Total operating revenues		1,172.2		1,120.3
Losses and operating expenses
Losses and LAE		683.4		661.4
Amortization of deferred acquisition costs		242.5		228.1
Other operating expenses		144.1		145.1
Total losses and operating expenses		1,070.0		1,034.6
Operating income before interest expense and income taxes	$	102.2	$	85.7

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Operating income before interest expense and income taxes was $102.2 million in the three months ended March 31, 2013, compared to $85.7 million in the three months ended March 31, 2012, an increase in earnings of $16.5 million. Catastrophe related activity in the quarter was $21.7 million compared to $40.6 million in the same period of 2012, a decrease of $18.9 million. Excluding the impact of catastrophe related activity, operating earnings decreased by $2.4 million. This decrease was primarily due to lower favorable development on prior years’ loss reserves, partially offset by lower current accident year losses and underwriting expenses. Favorable development on prior years’ loss reserves was $6.9 million in the quarter, compared to $17.2 million in the same period in 2012. This decrease was driven by lower favorable development in our Chaucer segment.

Net premiums written grew by $59.9 million in the three months ended March 31, 2013, compared to the three months ended March 31, 2012, and net premiums earned grew by $58.7 million. Chaucer accounted for $51.3 million of the net premiums written increase and $11.9 million of the net premiums earned increase. The balance of the growth is primarily attributable to Commercial Lines, resulting from rate increases, strong retention and targeted new business expansion.

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Production and Underwriting Results

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

	Three Months Ended March 31, 2013
	Gross
	Written		Net Written		Net Earned		Catastrophe		Loss & LAE		Expense		Combined
(dollars in millions)	Premium		Premium		Premium		Loss Ratios		Ratios		Ratios		Ratios
Commercial Lines	$	561.4	$	483.6	$	476.6		1.6		62.5		38.0		100.5
Personal Lines		367.2		341.6		368.8		3.2		69.3		27.2		96.5
Chaucer		389.5		251.5		248.9		1.0		52.0		34.7		86.7
Total	$	1,318.1	$	1,076.7	$	1,094.3		2.0		62.4		33.7		96.1

	Three Months Ended March 31, 2012
	Gross
	Written		Net Written		Net Earned		Catastrophe		Loss & LAE		Expense		Combined
(dollars in millions)	Premium		Premium		Premium		Loss Ratios		Ratios		Ratios		Ratios
Commercial Lines	$	532.6	$	468.9	$	434.9		2.6		61.6		38.7		100.3
Personal Lines		373.2		347.4		363.3		6.3		70.7		27.3		98.0
Chaucer		381.7		200.2		237.0		2.7		57.6		36.2		93.8
Total	$	1,287.5	$	1,016.5	$	1,035.2		3.9		63.9		34.2		98.1

The following table summarizes net premiums written and loss and LAE and catastrophe loss ratios by line of business for the Commercial Lines and Personal Lines segments. Loss and LAE and catastrophe loss ratios include prior year reserve development.

	Three Months Ended March 31,
	2013						2012
	Net				Catastrophe		Net				Catastrophe
	Premiums		Loss & LAE		Loss		Premiums		Loss & LAE		Loss
(dollars in millions)	Written		Ratios		Ratios		Written		Ratios		Ratios
Commercial Lines:
Commercial multiple peril	$	154.0		60.2		3.4	$	148.0		56.8		6.8
Commercial automobile		72.8		73.1		0.1		70.7		71.4		0.8
Workers’ compensation		62.2		63.4		—		55.0		72.6		—
Other commercial		194.6		60.1		1.0		195.2		59.1		0.5
Total Commercial Lines	$	483.6		62.5		1.6	$	468.9		61.6		2.6
Personal Lines:
Personal automobile	$	227.1		76.5		—	$	233.1		75.2		1.1
Homeowners		105.4		58.5		8.8		105.0		63.7		15.8
Other personal		9.1		47.2		5.7		9.3		55.6		5.6
Total Personal Lines	$	341.6		69.3		3.2	$	347.4		70.7		6.3

The following table summarizes premiums written on a gross and net basis and net premiums earned by line of business for the Chaucer segment.

	Three Months Ended March 31,
	2013						2012
	Gross Written		Net Written		Net Earned		Gross Written		Net Written		Net Earned
(in millions)	Premium		Premium		Premium		Premium		Premium		Premium
Chaucer:
Marine and aviation	$	108.3	$	81.3	$	58.8	$	99.5	$	58.5	$	54.2
U.K. motor		79.7		60.1		66.5		66.6		45.5		61.5
Energy		51.8		17.7		44.8		71.3		23.3		39.4
Property		92.2		47.8		44.5		87.7		29.6		46.7
Casualty and other		57.5		44.6		34.3		56.6		43.3		35.2
Total Chaucer	$	389.5	$	251.5	$	248.9	$	381.7	$	200.2	$	237.0

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

	Three Months Ended March 31,
	2013															2012
	Commercial			Personal												Commercial			Personal
(in millions)	Lines			Lines			Chaucer			Other			Total			Lines			Lines			Chaucer			Other			Total
GAAP underwriting profit (loss), excluding prior year reserve development and catastrophes	$	4.5		$	27.4		$	22.3		$	(0.5	)	$	53.7		$	9.1		$	31.0		$	(0.5	)	$	(0.2	)	$	39.4
Prior year favorable (unfavorable) loss and LAE reserve development		(0.2	)		(5.6	)		13.3			(0.6	)		6.9			(0.5	)		(3.8	)		21.7			(0.2	)		17.2
Pre-tax catastrophe effect		(7.4	)		(11.7	)		(2.6	)		—			(21.7	)		(11.1	)		(23.0	)		(6.5	)		—			(40.6	)
GAAP underwriting profit (loss)		(3.1	)		10.1			33.0			(1.1	)		38.9			(2.5	)		4.2			14.7			(0.4	)		16.0
Net investment income		36.1			19.0			10.5			1.7			67.3			35.7			21.6			9.4			2.1			68.8
Fees and other income		2.0			3.3			4.5			0.8			10.6			5.1			3.5			5.3			2.0			15.9
Other operating expenses		(2.0	)		(1.9	)		(7.1	)		(3.6	)		(14.6	)		(4.4	)		(1.8	)		(3.9	)		(4.9	)		(15.0	)
Operating income (loss) before income taxes	$	33.0		$	30.5		$	40.9		$	(2.2	)	$	102.2		$	33.9		$	27.5		$	25.5		$	(1.2	)	$	85.7

Commercial Lines

Commercial Lines net premiums written was $483.6 million in the three months ended March 31, 2013, compared to $468.9 million in the three months ended March 31, 2012. This $14.7 million increase was primarily driven by rate increases, strong retention and targeted new business expansion.

Commercial Lines underwriting loss in the three months ended March 31, 2013 was $3.1 million, relatively consistent with $2.5 million for the three months ended March 31, 2012. This reflects increased current year non-catastrophe losses offset by decreased catastrophe losses. In addition, the current quarter’s results benefited from growth in earned premium and the resulting positive effect on our expense ratio. Catastrophe losses for the three months ended March 31, 2013 were $7.4 million, compared to $11.1 million for the three months ended March 31, 2012, a decrease of $3.7 million. Current accident year losses increased in our commercial multiple peril and commercial automobile lines, partially offset by lower losses in our workers’ compensation line. Unfavorable development on prior years’ loss reserves for the three months ended March 31, 2013 was $0.2 million compared to unfavorable development of $0.5 million for the three months ended March 31, 2012.

Commercial Lines current accident year underwriting profit, excluding catastrophes, was $4.5 million for the three months ended March 31, 2013, compared to $9.1 million for the three months ended March 31, 2012. This $4.6 million decrease in non-catastrophe current accident year results was primarily due to higher non-catastrophe weather-related losses in our commercial multiple peril and commercial automobile lines.

Pricing in Commercial Lines continues to improve. We believe that industry pricing is increasing due to recent weather-related losses, as well as to reduced investment income as a result of low interest rates, and other factors. We are continuing efforts to improve our underwriting results, including through increased rates; however, our ability to increase Commercial Lines net premiums written while maintaining or improving underwriting results may be affected by price competition and the current challenging economic environment. We also expect to continue our efforts to reduce our property exposures in certain geographic areas and classes of business, with a goal of improving our longer-term profitability and reducing earnings volatility. Also, in recent years, weather-related catastrophe and non-catastrophe losses have been in excess of longer term averages for the insurance industry. We continue to monitor these trends and consider them in our rate actions.

Personal Lines

Personal Lines net premiums written was $341.6 million in the three months ended March 31, 2013, compared to $347.4 million in the three months ended March 31, 2012, a decrease of $5.8 million. The primary factors contributing to this decrease were our continued property-focused exposure management actions. Our actions to reduce homeowners policy exposures, including increases in rate, have resulted in an increase in policy attrition. These decreases were partially offset by higher rates in both our homeowners and personal automobile lines.

Net premiums written in the personal automobile line of business for the three months ended March 31, 2013 were $227.1 million compared to $233.1 million for the three months ended March 31, 2012, a decrease of $6.0 million. This decrease was primarily due to a decline in policies in force of 3.4%, primarily from exposure management actions and actions to improve underwriting results,

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partially offset by rate increases. Net premiums written in the homeowners line of business for the three months ended March 31, 2013 were $105.4 million compared to $105.0 million for the three months ended March 31, 2012, an increase of $0.4 million. This increase was primarily from rate increases, partially offset by a 4.4% decline in policies in force from the aforementioned exposure management actions.

Personal Lines underwriting profit for the three months ended March 31, 2013 was $10.1 million, compared to $4.2 million for the three months ended March 31, 2012, an improvement of $5.9 million. This was primarily due to decreased catastrophe losses and from earned premium growth. These items were partially offset by increased non-catastrophe weather-related losses and unfavorable development on prior years’ loss reserves. Catastrophe losses for the three months ended March 31, 2013 were $11.7 million, compared to $23.0 million for the three months ended March 31, 2012, a decrease of $11.3 million. Unfavorable development on prior years’ loss reserves for the three months ended March 31, 2013 was $5.6 million, compared to $3.8 million for the three months ended March 31, 2012, a change of $1.8 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $27.4 million in the three months ended March 31, 2013, compared to $31.0 million for the three months ended March 31, 2012. This $3.6 million decrease in non-catastrophe current accident year results was primarily due to higher non-catastrophe weather-related losses in our homeowners and personal automobile lines, partially offset by earned premium growth.

Although we have been able to obtain rate increases in our Personal Lines markets and believe that our ability to obtain these increases will continue, our ability to maintain Personal Lines net written premium and to maintain and improve underwriting results may be affected by price competition, recent weather-related losses, our exposure management actions, recent loss trends in bodily injury and personal injury protection claims, and regulatory and legal developments. In several recent years, weather-related catastrophe and non-catastrophe losses have been in excess of longer term averages. We monitor these trends and consider them in our rate actions. Our rate and exposure management actions could adversely affect our ability to increase our policies in force and new business. There is no assurance that we will be able to maintain our current level of production or maintain or increase rates.

Chaucer

Chaucer’s net premiums written was $251.5 million in the three months ended March 31, 2013, compared to $200.2 million in the three months ended March 31, 2012, an increase of $51.3 million, or 25.6%. Approximately $33 million of this growth was due to an increase in Chaucer’s economic interests in Syndicate 1084 to 98% for 2013, up from 84% in 2012, primarily due to our non-renewal of the capital provision reinsurance treaty with Flagstone Re. Additionally, changes to our 2013 ceded reinsurance program, including increased net retentions for certain major lines, contributed to the growth in net written premium. See “Reinsurance” in Item I – Business of our December 31, 2012 Form 10-K for additional information. Net written premium increases also includes growth in our U.K. motor line, primarily as a result of an increase in policies in force.

Chaucer’s underwriting profit for the three months ended March 31, 2013 was $33.0 million, compared to $14.7 million for the three months ended March 31, 2012, an improvement of $18.3 million. These improved results were primarily due to lower loss activity in most lines and an absence of significant man-made and natural catastrophe losses.

Due to continued high levels of capacity across the international insurance industry, we expect few rate increases in 2013. Opportunities for rate increases will likely be limited to those marine and property markets most affected by recent high levels of insured market losses. Current pricing conditions for energy are weakening, while aviation and casualty markets continue to be affected by the challenging economic environment and over-capacity. U.K. motor rates decreased modestly in 2012 and this decline has continued in 2013, as expected, following significant increases in 2010 and 2011. There can be no assurance that we will be able to maintain or increase our rates in light of economic and regulatory conditions in our markets.

Other

Other operating loss before interest expense and income taxes was $2.2 million for the three months ended March 31, 2013, compared to a $1.2 million loss for the three months ended March 31, 2012. The $1.0 million increased loss is primarily due to lower net investment income in our holding company, and increased losses in our voluntary pools business.

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Reserve for Losses and Loss Adjustment Expenses

The following table provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.

	Three Months Ended
	March 31,
(in millions)	2013			2012
Gross loss and LAE reserves, beginning of period	$	6,197.0		$	5,760.3
Reinsurance recoverable on unpaid losses		2,074.3			1,931.8
Net loss and LAE reserves, beginning of period		4,122.7			3,828.5
Net incurred losses and LAE in respect of losses occurring in:
Current year		690.3			678.6
Prior years		(6.9	)		(17.2	)
Total incurred losses and LAE		683.4			661.4
Net payments of losses and LAE in respect of losses occurring in:
Current year		165.7			161.9
Prior years		517.0			509.3
Total payments		682.7			671.2
Effect of foreign exchange rate changes		(47.0	)		19.4
Net reserve for losses and LAE, end of period		4,076.4			3,838.1
Reinsurance recoverable on unpaid losses		2,016.1			1,989.2
Gross reserve for losses and LAE, end of period	$	6,092.5		$	5,827.3

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