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HANOVER INSURANCE GROUP, INC. - 10-K -

The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist readers in understanding the consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and subsidiaries and should be read in conjunction with the Consolidated Financial Statements and...

Edgar Online, Inc.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE OF CONTENTS



               Introduction                                       33

               Executive Overview                              33-35

               Description of Operating Segments                  35

               Results of Operations                           35-36

               Segment Results                                 37-54

               Property and Casualty                           37-52
               Discontinued Operations                         52-53
               Other Items                                     53-54

               Investment Portfolio                            55-60

               Market Risk and Risk Management Policies        60-62

               Income Taxes                                    62-64

               Critical Accounting Estimates                   64-66

               Other Significant Transactions                  66-68

               Statutory Surplus of Insurance Subsidiaries        68

               Liquidity and Capital Resources                 68-71

               Other Matters                                      72

               Off-Balance Sheet Arrangements                     72

               Contingencies and Regulatory Matters            72-74

               Rating Agencies                                    74

               Recent Developments                                74

               Risks and Forward-Looking Statements               74

               Glossary of Selected Insurance Terms            75-77




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Table of Contents

INTRODUCTION


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

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

EXECUTIVE OVERVIEW

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

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

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

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


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

Commercial Lines


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

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

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



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Table of Contents


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

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

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

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

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

Personal Lines


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

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

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

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



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

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

Investment Portfolio


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

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

Description of Operating Segments


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

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

Results of Operations


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



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

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

2010 Compared to 2009


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

2009 Compared to 2008


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

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



For The Years Ended December 31                              2010         2009         2008
(In millions)
Segment income before federal income taxes:
Property and Casualty
Commercial Lines                                            $ 111.2      $ 189.7      $ 169.7
Personal Lines                                                113.0         76.4        123.5
Other Property and Casualty                                     3.5         

4.0 9.0


Total Property and Casualty                                   227.7        270.1        302.2
Interest expense on debt                                      (44.3 )      

(35.1 ) (39.9 )


Total segment income before federal income taxes              183.4        235.0        262.3
Federal income tax expense on segment income                  (61.2 )      (77.5 )      (86.3 )
Federal income tax settlement                                    -            -           6.4
Net realized investment gains (losses)                         29.7          1.4        (97.8 )
(Loss) gain from retirement of debt                            (2.0 )       34.5           -
Other non-segment items                                          -          

- (0.1 ) Federal income tax benefit (expense) on non-segment items 3.3 (5.6 ) -


Income from continuing operations, net of taxes               153.2        187.8         84.5
Discontinued operations, net of taxes:
Gain (loss) from discontinued FAFLIC business (including
gain (loss) on disposal of $0.5, $7.1 and $(77.3) in
2010, 2009 and 2008)                                            0.5          7.1        (84.8 )
Loss from discontinued accident and health business            (0.3 )       

(2.6 ) - Income from discontinued variable life insurance and annuity business (including gain on disposal of $1.3, $4.9 and $8.7 in 2010, 2009 and 2008)

                           1.3          4.9         11.3
Income from operations of AMGRO (including gain on
disposal of $11.1 in 2008)                                       -            -          10.1
Other discontinued operations                                   0.1           -          (0.5 )

Net income                                                  $ 154.8      $ 197.2      $  20.6





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SEGMENT RESULTS


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

PROPERTY AND CASUALTY

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




       FOR THE YEARS ENDED DECEMBER 31         2010          2009          2008
       (In millions)
       Net premiums written                  $ 3,048.0     $ 2,608.7     $ 2,518.0

       Net premiums earned                     2,841.0       2,546.4       2,484.9
       Net investment income                     247.2         251.7         258.0
       Other income                               38.9          38.6          40.9

       Total segment revenues                  3,127.1       2,836.7       2,783.8

       Losses and LAE                          1,856.3       1,639.2       1,626.2
       Policy acquisition expenses               669.0         581.3        

556.2

       Other operating expenses                  374.1         346.1        

299.2


       Total losses and operating expenses     2,899.4       2,566.6       2,481.6

       Segment income                        $   227.7     $   270.1     $   302.2



2010 Compared to 2009

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

2009 Compared to 2008


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

PRODUCTION AND UNDERWRITING RESULTS

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





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FOR THE YEARS ENDED
DECEMBER 31                                      2010                                         2009                                         2008
                                               GAAP          Catast-                        GAAP          Catast-                        GAAP          Catast-
                               GAAP Net        Loss           rophe         GAAP Net        Loss           rophe         GAAP Net        Loss           rophe
                               Premiums       Ratios          Loss          Premiums       Ratios          Loss          Premiums       Ratios           Loss
(In millions, except ratios)    Written       (1)(2)       Ratios (3)      
 Written       (1)(2)       Ratios (3)        Written       (1)(2)        Ratios (3)
Commercial Lines:
Workers' compensation          $   161.3         52.7                -      $   109.7         43.9                -      $   127.2         44.0                 -
Commercial automobile              246.1         51.5               0.3         187.3         50.6               0.6         192.8         49.0                0.3
Commercial multiple peril          559.8         51.5               9.7         366.7         46.8               6.5         368.5         54.1               16.2
Other commercial                   617.6         44.4               2.9         472.6         39.2               1.0         345.2         39.2                7.6

Total Commercial Lines           1,584.8         48.8               4.5       1,136.3         44.2               2.6       1,033.7         47.1                8.3

Personal Lines:
Personal automobile                935.1         60.6               1.0         967.9         61.6               0.4       1,011.3         59.5                0.3
Homeowners                         485.5         63.3              18.4         464.3         67.6              14.7         432.5         64.4               18.4
Other personal                      42.3         37.8               3.3          40.0         34.7               2.3          40.2         37.0                7.4

Total Personal Lines             1,462.9         60.8               6.7       1,472.2         62.8               4.8       1,484.0         60.4                5.8

Total                          $ 3,047.7         55.0               5.6     $ 2,608.5         54.3               3.9     $ 2,517.7         54.9                6.8


FOR THE YEARS ENDED
DECEMBER 31                                      2010                                         2009                                         2008
                                 GAAP          GAAP           GAAP            GAAP          GAAP           GAAP            GAAP          GAAP            GAAP
                                  LAE        Expense        Combined           LAE        Expense        Combined           LAE        Expense         Combined

(In millions, except ratios) Ratio Ratio Ratio (4)(5)

  Ratio        Ratio       Ratio (4)(5)        Ratio        Ratio        Ratio (4)(5)
Commercial Lines                    10.2         42.2             101.3           8.6         41.3              94.1           9.6         39.1               95.8
Personal Lines                      10.5         27.8              99.1          11.0         28.3             102.1          11.1         28.1               99.6
Total                               10.4         34.8             100.1          10.0         33.8              98.2          10.5         32.5               98.0



(1) GAAP loss ratio is a common industry measurement of the results of property

and casualty insurance underwriting. This ratio reflects incurred claims

compared to premiums earned. GAAP loss ratios include catastrophe losses.

(2) Includes policyholders' dividends.

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

    premiums earned.



(4) GAAP combined ratio is a common industry measurement of the results of

property and casualty insurance underwriting. This ratio is the sum of

incurred claims, claim expenses and underwriting expenses incurred to

premiums earned. GAAP combined ratios include the impact of catastrophes.

    Federal income taxes, net investment income and other non-underwriting
    expenses are not reflected in the GAAP combined ratio.



(5) Total includes favorable development of $0.8 million, $11.8 million and $1.9

million for the years ended December 31, 2010, 2009 and 2008, respectively,

    which is reflected in our Other Property and Casualty segment.




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

FOR THE YEAR ENDED DECEMBER 31, 2010

                                                                                    Other
                                                                                   Property
                                               Commercial         Personal           and
(In millions)                                    Lines             Lines           Casualty         Total
GAAP underwriting (loss) profit, excluding
prior year reserve development and
catastrophes                                  $      (20.5 )     $     51.5       $       -        $   31.0
Prior year loss and LAE reserve
development - favorable                               61.5             48.8              0.8          111.1
Pre-tax catastrophe effect                           (61.6 )          (98.7 )             -          (160.3 )

GAAP underwriting (loss) profit                      (20.6 )            1.6              0.8          (18.2 )
Net investment income (1)                            129.9            102.9             14.4          247.2
Fees and other income                                 19.0             13.6              6.3           38.9
Other operating expenses                             (17.1 )           (5.1 )          (18.0 )        (40.2 )

Segment income                                $      111.2       $    113.0       $      3.5       $  227.7

FOR THE YEAR ENDED DECEMBER 31, 2009

                                                                                    Other
                                                                                   Property
                                               Commercial         Personal           and
(In millions)                                    Lines             Lines           Casualty         Total
GAAP underwriting loss, excluding prior
year reserve development and catastrophes     $      (14.6 )     $    (12.7 )     $     (0.1 )     $  (27.4 )
Prior year loss and LAE reserve
development - favorable                              104.1             39.4             11.8          155.3
Pre-tax catastrophe effect                           (28.6 )          (70.3 )             -           (98.9 )

GAAP underwriting profit (loss)                       60.9            (43.6 )           11.7           29.0
Net investment income (1)                            125.6            109.6             16.5          251.7
Fees and other income                                 18.4             14.4              5.8           38.6
Other operating expenses                             (15.2 )           (4.0 )          (30.0 )        (49.2 )

Segment income                                $      189.7       $     76.4       $      4.0       $  270.1

FOR THE YEAR ENDED DECEMBER 31, 2008

                                                                                    Other
                                                                                   Property
                                               Commercial         Personal           and
(In millions)                                    Lines             Lines           Casualty         Total
GAAP underwriting profit (loss), excluding
prior year reserve development and
catastrophes                                  $       25.9       $     18.8       $     (0.7 )     $   44.0
Prior year loss and LAE reserve
development - favorable                               98.2             58.9              1.9          159.0
Pre-tax catastrophe effect                           (84.3 )          (85.4 )             -          (169.7 )

GAAP underwriting profit (loss)                       39.8             (7.7 )            1.2           33.3
Net investment income (1)                            124.4            118.9             14.7          258.0
Fees and other income                                 18.3             16.0              6.6           40.9
Other operating expenses                             (12.8 )           (3.7 )          (13.5 )        (30.0 )

Segment income                                $      169.7       $    123.5       $      9.0       $  302.2




(1) We manage investment assets for our property and casualty business based on

the requirements of the entire Property and Casualty group. We allocate net

investment income to each of our Property and Casualty segments based on

actuarial information related to the underlying business.


2010 Compared to 2009

Commercial Lines

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

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

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



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

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

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

Personal Lines


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

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

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

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

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

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

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



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

Other Property and Casualty

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

2009 Compared to 2008

Commercial Lines


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

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

Personal Lines


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

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

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

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



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

Other Property and Casualty


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

INVESTMENT RESULTS


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

RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Overview of Loss Reserve Estimation Process


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

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

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

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

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

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

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



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

Management's Review of Judgments and Key Assumptions


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

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

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

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

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

We regularly review our reserving techniques, our overall reserving position and
our reinsurance. Based on (i) our review of historical data, legislative
enactments, judicial decisions, legal developments in impositions of damages and
policy coverage, political attitudes and trends in general economic conditions,
(ii) our review of per claim information, (iii) our historical loss experience
and that of the industry, (iv) the relatively short-term nature of most policies
written by us, and (v) our internal estimates of required reserves, we believe
that adequate provision has been made for loss reserves. However, establishment
of appropriate reserves is an inherently uncertain process and there can be no
certainty that current established reserves will prove adequate in light of
subsequent actual experience. A significant change to the estimated reserves
could have a material impact on our results of operations and financial
position. An increase or decrease in reserve estimates would result in a
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in financial results. For example, each one percentage point change in the
aggregate loss and LAE ratio resulting from a change in reserve estimation is
currently projected to have an approximate $28 million impact on property and
casualty segment income, based on 2010 full year premiums.

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

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

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

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

Loss and LAE Reserves by Line of Business

Reserves Other than those Relating to Asbestos and Environmental Claims


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

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

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

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

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

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



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


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

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

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

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

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

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

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

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



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

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

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

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

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

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

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



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

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

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



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



(1) Example: Personal Automobile Bodily Injury, if losses are actually developing

and emerging three months slower than we anticipate in our models, our

actuarial estimate for this coverage would be understated by $18 million. If

our assumed payment patterns are consistent with our expectations, but the

expected loss ratio in our model is 5% too low, then our actuarial estimate

for this coverage would be understated by $7 million.



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



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

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



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

      Total                        $ 2,160.3     $  2,094.9     $ 2,091.9     $  2,005.2



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

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

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



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




FOR THE YEARS ENDED DECEMBER 31                       2010             2009             2008
(In millions)
Reserve for losses and LAE, beginning of year       $ 3,152.1        $ 3,201.3        $ 3,165.8
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of current year
(1)                                                   1,966.4          1,793.5          1,784.6
Decrease in provision for insured events of
prior years; favorable development                     (111.1 )         (155.3 )         (159.0 )

Total incurred losses and LAE                         1,855.3          1,638.2          1,625.6

Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year                                       1,077.8            970.9            999.9
Losses and LAE attributable to insured events
of prior years                                          738.6            788.5            712.4

Total payments                                        1,816.4          1,759.4          1,712.3

Change in reinsurance recoverable on unpaid
losses                                                   48.3             72.0            (11.9 )
Purchase of Verlan Fire Insurance Company                  -                -               4.2
Purchase of AIX Holdings, Inc.                             -                -             129.9
Purchase of Campania Holdings, Inc.                      36.5               -                -

Reserve for losses and LAE, end of year             $ 3,275.8        $ 3,152.1        $ 3,201.3




(1) Includes unfavorable reserve development related to catastrophe losses of

$4.1 million, $7.0 million, and $0.7 million in 2010, 2009, and 2008,

respectively.



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



         DECEMBER 31                          2010          2009          2008
         (In millions)
         Workers' Compensation              $   527.1     $   524.1     $   547.0
         Commercial Automobile                  224.5         217.4         226.4
         Commercial Multiple Peril              470.4         449.7         499.5
         Other Commercial                       559.1         517.4         483.8

         Total Commercial                     1,781.1       1,708.6       1,756.7

         Personal Automobile                  1,358.4       1,303.4       1,292.5
         Homeowners and Other                   136.3         140.1         152.1

         Total Personal                       1,494.7       1,443.5       1,444.6

         Total reserve for losses and LAE   $ 3,275.8     $ 3,152.1     $ 3,201.3


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

Prior Year Development by Line of Business


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

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




FOR THE YEARS ENDED DECEMBER 31                         2010            2009            2008
(In millions)
(Decrease) increase in loss provision for insured
events of prior years:
Workers' Compensation                                 $  (21.2 )      $  (28.2 )      $  (27.6 )
Commercial Automobile                                     (4.0 )          (7.1 )          (9.3 )
Commercial Multiple Peril                                (20.6 )         (28.8 )         (36.1 )
Other Commercial                                          (0.5 )         (17.1 )         (18.0 )

Total Commercial                                         (46.3 )         (81.2 )         (91.0 )

Personal Automobile                                      (37.8 )         (44.9 )         (54.6 )
Homeowners and Other                                      (3.6 )           4.8            (6.9 )

Total Personal                                           (41.4 )         (40.1 )         (61.5 )
Voluntary Pools                                           (0.8 )         (11.8 )          (1.9 )

Decrease in loss provision for insured events of
prior years                                              (88.5 )        

(133.1 ) (154.4 )


Decrease in LAE provision for insured events of
prior years                                              (22.6 )         

(22.2 ) (4.6 )


Decrease in total loss and LAE provision for
insured events of prior years                         $ (111.1 )      $ 

(155.3 ) $ (159.0 )




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



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


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

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

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

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

Asbestos and Environmental Reserves


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

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




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

Ending reserves                                $      6.8        $           3.3        $ 10.1        $      6.5        $           4.8        $ 11.3$     10.3        $           8.2        $ 18.5







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

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

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

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

REINSURANCE


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

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



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

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

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

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

Discontinued Operations


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

Discontinued FAFLIC Business


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

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




For the Years Ended December 31                              2010        2009         2008
(In millions)
Gain (loss) on sale of FAFLIC, net of taxes                  $ 0.5       $ 

7.1 $ (77.3 ) Loss from operations of FAFLIC business, including net realized losses of $14.4 for the year ended December 31, 2008

                                                            -           -           (7.5 )

Gain (loss) from discontinued FAFLIC business, net of
taxes                                                        $ 0.5       $ 7.1       $ (84.8 )


Gain (Loss) on sale of FAFLIC

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




For the Year Ended December 31                                         2008
(In millions)
Carrying value of FAFLIC before pre-close dividend                   $  267.7 (1)
Pre-close net dividend                                                 (129.8 )(2)

                                                                        137.9
Proceeds from sale                                                      105.8 (3)

Loss on sale before impact of transaction and other costs               (32.1 )
Transaction costs                                                        (3.9 )(4)
Liability for certain legal indemnities and employee-related costs       (8.2 )(5)
Other miscellaneous adjustments                                         (33.1 )(6)

Net loss                                                             $  (77.3 )




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

    transaction.


(2)  Net pre-close dividends.


(3) Proceeds to THG from Commonwealth Annuity.

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

(5) Liability for expected contractual indemnities of FAFLIC recorded at

December 31, 2008. These costs also include severance and retention payments

anticipated to result from this transaction.

(6) Included in other miscellaneous adjustments are investment losses of $48.5

million, as well as favorable reserve adjustments related to the accident

     and health business of $15.6 million.






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

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

Loss from Operations of FAFLIC Business

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




 For the Year Ended December 31                                          2008
 (In millions)
 Premiums                                                               $  25.6
 Fees and other loss                                                       (0.7 )
 Net investment income                                                     66.2
 Net realized investment losses                                           

(14.4 )


 Total revenue                                                             

76.7

 Policy benefits, claims and losses                                        

69.7

 Policy acquisition and other operating expenses                            

9.9

Loss included in discontinued operations before federal income taxes (2.9 )

 Federal income tax expense                                                 

4.6


 Loss from discontinued operations of FAFLIC                            $  

(7.5 )




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

Discontinued Operation of our Variable Life Insurance and Annuity Business


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



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



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

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

Discontinued Accident and Health Business


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

OTHER ITEMS


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



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

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

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

Net income includes the following items:



(In millions)
                                                Property and Casualty
                                                                          Other
                                                                         Property
                                  Commercial          Personal             and              Discontinued
2010                                Lines              Lines           Casualty (2)          Operations           Total
Net realized investment
gains (losses) (1)               $       13.3        $     17.8       $         (1.4 )      $          -         $  29.7
Loss from retirement of debt               -                 -                  (2.0 )                 -            (2.0 )
Gain from discontinued
FAFLIC business, net of
taxes                                      -                 -                    -                   0.5            0.5
Loss from discontinued
accident and health
business, net of taxes                     -                 -                    -                  (0.3 )         (0.3 )
Gain on disposal of variable
life insurance and annuity
business, net of taxes                     -                 -                    -                   1.3            1.3
Other discontinued
operations, net of taxes                   -                 -                    -                   0.1            0.1

2009
Net realized investment
gains (losses) (1)               $        0.3        $     (0.8 )     $          1.9        $          -         $   1.4
Gain from retirement of debt               -                 -                  34.5                   -            34.5
Gain from discontinued
FAFLIC business, net of
taxes                                      -                 -                    -                   7.1            7.1
Loss from discontinued
accident and health
business, net of taxes                     -                 -                    -                  (2.6 )         (2.6 )
Gain on disposal of variable
life insurance and annuity
business, net of taxes                     -                 -                    -                   4.9            4.9

2008
Net realized investment
(losses) gains (1)               $      (53.4 )      $    (53.6 )     $          9.2        $          -         $ (97.8 )
Federal income tax
settlement                                2.1               5.6                 (1.3 )                 -             6.4
Other non-segment items                  (0.1 )              -                    -                    -            (0.1 )
Loss from discontinued
FAFLIC business (including
loss on disposal of $77.3),
net of taxes                               -                 -                    -                 (84.8 )        (84.8 )
Gain on disposal of variable
life insurance and annuity
business, net of taxes                     -                 -                    -                  11.3           11.3
Income from operations of
AMGRO (including gain on
disposal of $11.1), net of
taxes                                      -                 -                    -                  10.1           10.1
Other discontinued
operations                                 -                 -                    -                  (0.5 )         (0.5 )



(1) We manage investment assets for our property and casualty business based on

the requirements of the entire property and casualty group. We allocate the

investment income, expenses and realized gains (losses) to our Commercial

Lines, Personal Lines and Other Property and Casualty segments based on

actuarial information related to the underlying business.

(2) Includes corporate eliminations.




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INVESTMENT PORTFOLIO


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



DECEMBER 31                                               2010                                 2009
                                                                % of Total                           % of Total
                                              Carrying           Carrying          Carrying           Carrying
(In millions, except percentage data)           Value             Value              Value             Value
Fixed maturities (1)                          $ 4,915.2                91.4 %      $ 4,732.4                91.9 %
Equity securities (1)                             128.6                 2.4             69.3                 1.3
Cash and cash equivalents (1)                     292.9                 5.5            316.7                 6.1
Other long-term investments                        39.4                 0.7             32.3                 0.7

Total, including assets of discontinued
operations                                      5,376.1               100.0 %        5,150.7               100.0 %
Investment assets of discontinued
operations                                       (119.8 )                   

(117.1 )


Total investment assets of continuing
operations                                    $ 5,256.3                            $ 5,033.6




(1) We carry these investments at fair value.

Investment Assets

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


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

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

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



DECEMBER 31                                                                                              2010
                                                                                                                                                      Change in Net
(In millions, except percentage data)                  Rating Agency                                                        Net Unrealized             Unrealized
Investment Type                                   Equivalent  Designation       Amortized Cost          Fair Value          Gain (Loss) (1)           for the Year
Corporates:
NAIC 1                                            Aaa/Aa/A                     $        1,002.2        $    1,058.6        $            56.4         $          24.1
NAIC 2                                            Baa                                   1,012.6             1,082.5                     69.9                    21.4
NAIC 3 and below                                  Ba, B, Caa and lower                    341.4               360.8                     19.4                    15.5

Total corporates                                                                        2,356.2             2,501.9                    145.7                    61.0
Asset-backed:
Residential mortgage-backed securities                                                    725.4               755.3                     29.9            

14.3

Commercial mortgage-backed securities                                                     350.7               368.1                     17.4                    14.7
Asset-backed securities                                                                    57.5                61.2                      3.7                     1.2
Municipals:
Taxable                                                                                   813.7               812.8                     (0.9 )                  15.7
Tax-exempt                                                                                149.7               152.7                      3.0                    (1.1 )
U.S. government                                                                           261.4               263.2                      1.8                     2.3

Total fixed maturities (2)                                                     $        4,714.6        $    4,915.2        $           200.6         $         108.1




(1) Includes $33.7 million unrealized loss related to other-than-temporary

impairment losses recognized in other comprehensive income.

(2) Includes discontinued accident and health business of $115.8 million in

    amortized cost and $117.3 million in fair value at December 31, 2010.




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

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




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

Total fixed maturities (1)                                       $  4,714.6      $ 4,915.2             100.0 %     $  4,639.9      $ 4,732.4             100.0 %




(1) Includes discontinued accident and health business of $115.8 million in

amortized cost and $117.3 million in fair value at December 31, 2010, and

$119.6 million in amortized cost and $116.8 million in fair value at

December 31, 2009.

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


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

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

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

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

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

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



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Other-than-Temporary Impairments


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

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

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

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

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

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

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

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

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

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

Unrealized Losses

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

DECEMBER 31, 2010
                                                                        Greater than 12
(In millions)                             12 months or less                  Months                        Total
                                         Gross                         Gross                        Gross
                                       Unrealized                    Unrealized                  Unrealized
                                       Losses and        Fair        Losses and       Fair       Losses and        Fair
                                          OTTI           Value          OTTI          Value       OTTI (1)         Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S.
government and agency securities      $        2.7      $  85.1     $        0.5     $  16.4     $       3.2     $   101.5
States and political subdivisions             10.4        292.3              9.0        86.7            19.4         379.0
Corporate fixed maturities                     6.7        256.9             14.0        78.3            20.7         335.2
Residential mortgage-backed
securities                                     3.2        103.8              8.8        31.0            12.0         134.8
Commercial mortgage-backed
securities                                     0.1         13.1              0.9         7.3             1.0          20.4

Total investment grade                        23.1        751.2             33.2       219.7            56.3         970.9

Below investment grade (2):
Corporate fixed maturities                     1.1         56.8             14.8       102.5            15.9         159.3

Total fixed maturities                        24.2        808.0             48.0       322.2            72.2       1,130.2

Equity securities:
Common equity securities                       1.9         45.8               -           -              1.9          45.8

Total (3)                             $       26.1      $ 853.8     $       48.0     $ 322.2     $      74.1     $ 1,176.0




(1) Includes $33.7 million of unrealized losses related to OTTI recognized in

other comprehensive income, of which $14.8 million are below investment grade

aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss

had been rated by the NAIC, Standard & Poor's or Moody's at December 31,

2010.

(3) Includes discontinued accident and health business of $6.6 million in gross

unrealized losses with $48.6 million in fair value at December 31, 2010.




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DECEMBER 31, 2009
                                                                        Greater than 12
(In millions)                             12 months or less                  Months                         Total
                                         Gross                         Gross                        Gross
                                       Unrealized                    Unrealized                  Unrealized
                                       Losses and        Fair        Losses and       Fair       Losses and
                                          OTTI           Value          OTTI          Value       OTTI (1)        Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S.
government and agency securities      $        3.7      $ 170.8     $         -      $    -      $       3.7     $      170.8
States and political subdivisions              9.0        275.2             15.6       176.5            24.6            451.7
Corporate fixed maturities                     3.4        115.8             13.3       152.7            16.7            268.5
Residential mortgage-backed
securities                                     6.6         89.1              7.5        62.6            14.1            151.7
Commercial mortgage-backed
securities                                     0.4         13.5              7.0        30.0             7.4             43.5

Total investment grade                        23.1        664.4             43.4       421.8            66.5          1,086.2

Below investment grade (2):
States and political subdivisions              0.2          8.7              0.8         8.2             1.0             16.9
Corporate fixed maturities                    10.6         84.1             16.9       150.1            27.5            234.2

Total below investment grade                  10.8         92.8             17.7       158.3            28.5            251.1

Total fixed maturities                        33.9        757.2             61.1       580.1            95.0          1,337.3

Equity securities:
Common equity securities                        -            -               0.3         1.4             0.3              1.4

Total (3)                             $       33.9      $ 757.2     $       61.4     $ 581.5     $      95.3     $    1,338.7




(1) Includes $40.6 million of unrealized losses related to OTTI losses recognized

in other comprehensive income, of which $14.8 million are below investment

grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss

had been rated by the NAIC, Standard & Poor's or Moody's at December 31,

2009.

(3) Includes discontinued accident and health business of $8.8 million in gross

unrealized losses with $55.0 million in fair value at December 31, 2009.



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

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

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



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



         DECEMBER 31                                         2010       2009
         (In millions)
         Due in one year or less                            $  2.6     $  0.5
         Due after one year through five years                11.9       14.0
         Due after five years through ten years               17.8       23.0
         Due after ten years                                  39.9       57.5

         Total fixed maturities                               72.2       95.0
         Equity securities                                     1.9        0.3

         Total fixed maturities and equity securities (1)   $ 74.1     $ 95.3




(1) Includes discontinued accident and health business of $6.6 million and $8.8

million in gross unrealized losses at December 31, 2010 and 2009,

respectively.



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

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

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

MARKET RISK AND RISK MANAGEMENT POLICIES

INTEREST RATE SENSITIVITY


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

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





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

Total                                    $ 4,255     $ 4,460     $ 4,685     $ 4,915     $ 5,125     $ 5,295     $ 5,405



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

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

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



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




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


EQUITY PRICE RISK

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

FOREIGN CURRENCY SENSITIVITY

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


INCOME TAXES

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


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

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

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


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



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

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

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

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

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

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

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

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



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

CRITICAL ACCOUNTING ESTIMATES


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

PROPERTY & CASUALTY INSURANCE LOSS RESERVES

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

PROPERTY AND CASUALTY REINSURANCE RECOVERABLES


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

PENSION BENEFIT OBLIGATIONS


Prior to 2005, we provided pension retirement benefits to substantially all of
our employees based on a defined benefit cash balance formula. In addition to
the cash balance allocation, certain transition group employees, who had met
specified age and service requirements as of December 31, 1994, were eligible
for a grandfathered benefit based primarily on the employees' years of service
and compensation during their highest five consecutive plan years of employment.
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We account for our pension plans in accordance with ASC 715, Compensation -
Retirement Benefits. In order to measure the liabilities and expense associated
with these plans, we must make various estimates and key assumptions, including
discount rates used to value liabilities, assumed rates of return on plan
assets, employee turnover rates and anticipated mortality rates. These estimates
and assumptions are reviewed at least annually and are based on our historical
experience, as well as current facts and circumstances. In addition, we use
outside actuaries to assist in measuring the expenses and liabilities associated
with this plan.

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

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

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


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

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

OTHER-THAN-TEMPORARY IMPAIRMENTS


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

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



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

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

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

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

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

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

OTHER SIGNIFICANT TRANSACTIONS


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

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



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


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

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


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

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

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

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



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

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

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


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

STATUTORY SURPLUS OF INSURANCE SUBSIDIARIES

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



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


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

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



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

December 31, 2009
The Hanover Insurance Company   $  498.9     $      249.5              346 %             693 %

LIQUIDITY AND CAPITAL RESOURCES


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

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

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

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



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


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

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

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

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

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

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



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

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

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

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

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

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

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



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



(1) Debt includes our senior debentures due in 2025, which pay annual interest at

a rate of 7 5/8%, our senior debentures due in 2020, which pay annual

interest at a rate of 7.50%, and our junior subordinated debentures due in

2027, which pay cumulative dividends at an annual rate of 8.207%. We executed

a repurchase of $48.0 million of our Junior Debentures in February 2011; such

repurchase is reflected in the less than one year category. All other

payments related to the principal amount of these agreements are expected to

be made at the end of the respective debt agreements. We hold two additional

junior subordinated debentures, of which one, in the principal amount of $3.0

million, pays cumulative dividends at an annual rate of LIBOR plus 3.625%

through maturity in 2035. Payment related to the principal amount of this

agreement represents the contractual maturity; therefore, principal and

interest associated with this obligation are reflected in the above table

based upon the contractual maturity date and based upon current LIBOR rates.

The Company has the ability to prepay this commitment, which is not reflected

in the table above. The other junior subordinated debentures, in the

principal amount of $15.0 million, pay cumulative dividends at an annual rate

of 8.37% on two-thirds of the securities, while dividend payments on

one-third of the securities is based on the three-month LIBOR plus 3.70%.

Payment related to the principal amount of this agreement represents the

contractual maturity; therefore, principal and interest associated with this

obligation are reflected in the above table based upon the contractual

maturity date and based upon current LIBOR rates. The Company has the ability

    to prepay this commitment, which is not reflected in the table above. In
    addition, we have $125.0 million of borrowings under a collateralized
    borrowing program with the FHLBB which pays interest monthly at a rate of
    5.50% annually. Such borrowings are available for a twenty-year term or

through September 25, 2029. We also have $9.5 million of borrowings under

this collateralized borrowing program which pays interest monthly.

Furthermore, we have committed to borrowing an additional $36.8 million under

    this program, the majority of which will occur in 2011. All current and
    future borrowings under this program with the FHLBB pay interest at a
    weighted average rate of 3.88%. These borrowings have a maturity date of

July 20, 2020. Additionally, our debt includes surplus notes in the principal

amount of $4.0 million due in 2034, which pay quarterly interest at a rate of

the three month LIBOR plus 4.25%. Payment related to the principal amount of

this agreement represents the contractual maturity; therefore, principal and

interest associated with this obligation are reflected in the above table

based upon the contractual maturity date and based upon current LIBOR rates.

The Company has the ability to prepay this commitment, which is not reflected

in the table above. For purposes of this table, we used the LIBOR rate as of

December 31, 2010 which was 0.30%.

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

(3) In 2010, we contributed $100.0 million to our qualified defined benefit

pension plan and do not expect to make any significant additional

contributions in order to meet our minimum funding requirements. However,

additional contributions may be required in the future based on the level of

pension assets and liabilities in future periods. The ultimate payment amount

is based on several assumptions, including, but not limited to, the rate of

return on plan assets, the discount rate for benefit obligations, mortality

experience, interest crediting rates and the ultimate valuation of benefit

obligations. Differences between actual plan experience and our assumptions

are likely and will likely result in changes to our funding obligations in

future periods.

(4) Non-qualified defined benefit pension and postretirement benefit obligations

reflect estimated payments to be made through plan year 2020 for pension,

postretirement and postemployment benefits. Estimates of these payments and

the payment patterns are based upon historical experience.

(5) Investment commitments include $58.4 million related to the City Square

Project, $18.8 million related to tax credits, $16.8 million related to

partnerships, and $2.3 million in other investment commitments.

(6) Unlike many other forms of contractual obligations, loss and LAE reserves do

not have definitive due dates and the ultimate payment dates are subject to a

number of variables and uncertainties. As a result, the total loss and LAE

reserve payments to be made by period, as shown above, are estimates based

    principally on historical experience.




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OTHER MATTERS

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


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

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS


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

CONTINGENCIES AND REGULATORY MATTERS

LITIGATION AND CERTAIN REGULATORY MATTERS

Durand Litigation


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



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

Hurricane Katrina Litigation


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

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

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

Certain Regulatory and Industry Developments


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

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

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



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


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

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

Other Matters

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

Residual Markets

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

RATING AGENCIES

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


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

RECENT DEVELOPMENTS


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

RISKS AND FORWARD-LOOKING STATEMENTS


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



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GLOSSARY OF SELECTED INSURANCE TERMS

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

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

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

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


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

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


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

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


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

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


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

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

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

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

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

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

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



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

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

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


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

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

Peril - A cause of loss.

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

Rate - The pricing factor upon which the policyholder's premium is based.

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

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


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

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

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


• The Company Action Level, which equals 200% of the Authorized Control

Level, requires a company to prepare and submit a RBC plan to the

commissioner of the state of domicile. A RBC plan proposes actions which a

company may take in order to bring statutory capital above the Company

Action Level. After review, the commissioner will notify the company if

         the plan is satisfactory.




     •   The Regulatory Action Level, which equals 150% of the Authorized Control

Level, requires the insurer to submit to the commissioner of the state of

domicile an RBC plan, or if applicable, a revised RBC plan. After

examination or analysis, the commissioner will issue an order specifying

         corrective actions to be taken.




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



• The Mandatory Control Level, which equals 70% of the Authorized Control

Level, authorizes the commissioner of the state of domicile to take

actions necessary to place the company under regulatory control (i.e.,

         rehabilitation or liquidation).




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

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


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

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

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

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

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

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


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


ITEM 7A- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



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            Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

The Hanover Insurance Group, Inc.:


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

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

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

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

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

PricewaterhouseCoopers LLPBoston, MassachusettsFebruary 23, 2011



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THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME




FOR THE YEARS ENDED DECEMBER 31                          2010           2009           2008
(In millions, except per share data)
Revenues
Premiums                                               $ 2,841.0      $ 2,546.4      $ 2,484.9
Net investment income                                      247.2          252.1          258.7
Net realized investment gains (losses):
Total other-than-temporary impairment losses on
investments                                                 (9.4 )        (42.2 )       (113.1 )
Portion of loss transferred (from) to other
comprehensive income                                        (4.5 )          9.3             -

Net other-than-temporary impairment losses on
investments recognized in earnings                         (13.9 )        (32.9 )       (113.1 )
Net realized gains from sales and other                     43.6           34.3           15.3

Total net realized investment gains (losses)                29.7            1.4          (97.8 )
Fees and other income                                       34.3           34.2           34.6

Total revenues                                           3,152.2        2,834.1        2,680.4

Losses and expenses
Losses and loss adjustment expenses                      1,856.3        1,639.2        1,626.2
Policy acquisition expenses                                669.0          581.3          556.2
Loss (gain) from retirement of debt                          2.0          (34.5 )           -
Other operating expenses                                   413.8          377.2          333.6

Total losses and expenses                                2,941.1        2,563.2        2,516.0

Income before federal income taxes                         211.1          270.9          164.4

Federal income tax expense:
Current                                                      5.7           51.2           17.5
Deferred                                                    52.2           31.9           62.4

Total federal income tax expense                            57.9           83.1           79.9

Income from continuing operations                          153.2          187.8           84.5
Discontinued operations (Note 2):
Gain (loss) from discontinued FAFLIC business (net
of income tax benefit (expense) of $0.3, $(0.9) and
$(4.6) in 2010, 2009 and 2008), including gain
(loss) on disposal of $0.5, $7.1 and $(77.3) in
2010, 2009 and 2008                                          0.5            7.1          (84.8 )
Income from operations of discontinued variable life
insurance and annuity business (net of income tax
benefit of $2.9 in 2008), including gain on disposal
of $1.3, $4.9 and $8.7 in 2010, 2009 and 2008                1.3            4.9           11.3

Loss from discontinued accident and health business (net of income tax expense of $0.1 and $0.4 in 2010 and 2009)

                                                   (0.3 )         (2.6 )           -
Income from the operations of AMGRO (net of tax
benefit of $1.3 in 2008), including gain on disposal
of $11.1 in 2008                                              -              -            10.1
Other discontinued operations                                0.1             -            (0.5 )

Net income                                             $   154.8      $   197.2      $    20.6





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THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Continued)




FOR THE YEARS ENDED DECEMBER 31                              2010         2009         2008
(In millions, except per share data)
Earnings per common share:
Basic:
Income from continuing operations                           $  3.36      $  3.71      $  1.65
Discontinued operations:
Gain (loss) from operations of discontinued FAFLIC
business (net of income tax benefit (expense) of $0.01,
$(0.02) and $(0.09) in 2010, 2009 and 2008), including
gain (loss) on disposal of $0.01, $0.14 and $(1.51) in
2010, 2009 and 2008                                            0.01         

0.14 (1.66 ) Income from operations of discontinued variable life insurance and annuity business (net of income tax benefit of $0.06 in 2008), including gain on disposal of $0.03, $0.10, and $0.17 in 2010, 2009 and 2008

                        0.03         

0.10 0.22 Loss from discontinued accident and health business (net of income tax expense of $0.01 in 2009)

                       (0.01 )      (0.05 )         -
Income from the operations of AMGRO (net of tax benefit
of $0.02 in 2008), including gain on disposal of $0.22 in
2008                                                             -            -          0.20
Other discontinued operations                                    -            -         (0.01 )

Net income per share                                        $  3.39      $  3.90      $  0.40

Weighted average shares outstanding                            45.6         

50.6 51.3

Diluted:

Income from continuing operations                           $  3.31      $  3.68      $  1.63
Discontinued operations:
Gain (loss) from operations of discontinued FAFLIC
business (net of income tax benefit (expense) of $0.01,
$(0.02), and $(0.09) in 2010, 2009 and 2008), including
gain (loss) on disposal of $0.01, $0.14 and $(1.49) in
2010, 2009 and 2008                                            0.01         

0.14 (1.64 ) Income from operations of discontinued variable life insurance and annuity business (net of income tax benefit of $0.05 in 2008), including gain on disposal of $0.03, $0.09 and $0.17 in 2010, 2009 and 2008

                         0.03         

0.09 0.22 Loss from discontinued accident and health business (net of income tax expense of $0.01 in 2009)

                       (0.01 )      (0.05 )         -
Income from the operations of AMGRO (net of tax benefit
of $0.02 in 2008), including gain on disposal of $0.21 in
2008                                                             -            -          0.20
Other discontinued operations                                    -            -         (0.01 )

Net income per share                                        $  3.34      $  3.86      $  0.40

Weighted average shares outstanding                            46.3         

51.1 51.7




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



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THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED BALANCE SHEETS



DECEMBER 31                                                      2010           2009
(In millions, except share data)
Assets
Investments:
Fixed maturities at fair value (amortized cost of $4,598.8
and $4,520.3)                                                  $ 4,797.9      $ 4,615.6
Equity securities at fair value (cost of $120.7 and $57.3)         128.6           69.2
Other long-term investments                                         39.4           32.3

Total investments                                                4,965.9        4,717.1

Cash and cash equivalents                                          290.4          316.5
Accrued investment income                                           53.8           52.3
Premiums and accounts receivable, net                              772.0    

590.8

Reinsurance receivable on paid and unpaid losses, benefits and unearned premiums

                                            1,254.2    

1,197.9

Deferred policy acquisition costs                                  345.3          286.3
Deferred federal income taxes                                      177.4          228.6
Goodwill                                                           179.2          171.4
Other assets                                                       398.1          351.2
Assets of discontinued operations                                  133.6          130.6

Total assets                                                   $ 8,569.9      $ 8,042.7

Liabilities
Policy liabilities and accruals:
Losses and loss adjustment expenses                            $ 3,277.7      $ 3,153.9
Unearned premiums                                                1,520.3    

1,300.5


Total policy liabilities and accruals                            4,798.0        4,454.4

Expenses and taxes payable                                         541.7          603.2
Reinsurance premiums payable                                        34.4           58.5
Debt                                                               605.9          433.9
Liabilities of discontinued operations                             129.4          134.1

Total liabilities                                                6,109.4        5,684.1

Commitments and contingencies (Notes 15 and 19)
Shareholders' Equity
Preferred stock, $.01 par value, 20.0 million shares
authorized, issued none                                               -     

-

Common stock, $.01 par value, 300.0 million shares authorized, 60.5 million shares issued

                               0.6    

0.6

Additional paid-in capital                                       1,796.5    

1,808.5

Accumulated other comprehensive income                             136.7    

28.8

Retained earnings                                                1,246.8    

1,141.1

Treasury stock at cost (15.6 million and 13.0 million
shares)                                                           (720.1 )       (620.4 )

Total shareholders' equity                                       2,460.5        2,358.6

Total liabilities and shareholders' equity                     $ 8,569.9      $ 8,042.7



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



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THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY




FOR THE YEARS ENDED DECEMBER 31                          2010           2009           2008
(In millions)
Preferred Stock
Balance at beginning and end of year                   $      -       $     

- $ -


Common Stock
Balance at beginning and end of year                         0.6            0.6            0.6

Additional Paid-in Capital
Balance at beginning of year                             1,808.5        1,803.8        1,822.6
Settlement of accelerated share repurchases                 (8.7 )           -              -
Employee and director stock-based awards and other          (3.3 )          4.7          (18.8 )

Balance at end of year                                   1,796.5        1,808.5        1,803.8

Accumulated Other Comprehensive Income (Loss)
Net Unrealized Appreciation (Depreciation) on
Investments and Derivative Instruments:
Balance at beginning of year                               107.7         (276.1 )          5.5
Cumulative effect of change in accounting principle           -           (33.3 )           -

Balance at beginning of year, as adjusted                  107.7         (309.4 )          5.5
Net appreciation (depreciation) during the period:
Net appreciation (depreciation) on
available-for-sale securities and derivative
instruments                                                104.7          415.8         (284.3 )
Benefit for deferred federal income taxes                    5.9            1.3            2.7

                                                           110.6          417.1         (281.6 )

Balance at end of year                                     218.3          107.7         (276.1 )

Defined Benefit Pension and Postretirement Plans:
Balance at beginning of year                               (78.9 )       (108.7 )        (25.9 )
Amounts arising in the period                              (13.9 )         26.0         (123.8 )
Amortization during the period:
Amount recognized as net periodic benefit cost               9.8           19.8           (3.6 )
Benefit (provision) for deferred federal income
taxes                                                        1.4          (16.0 )         44.6

                                                            (2.7 )         29.8          (82.8 )

Balance at end of year                                     (81.6 )        (78.9 )       (108.7 )

Total accumulated other comprehensive income (loss) 136.7 28.8 (384.8 )


Retained Earnings
Balance at beginning of year, before cumulative
effect of accounting change, net of tax                  1,141.1          949.8          946.9
Cumulative effect of accounting change, net of tax            -            33.3             -

Balance at beginning of year, as adjusted                1,141.1          983.1          946.9
Net income                                                 154.8          197.2           20.6
Dividends to shareholders                                  (47.2 )        (37.5 )        (23.0 )
Treasury stock issued for less than cost and other          (9.7 )         (5.3 )         (9.7 )
Recognition of share-based compensation                      7.8            3.6           15.0

Balance at end of year                                   1,246.8        1,141.1          949.8

Treasury Stock
Balance at beginning of year                              (620.4 )       (482.2 )       (450.7 )
Shares purchased at cost                                  (126.0 )       (148.1 )        (58.5 )
Net shares reissued at cost under employee
stock-based compensation plans                              26.3            9.9           27.0

Balance at end of year                                    (720.1 )       (620.4 )       (482.2 )

Total shareholders' equity                             $ 2,460.5      $ 2,358.6      $ 1,887.2



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



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THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)




FOR THE YEARS ENDED DECEMBER 31                             2010         2009          2008
(In millions)
Net income                                                 $ 154.8      $ 197.2      $   20.6
Other comprehensive income (loss):
Available-for-sale securities:
Net appreciation (depreciation) during the period             97.8        423.1        (284.9 )
Portion of other-than-temporary impairment losses
transferred from (to) other comprehensive income               6.9         (7.3 )          -
Benefit for deferred federal income taxes                      5.9          1.3           2.9

Total available-for-sale securities                          110.6        

417.1 (282.0 )


Derivative instruments:
Net appreciation during the period                              -            -            0.6
Provision for deferred federal income taxes                     -            -           (0.2 )

Total derivative instruments                                    -            -            0.4

                                                             110.6        417.1        (281.6 )

Pension and postretirement benefits:
Amounts arising in the period:
Net actuarial (loss) gain                                    (13.9 )       21.5        (126.9 )
Prior service cost                                              -           4.5           3.1

Total amounts arising in the period                          (13.9 )       26.0        (123.8 )
Amortization recognized as net periodic benefit costs:
Net actuarial loss                                            17.2         27.2           3.0
Prior service cost                                            (5.8 )       (5.8 )        (4.9 )
Transition asset                                              (1.6 )       (1.6 )        (1.7 )

Total amortization recognized as net periodic pension and postretirement cost (benefit)

                              9.8         

19.8 (3.6 )


(Decrease) increase in pension and postretirement
benefit costs                                                 (4.1 )       

45.8 (127.4 )

Benefit (provision) for deferred federal income taxes 1.4 (16.0 ) 44.6


Total pension and postretirement benefits                     (2.7 )       

29.8 (82.8 )


Other comprehensive income (loss)                            107.9        446.9        (364.4 )

Comprehensive income (loss)                                $ 262.7      $ 644.1      $ (343.8 )



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



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THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS




FOR THE YEARS ENDED DECEMBER 31                        2010             2009            2008
(In millions)
Cash Flows From Operating Activities
Net income                                          $    154.8       $    197.2       $    20.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of variable life insurance and
annuity business                                          (1.3 )           (4.9 )         (11.3 )
(Gain) loss on sale of FAFLIC                             (0.5 )           (7.1 )          77.3
Gain on sale of AMGRO, Inc.                                 -                -            (11.1 )
Loss (gain) from retirement of debt                        2.0            (34.5 )            -
Net realized investment (gains) losses                   (29.3 )            1.8           112.2
Net amortization and depreciation                         16.7             11.8            15.1
Stock-based compensation expense                          11.3             11.7            11.6
Amortization of defined benefit plan costs                 9.8             19.8            (3.6 )
Deferred federal income taxes                             52.0             31.9            53.7
Change in deferred acquisition costs                     (57.7 )          (21.5 )         (10.5 )
Change in premiums and notes receivable, net of
reinsurance premiums payable                            (204.9 )          (14.1 )          75.0
Change in accrued investment income                       (1.1 )             -              3.1
Change in policy liabilities and accruals, net           288.2              9.9          (156.8 )
Change in reinsurance receivable                         (38.2 )          (58.3 )         116.7
Change in expenses and taxes payable                     (85.0 )          (44.6 )        (103.2 )
Other, net                                               (33.2 )           

(7.5 ) 20.7


Net cash provided by operating activities                 83.6             91.6           209.5

Cash Flows From Investing Activities
Proceeds from disposals and maturities of
available-for-sale fixed maturities                    1,376.2          2,162.3         1,114.1
Proceeds from disposals of equity securities and
other investments                                        123.6             70.9            11.9
Proceeds from mortgages sold, matured or
collected                                                  9.0             17.4            10.2
Proceeds from collections of installment finance
and notes receivable                                        -                -            192.3
Proceeds from the sale of FAFLIC                            -             105.8              -
Cash transferred with sale of FAFLIC                        -            (108.1 )            -
Net proceeds from sale of AMGRO, Inc.                       -                -              1.0
Proceeds from sale of variable life insurance
and annuity business, net                                   -                -             13.3
Purchase of available-for-sale fixed maturities       (1,401.5 )       (2,345.8 )        (828.2 )
Purchase of equity securities and other
investments                                             (184.9 )          (44.5 )         (22.9 )
Net cash used for business acquisitions                  (13.3 )          (21.8 )        (114.1 )
Capital expenditures                                     (10.9 )          (10.4 )          (9.5 )
Disbursements to fund installment finance and
notes receivable                                            -                -           (178.6 )
Other investing items                                      3.0               -             (0.3 )

Net cash (used in) provided by investing
activities                                               (98.8 )         

(174.2 ) 189.2


Cash Flows From Financing Activities
Withdrawals from contractholder deposit funds
and trust instruments supported by funding
obligations                                                 -                -            (21.0 )
Exercise of options                                       12.0              3.1             8.2
Proceeds from debt borrowings                            207.5            125.0              -
Change in collateral related to securities
lending program                                           (7.7 )           53.1           (50.6 )
Dividends paid to shareholders                           (47.2 )          (37.5 )         (23.0 )
Repurchases of debt                                      (38.5 )         (125.9 )            -
Repurchases of common stock                             (134.7 )         (148.1 )         (58.5 )
Other financing activities                                  -               0.1             0.3

Net cash used in financing activities                     (8.6 )         

(130.2 ) (144.6 )


Net change in cash and cash equivalents                  (23.8 )         (212.8 )         254.1
Net change in cash related to discontinued
operations                                                (2.3 )          131.6           (67.0 )
Cash and cash equivalents, beginning of year             316.5            397.7           210.6

Cash and cash equivalents, end of year              $    290.4       $    

316.5 $ 397.7


Supplemental Cash Flow information
Interest payments                                   $     40.3       $     35.5       $    40.9
Income tax net payments                             $     11.3       $     47.9       $    36.5


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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation and Principles of Consolidation


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

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

B. Valuation of Investments


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

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

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


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



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

C. Financial Instruments


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

D. Cash and Cash Equivalents

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

E. Deferred Policy Acquisition Costs


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

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

F. Reinsurance Recoverables


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



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G. Property, Equipment and Capitalized Software


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

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

H. Goodwill

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

I. Liabilities for Losses, LAE, and Unearned Premiums


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

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

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

J. Debt


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

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


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



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

L. Federal Income Taxes

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

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

M. Stock-Based Compensation

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

N. Earnings Per Share


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

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

O. New Accounting Pronouncements

Recently Implemented Standards


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

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



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

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

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

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

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

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



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

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

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

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

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



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Recently Issued Standards


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

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

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

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

P. Reclassifications

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

Q. Discontinued Operations Significant Accounting Policy Discussion

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


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



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

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

2. DISCONTINUED OPERATIONS

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

Discontinued FAFLIC Business


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

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

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




For the Years Ended December 31                              2010        2009         2008
(In millions)
Gain (loss) on sale of FAFLIC, net of taxes                  $ 0.5       $ 

7.1 $ (77.3 ) Loss from operations of FAFLIC business, net of income tax expense of $4.6 in 2008

                                     -           -           (7.5 )

Gain (loss) from discontinued FAFLIC business, net of
taxes                                                        $ 0.5       $ 7.1       $ (84.8 )


Gain (Loss) on Sale of FAFLIC

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




For the Year Ended December 31                                         2008
(In millions)
Carrying value of FAFLIC before pre-close dividend                   $  267.7 (1)
Pre-close net dividend                                                 (129.8 )(2)

                                                                        137.9
Proceeds from sale                                                      105.8 (3)

Loss on sale before impact of transaction and other costs               (32.1 )
Transaction costs                                                        (3.9 )(4)
Liability for certain legal indemnities and employee-related costs       (8.2 )(5)
Other miscellaneous adjustments                                         (33.1 )(6)

Net loss                                                             $  (77.3 )




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

     transaction.


(2)  Net pre-close dividends.


(3) Proceeds to THG from Commonwealth Annuity.

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

(5) Liability for expected contractual indemnities of FAFLIC recorded at

December 31, 2008. These costs also include severance and retention payments

anticipated to result from this transaction.

(6) Included in other miscellaneous adjustments are investment losses of $48.5

million, as well as favorable reserve adjustments related to the accident

     and health business of $15.6 million.




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

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

Loss from Operations of FAFLIC Business

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




For the Years Ended December 31

2008

(In millions)
Total revenues                                                             

$ 76.7 Loss included in discontinued operations before federal income taxes, including net realized losses of $14.4

$ (2.9 )

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


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

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

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

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

Discontinued Accident and Health Insurance Business


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

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

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



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

3. OTHER SIGNIFICANT TRANSACTIONS


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

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

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

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

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

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

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



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

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

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

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


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



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4. INVESTMENTS

A. FIXED MATURITIES AND EQUITY SECURITIES

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

DECEMBER 31, 2010
(In millions)
                                                                            Gross Unrealized Losses
                                                         Gross                                 OTTI
                                      Amortized        Unrealized       Unrealized          Unrealized
                                       Cost (1)          Gains            Losses             Losses(2)        Fair Value
U.S. Treasury securities and U.S.
government and agency securities      $    261.4      $        5.0      $       3.2         $        -       $      263.2
States and political subdivisions          963.4              21.5             19.4                  -              965.5
Corporate fixed maturities               2,413.7             186.0             11.2                25.4           2,563.1
Residential mortgage-backed
securities                                 725.4              41.9              3.7                 8.3             755.3
Commercial mortgage-backed
securities                                 350.7              18.4              1.0                  -              368.1

Total fixed maturities, including
assets of discontinued operations        4,714.6             272.8             38.5                33.7           4,915.2
Less: fixed maturities of
discontinued operations                   (115.8 )            (8.1 )           (0.7 )              (5.9 )          (117.3 )

Total fixed maturities, excluding
discontinued operations               $  4,598.8      $      264.7      $      37.8         $      27.8      $    4,797.9

Equity securities, excluding
discontinued operations               $    120.7      $        9.8      $       1.9         $        -       $      128.6





DECEMBER 31, 2009
(In millions)
                                                                            Gross Unrealized Losses
                                                         Gross                                 OTTI
                                      Amortized        Unrealized       Unrealized          Unrealized
                                       Cost (1)          Gains            Losses             Losses(2)        Fair Value
U.S. Treasury securities and U.S.
government and agency securities      $    355.2      $        3.2      $       3.7         $        -       $      354.7
States and political subdivisions          844.7              13.1             25.6                  -              832.2
Corporate fixed maturities               2,246.7             131.4             14.3                29.9           2,333.9
Residential mortgage-backed
securities                                 858.8              29.7              3.4                10.7             874.4
Commercial mortgage-backed
securities                                 334.5              10.1              7.4                  -              337.2

Total fixed maturities, including
assets of discontinued operations        4,639.9             187.5             54.4                40.6           4,732.4
Less: fixed maturities of
discontinued operations                   (119.6 )            (6.0 )           (2.0 )              (6.8 )          (116.8 )

Total fixed maturities, excluding
discontinued operations               $  4,520.3      $      181.5      $      52.4         $      33.8      $    4,615.6

Equity securities, excluding
discontinued operations               $     57.3      $       12.2      $       0.3         $        -       $       69.2




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

(2) Represents other-than-temporary impairments recognized in accumulated other

comprehensive income. Amount excludes net unrealized gains on impaired

securities relating to changes in the value of such securities subsequent to

the impairment measurement date of $40.4 million and $30.1 million as of

December 31, 2010 and December 31, 2009, respectively.



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

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



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

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

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



DECEMBER 31                                                             2010
(In millions)
                                                            Amortized            Fair
                                                               Cost              Value
Due in one year or less                                     $    178.2         $   181.4
Due after one year through five years                          1,211.1      

1,287.9

Due after five years through ten years                         1,636.7      

1,720.0

Due after ten years                                            1,688.6      

1,725.9


Total fixed maturities including assets of
discontinued operations                                        4,714.6      

4,915.2

Less: fixed maturities of discontinued operations               (115.8 )    

(117.3 )


Total fixed maturities, excluding assets of
discontinued operations                                     $  4,598.8         $ 4,797.9


B. UNREALIZED GAINS AND LOSSES

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




FOR THE YEARS ENDED DECEMBER 31
(In millions)
                                                                         Equity
                                                    Fixed            Securities And
2010                                              Maturities           Other (1)            Total
Net appreciation, beginning of year              $       97.8       $            9.9       $  107.7
Net appreciation (depreciation) on
available-for-sale securities                           101.1                   (3.3 )         97.8
Portion of OTTI losses transferred from other
comprehensive income                                      6.9                     -             6.9
Benefit for deferred federal income taxes                 4.5                    1.4            5.9

                                                        112.5                   (1.9 )        110.6

Net appreciation, end of year                    $      210.3       $       

8.0 $ 218.3

2009

Net depreciation, beginning of year              $     (266.0 )     $          (10.1 )     $ (276.1 )
Cumulative effect of change in accounting
principle                                               (33.3 )                   -           (33.3 )

Balance at beginning of year, as adjusted              (299.3 )                (10.1 )       (309.4 )
Net appreciation on available-for-sale
securities                                              403.2                   19.9          423.1
Portion of OTTI losses transferred to other
comprehensive income                                     (7.3 )                   -            (7.3 )
Benefit for deferred federal income taxes                 1.2                    0.1            1.3

                                                        397.1                   20.0          417.1

Net appreciation, end of year                    $       97.8       $            9.9       $  107.7


2008
Net (depreciation) appreciation, beginning of
year                                             $       (3.1 )     $            8.6       $    5.5
Net depreciation on available-for-sale
securities                                             (267.9 )                (19.1 )       (287.0 )
Net appreciation from the effect on policy
liabilities                                               2.7                     -             2.7
Benefit for deferred federal income taxes                 2.3                    0.4            2.7

                                                       (262.9 )                (18.7 )       (281.6 )

Net depreciation, end of year                    $     (266.0 )     $          (10.1 )     $ (276.1 )




(1) Equity securities and other balances at December 31, 2010, 2009 and 2008

include after-tax net appreciation on other invested assets of $0.7 million,

$1.3 million and $1.4 million, respectively.




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C. SECURITIES IN AN UNREALIZED LOSS POSITION


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



DECEMBER 31, 2010
(In millions)                                                           Greater than 12
                                          12 months or less                  months                        Total
                                         Gross                         Gross                        Gross
                                       Unrealized                    Unrealized                  Unrealized
                                       Losses and        Fair        Losses and       Fair       Losses and        Fair
                                          OTTI           Value          OTTI          Value       OTTI (1)         Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S.
government and agency securities      $        2.7      $  85.1     $        0.5     $  16.4     $       3.2     $   101.5
States and political subdivisions             10.4        292.3              9.0        86.7            19.4         379.0
Corporate fixed maturities                     6.7        256.9             14.0        78.3            20.7         335.2
Residential mortgage-backed
securities                                     3.2        103.8              8.8        31.0            12.0         134.8
Commercial mortgage-backed
securities                                     0.1         13.1              0.9         7.3             1.0          20.4

Total investment grade                        23.1        751.2             33.2       219.7            56.3         970.9

Below investment grade (2):
Corporate fixed maturities                     1.1         56.8             14.8       102.5            15.9         159.3

Total fixed maturities                        24.2        808.0             48.0       322.2            72.2       1,130.2

Equity securities:
Common equity securities                       1.9         45.8               -           -              1.9          45.8

Total (3)                             $       26.1      $ 853.8     $       48.0     $ 322.2     $      74.1     $ 1,176.0




(1) Includes $33.7 million unrealized loss related to other-than-temporary

impairment losses recognized in other comprehensive income, of which $14.8

million are below investment grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss

had been rated by the National Association of Insurance Commissioners

("NAIC"), Standard & Poor's or Moody's at December 31, 2010.

(3) Includes discontinued accident and health business of $6.6 million in gross

unrealized losses with $48.6 million in fair value at December 31, 2010.




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DECEMBER 31, 2009
(In millions)
                                                                        Greater than 12
                                          12 months or less                  months                        Total
                                         Gross                         Gross                        Gross
                                       Unrealized                    Unrealized                  Unrealized
                                       Losses and        Fair        Losses and       Fair       Losses and        Fair
                                          OTTI           Value          OTTI          Value       OTTI (1)         Value
Fixed maturities:
Investment grade:
U.S. Treasury securities and U.S.
government and agency securities      $        3.7      $ 170.8     $         -      $    -      $       3.7     $   170.8
States and political subdivisions              9.0        275.2             15.6       176.5            24.6         451.7
Corporate fixed maturities                     3.4        115.8             13.3       152.7            16.7         268.5
Residential mortgage-backed
securities                                     6.6         89.1              7.5        62.6            14.1         151.7
Commercial mortgage-backed
securities                                     0.4         13.5              7.0        30.0             7.4          43.5

Total investment grade                        23.1        664.4             43.4       421.8            66.5       1,086.2

Below investment grade (2):
States and political subdivisions              0.2          8.7              0.8         8.2             1.0          16.9
Corporate fixed maturities                    10.6         84.1             16.9       150.1            27.5         234.2

Total below investment grade                  10.8         92.8             17.7       158.3            28.5         251.1

Total fixed maturities                        33.9        757.2             61.1       580.1            95.0       1,337.3

Equity securities:
Common equity securities                        -            -               0.3         1.4             0.3           1.4

Total (3)                             $       33.9      $ 757.2     $       61.4     $ 581.5     $      95.3     $ 1,338.7




(1) Includes $40.6 million unrealized loss related to other-than-temporary

impairment losses recognized in other comprehensive income, of which $14.8

million are below investment grade aged greater than 12 months.

(2) Substantially all below investment grade securities with an unrealized loss

had been rated by the NAIC, Standard & Poor's or Moody's at December 31,

2009.

(3) Includes discontinued accident and health business of $8.8 million in gross

unrealized losses with $55.0 million in fair value at December 31, 2009.



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



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



DECEMBER 31                                                                                         2010
(In millions)
                                                                                                                                                Total
                                                                                           Total                                  CCC           below
                                                                                        investment                                and        investment
                                         AAA          AA          A          BBB           grade           BB          B         below          grade         Total

U.S. Treasury securities and U.S government and agency securities $ 3.2 $ - $ - $ - $ 3.2 $ - $ - $ - $ -

       $  3.2
States and political subdivisions          4.0         6.2         1.5         7.7             19.4          -           -           -                -         19.4
Corporate fixed maturities                 0.3         1.1         6.5        12.8             20.7         5.6         5.7         4.6             15.9        36.6
Residential mortgage-backed
securities                                 3.7         0.6          -          7.7             12.0          -           -           -                -         12.0
Commercial mortgage-backed securities       -           -          1.0          -               1.0          -           -           -                -

1.0


Total fixed maturities, including
discontinued operations                   11.2         7.9         9.0        28.2             56.3         5.6         5.7         4.6             15.9        72.2
Less: losses included in discontinued
operations                                (0.2 )        -         (0.4 )      (3.1 )           (3.7 )      (2.3 )      (0.2 )      (0.4 )           

(2.9 ) (6.6 )


Total fixed maturities, excluding
discontinued operations                 $ 11.0      $  7.9      $  8.6      $ 25.1      $      52.6      $  3.3      $  5.5      $  4.2      $      13.0      $ 65.6


DECEMBER 31                                                                                         2009
(In millions)
                                                                                                                                                Total
                                                                                           Total                                  CCC           below
                                                                                        investment                                and        investment
                                         AAA          AA          A          BBB           grade           BB          B         below          grade         Total

U.S. Treasury securities and U.S government and agency securities $ 3.7 $ - $ - $ - $ 3.7 $ - $ - $ - $ -

       $  3.7
States and political subdivisions          4.1         7.3         4.8         8.4             24.6         0.8          -          0.2              1.0        25.6
Corporate fixed maturities                  -          1.4         7.1         8.2             16.7        11.8         9.7         6.0             27.5        44.2
Residential mortgage-backed
securities                                 2.4         1.4         7.9         2.4             14.1          -           -           -                -         14.1

Commercial mortgage-backed securities 0.5 0.8 6.1

    -               7.4          -           -           -                -

7.4


Total fixed maturities, including
discontinued operations                   10.7        10.9        25.9        19.0             66.5        12.6         9.7         6.2             28.5        95.0
Less: losses included in discontinued
operations                                  -         (0.2 )      (1.4 )      (3.2 )           (4.8 )      (0.5 )      (2.8 )      (0.7 )           

(4.0 ) (8.8 )


Total fixed maturities, excluding
discontinued operations                 $ 10.7      $ 10.7      $ 24.5      $ 15.8      $      61.7      $ 12.1      $  6.9      $  5.5      $      24.5      $ 86.2



D. OTHER

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



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

           Federal National Mortgage Association (2)   $ 205.4     $ 260.3




(1) Includes securities of discontinued operations of $6.4 million and $27.7

million at December 31, 2010 and 2009, respectively.

(2) Holdings in Federal National Mortgage Association at December 31, 2010 were

less than 10% of shareholders' equity but are included for comparative

purposes.

5. INVESTMENT INCOME AND GAINS AND LOSSES

A. NET INVESTMENT INCOME

The components of net investment income were as follows:



           FOR THE YEARS ENDED DECEMBER 31    2010         2009         2008
           (In millions)
           Fixed maturities                  $ 248.6      $ 249.3      $ 251.3
           Equity securities                     4.5          5.2          4.7
           Mortgage loans                        0.7          2.3          0.9
           Other long-term investments           0.1         (0.1 )        2.2
           Short-term investments                0.2          2.0          4.5

           Gross investment income             254.1        258.7        263.6
           Less investment expenses             (6.9 )       (6.6 )       (4.9 )

           Net investment income             $ 247.2      $ 252.1      $ 258.7





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

B. NET REALIZED INVESTMENT GAINS AND LOSSES

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

        FOR THE YEARS ENDED DECEMBER 31           2010        2009       
2008
        (In millions)
        Fixed maturities                         $ 17.7      $  5.3      $ (90.8 )
        Equity securities                          13.0        (4.3 )       (7.6 )
        Other investments                          (1.0 )       0.4          0.6

Net realized investment gains (losses) $ 29.7$ 1.4 $ (97.8 )

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

Other-than-temporary-impairments


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

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

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

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

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


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

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



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

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



FOR THE YEARS ENDED DECEMBER 31                                 2010          2009 (1)
(In millions)
Credit losses as of the beginning of the period                $ 22.1       

$ 17.3 Credit losses for which an OTTI was not previously recognized

                                                        1.2       

4.0

Additional credit losses on securities for which an OTTI was previously recognized

                                         3.1       

3.6

Reductions for securities sold, matured or called during the period

                                                       (8.3 )            (1.4 )
Reductions for securities reclassified as intend to sell         (0.4 )     

(1.4 )


Credit losses as of the end of the year                        $ 17.7        $     22.1




(1) The effective date of the section of ASC 320 requiring this disclosure was

April 1, 2009, therefore the period represented is April 1, 2009 through

December 31, 2009.



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



        FOR THE YEARS ENDED DECEMBER 31
        (In millions)
                                            Proceeds from       Gross       Gross
        2010                               Voluntary Sales      Gains      Losses
        Fixed maturities                  $           456.2     $ 24.1     $   2.2
        Equity securities                 $           112.1     $ 13.5     $    -

        2009
        Fixed maturities                  $         1,522.4     $ 40.4     $  14.2
        Equity securities                 $            44.6     $  7.6     $   2.6

        2008
        Fixed maturities                  $           498.1     $ 16.4     $   7.8
        Equity securities                 $             1.1     $  0.2     $    -

C. OTHER COMPREHENSIVE INCOME (LOSS) RECONCILIATION

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




FOR THE YEARS ENDED DECEMBER 31                              2010        2009          2008
(In millions)
Unrealized appreciation (depreciation) on
available-for-sale securities:
Unrealized holding gains (losses) arising during period,
net of income tax benefit of $9.1, $1.3 and $2.9 in 2010,
2009 and 2008.                                              $ 139.8     $ 

414.9 $ (397.0 ) Less: reclassification adjustment for gains (losses) included in net income

                                         29.2        

(2.2 ) (115.0 )


Total available-for-sale securities                           110.6       

417.1 (282.0 )

Unrealized depreciation on derivative instruments: Unrealized holding losses arising during period, net of income tax benefit of $1.7 in 2008.

                              -           -           (3.2 )

Less: reclassification adjustment for losses included in net income, net of income tax benefit of $1.9 in 2008.

           -           -           (3.6 )

Total derivative instruments                                     -           -            0.4

Other comprehensive income (loss)                           $ 110.6     $ 417.1      $ (281.6 )



6. FAIR VALUE

The Company follows the guidance in ASC 820, as it relates to the fair value of
its financial assets and liabilities. ASC 820 provides for a standard definition
of fair value to be used in new and existing pronouncements. This guidance
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases, may differ
significantly from the amounts that could be realized upon immediate
liquidation.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants and also provides a hierarchy

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for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1 as these are the most reliable, and the lowest priority given to Level 3.

Level 1 - Quoted prices in active markets for identical assets.


Level 2 - Quoted prices for similar assets in active markets, quoted prices for
identical or similar assets in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data, including
model-derived valuations.

Level 3 - Unobservable inputs that are supported by little or no market activity.


When more than one level of input is used to determine fair value, the financial
instrument is classified as Level 2 or 3 according to the lowest level input
that has a significant impact on the fair value measurement.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments and have not changed during the year:

Cash and Cash Equivalents

For these short-term investments, the carrying amount approximates fair value.

Fixed Maturities


Level 1 securities generally include U.S. Treasury issues and other securities
that are highly liquid and for which quoted market prices are available. Level 2
securities are valued using pricing for similar securities and pricing models
that incorporate observable inputs including, but not limited to yield curves
and issuer spreads. Level 3 securities include issues for which little
observable data can be obtained, primarily due to the illiquid nature of the
securities, and for which significant inputs used to determine fair value are
based on the Company's own assumptions. Non-binding broker quotes are also
included in Level 3.

The Company utilizes a third party pricing service for the valuation of the
majority of its fixed maturity securities and receives one quote per security.
When quoted market prices in an active market are available, they are provided
by the pricing service as the fair value and such values are classified as Level
1. Since fixed maturities other than U.S. Treasury securities generally do not
trade on a daily basis, the pricing service prepares estimates of fair value for
those securities using pricing applications based on a market approach. Inputs
into the fair value pricing applications which are common to all asset classes
include benchmark U.S. Treasury security yield curves, reported trades of
identical or similar fixed maturity securities, broker/dealer quotes of
identical or similar fixed maturity securities and structural characteristics of
the security, such as maturity date, coupon, mandatory principal payment dates,
frequency of interest and principal payments and optional principal redemption
features. Inputs into the fair value applications that are unique by asset class
include, but are not limited to:



• Corporate fixed maturities - overall credit quality, including assessments

of the level and variability of: industry economic sensitivity; company

financial policies; quality of management; regulatory environment;

competitive position; indenture restrictive covenants; and security or

         collateral.




     •   States and political subdivisions - overall credit quality, including

assessments of the level and variability of: sources of payment such as

income, sales or property taxes, levies or user fees; credit support such

as insurance; state or local economic and political base; natural resource

availability; and susceptibility to natural or man-made catastrophic

         events such as hurricanes, earthquakes or acts of terrorism.




     •   Residential mortgage-backed securities, U.S. agency pass-thrus and

collateralized mortgage obligations ("CMOs") - estimates of prepayment

         speeds based upon: historical prepayment rate trends; underlying
         collateral interest rates; geographic concentration; vintage year;
         borrower credit quality characteristics; interest rate and yield curve
         forecasts; U.S. government support programs; tax policies; and
         delinquency/default trends.



• Residential mortgage-backed securities, non-agency CMOs - estimates of

prepayment speeds based upon: historical prepayment rate trends;

underlying collateral interest rates; geographic concentration; vintage

year; borrower credit quality characteristics; interest rate and yield

curve forecasts; U.S. government support programs; tax policies;

delinquency/default trends; and severity of loss upon default and length

         of time to recover proceeds following default.




     •   Commercial mortgage-backed securities - overall credit quality, including

assessments of the level and variability of: collateral type such as

office, retail, residential, lodging, or other; geographic concentration

by region, state, metropolitan statistical area and locale; vintage year;

historical collateral performance including defeasance, delinquency,

default and special servicer trends; and capital structure support

features.

Generally, all prices provided by the pricing service, except actively traded securities with quoted market prices, are reported as Level 2.


The Company holds privately placed fixed maturity securities and certain other
fixed maturity securities that do not have an active market and for which the
pricing



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service cannot provide fair values. The Company determines fair values for these
securities using either matrix pricing utilizing the market approach or broker
quotes. The Company will use observable market data as inputs into the fair
value applications, as discussed in the determination of Level 2 fair values, to
the extent it is available, but is also required to use a certain amount of
unobservable judgment due to the illiquid nature of the securities involved.
Unobservable judgment reflected in the Company's matrix model accounts for
estimates of additional spread required by market participants for factors such
as issue size, structural complexity, high bond coupon, long maturity term or
other unique features. These matrix-priced securities are reported as Level 2 or
Level 3, depending on the significance of the impact of unobservable judgment on
the security's value. Additionally, the Company may obtain non-binding broker
quotes which are reported as Level 3.

Equity Securities

Level 1 includes publicly traded securities valued at quoted market prices. Level 2 includes securities that are valued using pricing for similar securities and pricing models that incorporate observable inputs. Level 3 consists of common stock of private companies for which observable inputs are not available.


The Company utilizes a third party pricing service for the valuation of the
majority of its equity securities and receives one quote for each equity
security. When quoted market prices in an active market are available, they are
provided by the pricing service as the fair value and such values are classified
as Level 1. Generally, all prices provided by the pricing service, except quoted
market prices, are reported as Level 2. Occasionally, the Company may obtain
non-binding broker quotes which are reported as Level 3.

Mortgage Loans


Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings.

Legal Indemnities

Fair values are estimated using probability-weighted discounted cash flow analyses.

Debt


The fair value of debt was estimated based on quoted market prices. If a quoted
market price is not available, fair values are estimated using discounted cash
flows that are based on current interest rates and yield curves for debt
issuances with maturities and credit risks consistent with the debt being
valued.

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



DECEMBER 31                                               2010                          2009
(In millions)
                                                Carrying         Fair         Carrying         Fair
                                                  Value          Value          Value          Value
Financial Assets
Cash and cash equivalents                       $   292.9      $   292.9      $   316.7      $   316.7
Fixed maturities                                  4,915.2        4,915.2        4,732.4        4,732.4
Equity securities                                   128.6          128.6           69.3           69.3
Mortgage loans                                        5.5            5.8           14.1           15.0

Total financial assets, including financial
assets of discontinued operations                 5,342.2        5,342.5        5,132.5        5,133.4
Less: financial assets of discontinued
operations                                         (119.8 )       (119.8 )  

(117.1 ) (117.1 )


Total financial assets of continuing
operations                                      $ 5,222.4      $ 5,222.7      $ 5,015.4      $ 5,016.3

Financial Liabilities
Client claim funds                              $      -       $      -       $     2.0      $     2.0
Legal indemnities                                     5.4            5.4            7.0            7.0
Debt                                                605.9          603.9          433.9          387.9

Total financial liabilities of continuing
operations (1)                                  $   611.3      $   609.3      $   442.9      $   396.9




(1) There were no financial liabilities associated with the discontinued

    operations.




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The Company performs a review of the fair value hierarchy classifications and of
prices received from its third party pricing service on a quarterly basis. The
Company reviews the pricing services' policy describing its processes, practices
and inputs, including various financial models used to value securities. Also,
the Company reviews the portfolio pricing. Securities with changes in prices
that exceed a defined threshold are verified to independent sources such as
Bloomberg. If upon review, the Company is not satisfied with the validity of a
given price, a pricing challenge would be submitted to the pricing service along
with supporting documentation for its review. The Company does not adjust quotes
or prices obtained from the pricing service unless the pricing service agrees
with the Company's challenge. During 2010 and 2009, the Company did not adjust
any prices received from brokers or its pricing service.

Changes in the observability of valuation inputs may result in a
reclassification of certain financial assets within the fair value hierarchy.
Reclassifications between levels of the fair value hierarchy are reported as of
the beginning of the period in which the reclassification occurs. As previously
discussed, the Company utilizes a third party pricing service for the valuation
of the majority of its fixed maturities and equity securities. The pricing
service has indicated that it will only produce an estimate of fair value if
there is objectively verifiable information to produce a valuation. If the
pricing service discontinues pricing an investment, the Company will use
observable market data to the extent it is available, but may also be required
to make assumptions for market based inputs that are unavailable due to market
conditions.

The Company currently holds fixed maturity securities and equity securities for
which fair value is determined on a recurring basis. The following tables
present for each hierarchy level, the Company's assets that were measured at
fair value at December 31, 2010 and 2009.



December 31, 2010
(In millions)
                                                                    Fair Value
                                               Total         Level 1         Level 2         Level 3
Fixed maturities:
U.S. Treasury securities and U.S.
government and agency securities             $   263.2       $  124.9       $   138.3       $      -
States and political subdivisions                965.5             -            948.9            16.6
Corporate fixed maturities                     2,563.1             -          2,520.9            42.2
Residential mortgage-backed securities,
U.S. agency backed                               621.6             -            621.6              -
Residential mortgage-backed securities,
non-agency                                       133.7             -            132.9             0.8
Commercial mortgage-backed securities            368.1             -            362.6             5.5

Total fixed maturities                         4,915.2          124.9         4,725.2            65.1
Equity securities (1)                            120.0          106.6            10.5             2.9

Total investment assets at fair value,
including assets of discontinued
operations                                     5,035.2          231.5         4,735.7            68.0
Investment assets of discontinued
operations at fair value                        (117.3 )         (0.9 )     

(115.9 ) (0.5 )


Total investment assets of continuing
operations at fair value                     $ 4,917.9       $  230.6       $ 4,619.8       $    67.5


December 31, 2009
(In millions)
Fixed maturities:
U.S. Treasury securities and U.S.
government and agency securities             $   354.7       $  100.6       $   254.1       $      -
States and political subdivisions                832.2             -            816.7            15.5
Foreign governments                                3.0             -              3.0              -
Corporate fixed maturities                     2,330.9             -          2,292.8            38.1
Residential mortgage-backed securities,
U.S. agency backed                               689.0             -            689.0              -
Residential mortgage-backed securities,
non-agency                                       185.4             -            185.4              -
Commercial mortgage-backed securities            337.2             -            331.0             6.2

Total fixed maturities                         4,732.4          100.6         4,572.0            59.8
Equity securities (1)                             60.6           51.0             6.8             2.8

Total investment assets at fair value,
including assets of discontinued
operations                                     4,793.0          151.6         4,578.8            62.6
Investment assets of discontinued
operations at fair value                        (116.9 )         (0.3 )        (116.6 )            -

Total investment assets of continuing
operations at fair value                     $ 4,676.1       $  151.3       $ 4,462.2       $    62.6




(1) Excludes equities carried at cost of $8.6 million at December 31, 2010 and

$8.7 million at December 31, 2009, which consists primarily of Federal

Home Loan Bank common stock.




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



YEAR ENDED DECEMBER 31, 2010
(In millions)
                                                                                  Fixed Maturities
                                                                                        Residential
                                                                                         mortgage
                                                                                          backed           Commercial
                                                  States and                            securities,         mortgage
                                                  political                                non-              backed                                          Total
                                                 subdivisions         Corporate           agency           securities         Total         Equities        Assets
Balance at beginning of year                    $         15.5       $      38.1       $          -        $       6.2       $  59.8       $      2.8       $  62.6
Transfers into Level 3                                      -               17.3                  -                 -           17.3               -           17.3
Transfers out of Level 3                                    -               (4.7 )                -                 -           (4.7 )             -           (4.7 )
Total gains (losses):
Included in earnings                                        -                0.7                  -                 -            0.7             (0.3 )         0.4
Included in other comprehensive income                    (0.5 )             0.4                  -                 -           (0.1 )           (0.6 )        (0.7 )
Purchases and sales:
Purchases                                                  3.0               5.3                 1.4                -            9.7              1.0          10.7
Sales                                                     (1.4 )           (14.9 )              (0.6 )            (0.7 )       (17.6 )             -          (17.6 )

Balance at end of year                          $         16.6       $      42.2       $         0.8       $       5.5       $  65.1       $      2.9       $  68.0





YEAR ENDED DECEMBER 31, 2009
(In millions)
                                                                      Fixed Maturities
                                                                            Residential
                                                                             mortgage
                                                                              backed           Commercial
                                        States and                          securities,         mortgage
                                        political                              non-              backed                                     Total
                                       subdivisions        Corporate          agency           securities        Total       Equities      Assets

Balance at beginning of year $ 18.2 $ 44.5 $ 6.9 $ 19.5 $ 89.1$ 1.2$ 90.3 Assets of discontinued operations sold with FAFLIC

                                (0.1 )           (3.4 )               -               (2.3 )       (5.8 )           -         (5.8 )
Transfers into Level 3                            -               1.4                 -                 -           1.4            1.6         3.0
Transfers out of Level 3                        (3.1 )          (20.2 )               -              (14.6 )      (37.9 )           -        (37.9 )
Total (losses) gains:
Included in earnings                            (0.3 )           (0.5 )              0.2                -          (0.6 )           -         (0.6 )
Included in other comprehensive
income                                          (1.0 )            3.6                 -                1.0          3.6             -          3.6
Purchases and sales:
Purchases                                        3.2             17.5                 -                3.2         23.9             -         23.9
Sales                                           (1.4 )           (4.8 )             (7.1 )            (0.6 )      (13.9 )           -        (13.9 )

Balance at end of year                $         15.5      $      38.1      $          -       $        6.2      $  59.8      $     2.8     $  62.6



During the twelve months ended December 31, 2010 and 2009, the Company
transferred fixed maturities between Level 2 and Level 3 primarily a result of
assessing the significance of unobservable inputs on the fair value measurement.
There were no transfers between Level 1 and Level 2 during 2010.

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

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Years Ended December 31                                        2010                                                    2009
(In millions)
                                                                   Net
                                                                 realized
                                           Other-than-          investment                       Other-than-           Net realized
                                            temporary             gains                           temporary             investment
                                           impairments           (losses)         Total          impairments          gains (losses)         Total
Level 3 Assets:
Fixed maturities:
States and political subdivisions         $          -         $         -        $   -         $          -         $           (0.3 )      $ (0.3 )
Corporate fixed maturities                           -                  0.7          0.7                 (1.1 )                   0.6          (0.5 )
Residential mortgage backed
securities, U.S. agency backed                       -                   -            -                    -                      0.2           0.2

Total fixed maturities                               -                  0.7          0.7                 (1.1 )                   0.5          (0.6 )
Equity securities                                  (0.3 )                -          (0.3 )                 -                       -             -

Total assets                              $        (0.3 )      $        0.7       $  0.4        $        (1.1 )      $            0.5        $ (0.6 )


There were no Level 3 liabilities held by the Company for the years ended December 31, 2010 and 2009.

7. DEBT

Debt consists of the following:



    DECEMBER 31                                                2010        2009
    (In millions)

Senior debentures (unsecured) maturing March 1, 2020$ 199.3 $

-

Senior debentures (unsecured) maturing October 16, 2025 121.4 121.4

    Holding company junior debentures                           129.2      
165.7
    FHLBB borrowing                                             134.5       125.0
    Capital securities                                           17.5        17.8
    Surplus notes                                                 4.0         4.0

                                                              $ 605.9     $ 433.9



On February 23, 2010, the Company issued $200.0 million aggregate principal
amount of 7.50% senior unsecured notes due March 1, 2020. These senior
debentures are subject to certain restrictive covenants, including limitations
on the issuance or disposition of capital stock of restricted subsidiaries and
limitations on liens. These debentures pay interest semi-annually (See also Note
3 - Other Significant Transactions). The Company is in compliance with the
covenants associated with this indenture.

The Company also issued senior unsecured notes with a face value of $200.0
million on October 16, 1995. In 2009, the Company repurchased a portion of these
senior debentures with a face value of $78.4 million (See also Note 3 - Other
Significant Transactions). The remaining senior debentures have a $121.6 million
face value, pay interest semi-annually at a rate of 7.625% and mature on
October 16, 2025. The senior debentures are subject to certain restrictive
covenants, including limitations on the issuance or disposition of stock of
restricted subsidiaries and limitations on liens. The Company is in compliance
with the covenants associated with this indenture.

The Company established a business trust in 1997, AFC Capital Trust I, for the
sole purpose of issuing mandatorily redeemable preferred securities to
investors. Through the trust, the Company issued $300.0 million of Series B
Capital Securities, which were registered under the Securities Act of 1933, the
proceeds of which were used to purchase related junior subordinated debentures
from the holding company. The Company liquidated the Trust on July 30, 2009.
Each holder of Capital Securities as of that date received a principal amount of
the Company's Series B Junior Debentures equal to the liquidation amount of the
Capital Securities held by such holder. In 2010 and 2009, the Company
repurchased a portion of these debentures with a face value of $36.5 million and
$134.3 million, respectively. These junior subordinated debentures have a face
value of $129.2 million and $165.7 million as of December 31, 2010 and
December 31, 2009, respectively. Consistent with the Capital Securities, these
debentures pay cumulative dividends semi-annually at 8.207% and mature
February 3, 2027 (See also Note 3 - Other Significant Transactions). On
February 15, 2011, the Company repurchased an additional $48.0 million of Junior
Debentures at a cost of $50.5 million, resulting in a loss of $2.5 million on
the repurchase.

On November 28, 2008, the Company acquired all of the outstanding shares of AIX.
Prior to this acquisition, AIX Group Trust issued $15.0 million floating rate
preferred capital securities and $0.5 million floating rate preferred common
securities. The proceeds were used to purchase $15.5 million floating rate
subordinated debentures issued by AIX. Coincident with the issuances, AIX issued
$0.5 million of the floating rate subordinate debentures to purchase all of the
common stock of AIX Group Trust. The Company carries the debt issued by this
trust as a component of its debt. The Company also has $4.0 million of surplus
notes outstanding related to AIX.



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On September 14, 2007, the Company acquired all of the outstanding shares of
PDI. Prior to this acquisition, Professionals Direct Statutory Trust II issued
$3.0 million of preferred securities in 2005, the proceeds of which were used to
purchase junior subordinated debentures issued by PDI. Coincident with the
issuance of the preferred securities, PDI issued $0.1 million of junior
subordinated debentures to purchase all of the common stock of Professionals
Direct Statutory Trust II.

In September 2009, Hanover Insurance received an advance of $125.0 million
through its membership in the FHLBB as part of a collateralized borrowing
program. This advance bears interest at a fixed rate of 5.50% per annum over a
twenty-year term. In July 2010, the Company committed to borrow an additional
$46.3 million from FHLBB to finance the development of the City Square Project.
These borrowings will be drawn in several increments from July 2010 to January
2012. All amounts mature on July 20, 2020 and carry fixed interest rates with a
weighted average of 3.88%. Through December 31, 2010, the Company has borrowed
$9.5 million under this arrangement. All interest associated with this
additional $46.3 million will be capitalized through the construction phase of
the City Square Project. As collateral to FHLBB, Hanover Insurance has pledged
government agency securities with a fair value of $162.7 million and $142.0
million as of December 31, 2010 and 2009, respectively (See also Note 3 - Other
Significant Transactions). The Company is in compliance with the covenants
associated with these borrowings.

In June 2007, the Company entered into a $150.0 million committed syndicated
credit agreement which expired in June 2010. There were no borrowings under this
agreement. The agreement provided for several covenants; all of which the
Company was in compliance with for the duration of the contract. The Company did
not renew or replace this syndicated credit agreement upon expiration.
Additionally, the Company had no commercial paper borrowings as of December 31,
2010.

Interest expense was $44.3 million in 2010, $35.5 million in 2009 and $41.0 million in 2008, and included interest related to the Company's senior debentures, junior subordinated debentures, FHLBB borrowing, capital securities and surplus notes. All interest expense is recorded in other operating expenses.

8. FEDERAL INCOME TAXES

Provisions for federal income taxes have been calculated in accordance with the provisions of ASC 740. A summary of the federal income tax expense in the Consolidated Statements of Income is shown below:



              FOR THE YEARS ENDED DECEMBER 31    2010       2009       2008
              (In millions)
              Federal income tax expense:
              Current                           $  5.7     $ 51.2     $ 17.5
              Deferred                            52.2       31.9       62.4

                                                $ 57.9     $ 83.1     $ 79.9


The federal income tax expense attributable to the consolidated results of operations is different from the amount determined by multiplying income before federal income taxes by the statutory federal income tax rate of 35%. The sources of the difference and the tax effects of each were as follows:




FOR THE YEARS ENDED DECEMBER 31                           2010           2009          2008
(In millions)
Expected federal income tax expense                      $  73.9        $ 94.8        $ 57.5
Change in valuation allowance                              (57.1 )        (6.9 )        34.2
Expired capital loss carryforward                           47.4            -             -
Tax difference related to investment disposals and
maturities                                                  (3.2 )          -             -
Tax-exempt interest                                         (2.2 )        (3.1 )        (3.9 )
Dividend received deduction                                 (0.8 )        (0.8 )        (0.6 )
Tax credits                                                 (0.4 )        (1.5 )        (2.1 )
Prior years' federal income tax settlement                    -           (0.3 )        (6.4 )
Changes in other tax estimates                                -             -           (0.2 )
Other, net                                                   0.3           0.9           1.4

Federal income tax expense                               $  57.9        $ 83.1        $ 79.9

Effective tax rate                                          27.4 %        30.7 %        48.6 %


The following are the components of the Company's deferred tax assets and liabilities (excluding those associated with discontinued operations).



             DECEMBER 31                           2010          2009
             (In millions)
             Deferred tax assets (liabilities)
             Insurance reserves                  $  171.8      $  157.3
             Deferred acquisition costs            (120.9 )      (100.8 )
             Tax credit carryforwards               111.1         112.1
             Capital losses                          69.2         228.6
             Employee benefit plans                  38.3          70.0
             Software capitalization                (28.3 )       (27.0 )
             Investments, net                        23.4         (28.1 )
             Other, net                               4.3          11.0

             Gross deferred tax asset               268.9         423.1
             Valuation allowance                    (91.5 )      (194.5 )

             Deferred tax asset, net             $  177.4      $  228.6







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Gross deferred income tax assets totaled approximately $1.2 billion at December 31, 2010 and 2009. Gross deferred income tax liabilities totaled approximately $1.0 billion at December 31, 2010 and 2009.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized.


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

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

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

At December 31, 2010, the Company's pre-tax capital loss carryforwards are
$197.8 million, including $176.5 million resulting from the sale of FAFLIC in
2009. At December 31, 2010, the Company has recorded a full valuation allowance
against this asset, since it is the Company's opinion that it is more likely
than not that the asset will not be realized. The Company's estimate of the
gross amount and likely realization of capital loss carryforwards may change
over time.

At December 31, 2010, the Company has a deferred tax asset of $111.1 million of
alternative minimum tax credit carryforwards. The alternative minimum tax credit
carryforwards have no expiration date. The Company may utilize the credits to
offset regular federal income taxes due from future income, and although the
Company believes that these assets are fully recoverable, there can be no
certainty that future events will not affect their recoverability. The Company
believes, based on objective evidence, the remaining deferred tax assets will be
realized.

The table below provides a reconciliation of the beginning and ending reserves for uncertain tax positions as follows:




FOR THE YEARS ENDED DECEMBER 31                            2010        2009 

2008

(In millions)
Liability at beginning of year, net                        $ 0.8       $ 0.8       $  27.7
Additions based on tax positions related to the
current year                                                  -           -            0.1
Additions for tax positions of prior years                    -           -            0.3
Reductions for tax positions of prior years                   -           -           (8.2 )
Settlements                                                   -           -          (19.1 )

Liability at end of year, net                              $ 0.8       $ 0.8       $   0.8





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Included in the December 31, 2010 balance is a receivable of $3.6 million for
tax positions, for which the ultimate deductibility is highly certain, but for
which there is uncertainty about the timing of such deductibility. Because of
the impact of deferred tax accounting, other than interest and penalties, a
change in the timing of deductions would not impact the annual effective tax
rate.

The Company recognizes interest and penalties related to unrecognized tax
benefits in federal income tax expense. In 2008, as part of the settlement of
the 1995 through 2001 audit period, the Company reduced its accrued interest by
$34.8 million. The Company had accrued interest of $1.0 million and $0.8 million
as of December 31, 2010 and 2009, respectively. The Company has not recognized
any penalties associated with unrecognized tax benefits.

The Company or its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. With few exceptions, the Company
and its subsidiaries are no longer subject to U.S. federal income tax
examinations by tax authorities for years before 2005. In 2008, the Company
received written notification from the IRS Appeals Division that the Joint
Committee on Taxation had completed its review of tax years 1995 through 2001
and found no exceptions. This settlement resulted in a tax benefit of $8.3
million recorded as a component of Net Income in the Consolidated Statement of
Income and is comprised of a $6.4 million adjustment to Federal Income Tax
Expense and a $1.9 million benefit to Discontinued Operations. Additionally, in
2009, the Company received a Revenue Agents Report for the 2005 and 2006 IRS
audit. The Company has agreed to all proposed adjustments other than a
disallowance of Separate Account Dividends Received Deductions for which the
Company has requested an Appeals conference. Due to available net operating loss
carryovers and the 2005 sale of Allmerica Financial Life Insurance and Annuity
Company, the effects of the proposed adjustments do not materially affect the
Company's financial position. The IRS audits of the years 2007 and 2008
commenced in April 2010. The Company and its subsidiaries are still subject to
U.S. state income tax examinations by tax authorities for years after 1998.

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

9. PENSION PLANS

Defined Benefit Plans


Prior to 2005, THG provided retirement benefits to substantially all of its
employees under defined benefit pension plans. These plans were based on a
defined benefit cash balance formula, whereby the Company annually provided an
allocation to each covered employee based on a percentage of that employee's
eligible salary, similar to a defined contribution plan arrangement. In addition
to the cash balance allocation, certain transition group employees who had met
specified age and service requirements as of December 31, 1994 were eligible for
a grandfathered benefit based primarily on the employees' years of service and
compensation during their highest five consecutive plan years of employment. The
Company's policy for the plans is to fund at least the minimum amount required
by the Employee Retirement Income Security Act of 1974 ("ERISA").



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As of January 1, 2005, the defined benefit pension plans were frozen and since
that date, no further cash balance allocations have been credited to
participants. Participants' accounts are credited with interest daily, based
upon the General Agreement of Trades and Tariffs ("GATT"). In addition, the
grandfathered benefits for the transition group were also frozen at January 1,
2005 levels with an annual transition pension adjustment calculated at an
interest rate equal to 5% per year up to 35 years of completed service, and 3%
thereafter.

The Company recognizes the funded status of its defined benefit plans in its
Consolidated Balance Sheet. The funded status is measured as the difference
between the fair value of plan assets and the projected benefit obligation of
the Company's defined benefit plans. ASC 715, Compensation - Retirement Plans
("ASC 715"), requires the aggregation of all overfunded plans separately from
all underfunded plans. On January 4, 2010 the Company made a discretionary
contribution of $100 million to the qualified defined benefit pension plan. With
this contribution, and based on current estimates of plan liabilities and other
assumptions, including future returns of plan assets, its qualified defined
benefit pension plan is essentially fully funded.

Assumptions


In order to measure the expense associated with these plans, management must
make various estimates and assumptions, including discount rates used to value
liabilities, assumed rates of return on plan assets, employee turnover rates and
anticipated mortality rates, for example. The estimates used by management are
based on the Company's historical experience, as well as current facts and
circumstances. In addition, the Company uses outside actuaries to assist in
measuring the expense and liability associated with these plans.

The Company measures the funded status of its plans as of the date of its
year-end statement of financial position. The Company utilizes a measurement
date of December 31st to determine its benefit obligations, consistent with the
date of its Consolidated Balance Sheets. Weighted-average assumptions used to
determine pension benefit obligations are as follows:



          DECEMBER 31                             2010        2009        2008
          Discount rate (1)                        5.63 %      6.13 %      6.63 %
          Cash balance interest crediting rate     4.50 %      4.50 %      5.00 %



(1) In 2010 and 2009, the discount rate utilized for the non-qualified plans was

5.50% and 6.00%, respectively. The discount rate for 2008 for the

non-qualified plan is consistent with the qualified plan.

The decrease in the interest crediting rate in 2009 reflects a change in expectations regarding long-term interest rate levels due to the current economic impact of the financial markets on the GATT rate.

The Company utilizes a measurement date of January 1st to determine its periodic pension costs. Weighted-average assumptions used to determine net periodic pension costs are as follows:



          FOR THE YEARS ENDED DECEMBER 31         2010        2009        2008
          Discount rate                            6.13 %      6.63 %      6.38 %
          Expected return on plan assets           7.00 %      7.50 %      7.75 %
          Cash balance interest crediting rate     4.50 %      5.00 %      5.00 %


The expected rate of return was determined by using historical mean returns,
adjusted for certain factors believed to have an impact on future returns.
Specifically, because the allocation of assets between fixed maturities and
equities has changed, as discussed in "Plan Assets" below, the historical mean
return was adjusted downward slightly to reflect this asset mix. The adjusted
mean returns were weighted to the plan's actual asset allocation at December 31,
2010, resulting in an expected rate of return on plan assets for 2010 of 7.00%.
The Company reviews and updates, at least annually, its expected return on plan
assets based on changes in the actual assets held by the plan.

Plan Assets


The Company utilizes a target allocation strategy, which focuses on creating a
mix of assets that will generate modest growth from equity securities while
minimizing volatility in the Company's earnings from changes in the markets and
economic environment. Various factors are taken into consideration in
determining the appropriate asset mix, such as census data, actuarial valuation
information and capital market assumptions. During 2010 and 2009, the plan
assets were shifted out of equity securities and into fixed income securities to
the current allocation of 74% in fixed income securities and 26% in equity
securities. The Company reviews and updates, at least annually, the target
allocation and makes changes periodically. The following table provides target
allocations and actual invested asset allocations for 2010 and 2009.



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                                               2010
                                              TARGET
             DECEMBER 31                      LEVELS       2010       2009
             Fixed Income Securities:
             Fixed Maturities                      73 %       73 %       56 %
             Money Market Funds                     2 %        1 %        1 %

             Total Fixed Income Securities         75 %       74 %       57 %
             Equity Securities:
             Domestic                              18 %       18 %       31 %
             International                          7 %        7 %       10 %
             THG Common Stock                      -           1 %        2 %

             Total Equity Securities               25 %       26 %       43 %

             Total Assets                         100 %      100 %      100 %



Included in total plan assets of $547.8 million at December 31, 2010 were $541.7
million of invested assets carried at fair value and $6.1 million of cash and
equivalents. Total plan assets at December 31, 2009 of $424.5 million included
$421.0 million of invested assets carried at fair value and $3.5 million of cash
and equivalents.

The following table presents for each hierarchy level the Plan's investment
assets that are measured at fair value at December 31, 2010 and 2009. (Please
refer to Note 6 - Fair Value, for a description of the different levels in the
Fair Value Hierarchy).



      December 31, 2010
      (in millions)
                                                           Fair Value
                                         Total       Level 1      Level 2       Level 3
      Description
      Fixed Income Securities
      Fixed Maturities                  $ 397.0     $     2.8     $  394.2     $      -

      Equity Securities:
      Domestic                             96.7           0.4         96.3            -
      International                        41.4           0.2         41.2            -
      THG Common Stock                      6.6           6.6           -             -

      Total Equity Securities             144.7           7.2        137.5            -

      Total Investments at Fair Value   $ 541.7     $    10.0     $  531.7     $      -





      December 31, 2009
      (in millions)
                                                           Fair Value
                                         Total       Level 1      Level 2       Level 3
      Description
      Fixed Income Securities
      Fixed Maturities                  $ 241.2     $    60.9     $  180.3     $      -

      Equity Securities:
      Domestic                            129.9           0.9        129.0            -
      International                        43.6           0.4         43.2            -
      THG Common Stock                      6.3           6.3           -             -

      Total Equity Securities             179.8           7.6        172.2            -

      Total Investments at Fair Value   $ 421.0     $    68.5     $  352.5     $      -



Fixed Income Securities

Securities classified as Level 1 at December 31, 2010 and 2009 include actively
traded mutual funds that are publicly traded securities which are valued at
quoted market prices. Securities classified as Level 1 in 2009 include a
separate investment account, which is invested entirely in the Vanguard Total
Bond Market Index Fund, a mutual fund that in turn invests in investment grade
fixed maturities.

Securities classified as Level 2 at December 31, 2010 include the aforementioned
separate investment account. Additionally, included in Level 2 at December 31,
2010 is a custom fund that invests in commingled pools and investment grade
fixed income securities. In 2009, Level 2 securities reflected investments in
commingled pools that primarily invest in investment grade fixed income
securities. These investments are valued using independent pricing models that
incorporate observable inputs related to the aggregated underlying investments.

During 2010, the separate investment account was reclassified from Level 1 in
2009 to Level 2 due to the application of new accounting guidance related to the
use of daily pricing as a practical expedient for fair value of these
investments.

Equity Securities


Level 1 securities primarily consist of 141,462 shares of THG common stock held
by the plan. THG common stock is valued through quoted market prices. Securities
also classified as Level 1 at December 31, 2010 and 2009 include actively traded
mutual funds that primarily invest in equity securities which are valued at
quoted market prices.

Securities classified as Level 2 include investments in commingled pools that
primarily invest in publicly traded common stocks and international equities.
These pools are valued using independent pricing models that incorporate
observable inputs related to the aggregated underlying investments.

Obligations and Funded Status


The Company recognizes the current net underfunded status of its plans in its
Consolidated Balance Sheet. Changes in the funded status of the plans are
reflected as components of accumulated other comprehensive loss or income. The
components of accumulated other comprehensive loss or income are reflected as
either a net actuarial gain or loss, a net prior service cost or a net
transition asset. The following table reflects the benefit obligations, fair
value of plan assets and funded status of the plans at December 31, 2010 and
2009.



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                                                      Qualified Pension              Non-Qualified
DECEMBER 31                                                 Plans                    Pension Plans
(in millions)
                                                     2010           2009          2010          2009
Accumulated benefit obligation                     $   548.0       $ 518.4  

$ 39.1$ 38.2


Change in benefit obligation:
Projected benefit obligation, beginning of year    $   518.4       $ 494.1       $  38.2       $  37.9
Service cost - benefits earned during the year           0.1           0.1            -             -
Interest cost                                           30.4          31.5           2.2           2.4
Actuarial losses                                        32.0          22.9           2.1           1.2
Benefits paid                                          (32.9 )       (30.2 )        (3.4 )        (3.3 )

Projected benefit obligation, end of year              548.0         518.4  

39.1 38.2


Change in plan assets:
Fair value of plan assets, beginning of year           424.5         338.5            -             -
Actual return on plan assets                            56.2          71.0            -             -
Company contribution                                   100.0          45.2           3.4           3.3
Benefits paid                                          (32.9 )       (30.2 

) (3.4 ) (3.3 )


Fair value of plan assets, end of year                 547.8         424.5            -             -

Funded status of the plans                         $    (0.2 )     $ (93.9 

) $ (39.1 ) $ (38.2 )

Components of Net Periodic Pension Cost

The components of net periodic pension cost for pension and other postretirement benefit plans are as follows:



   FOR THE YEARS ENDED DECEMBER 31                   2010         2009         2008
   (In millions)
   Service cost - benefits earned during the year   $   0.1      $   0.1      $   0.1
   Interest cost                                       32.6         33.9         32.8
   Expected return on plan assets                     (35.1 )      (25.4 )      (33.8 )
   Recognized net actuarial loss                       16.8         26.9          2.6
   Amortization of transition asset                    (1.6 )       (1.6 )       (1.7 )
   Amortization of prior service cost                   0.1           -           0.1

   Net periodic pension cost                        $  12.9      $  33.9      $   0.1


The following table reflects the amounts recognized in accumulated other comprehensive income (loss) relating to the Company's defined benefit pension plans as of December 31, 2010 and 2009.



                    December 31               2010        2009
                    (In millions)
                    Net actuarial loss       $ 134.4     $ 138.1
                    Net prior service cost       0.1         0.2
                    Net transition asset          -         (1.6 )

                                             $ 134.5     $ 136.7



The following table reflects the estimated amount that will be amortized from
accumulated other comprehensive income (loss) into net periodic pension cost in
2011:



                 Estimated Amortization in 2011 Expense
                 (In millions)
                 Net actuarial gain                       $ 15.0
                 Net prior service cost                      0.1

                                                          $ 15.1



The unrecognized net actuarial gains (losses) which exceed 10% of the greater of
the projected benefit obligation or the fair value of plan assets are amortized
as a component of net periodic pension cost in future years.

Contributions


On January 4, 2010, the Company made a discretionary contribution of $100.0
million to the qualified defined benefit pension plan. These funds were invested
primarily in fixed income investments. With this contribution, and based upon
the current estimate of liabilities and certain assumptions regarding investment
return and other factors, the Company's qualified defined benefit pension plan
is essentially fully funded. In addition, the Company expects to contribute $3.3
million to its non-qualified pension plans to fund 2011 benefit payments. At
this time, no additional discretionary contributions are expected to be made to
the plans during 2011 and the Company does not expect that any funds will be
returned from the plans to the Company during 2011.

Benefit Payments

The Company estimates that benefit payments over the next 10 years will be as follows:

FOR THE YEARS ENDED DECEMBER 31 2011 2012 2013 2014

2015 2016-2020

(In millions)

 Qualified pension plans           $ 37.1     $ 38.1     $ 38.3     $ 39.5  

$ 40.2$ 204.2

Non-qualified pension plans $ 3.3$ 3.2$ 3.1$ 3.3

$ 3.6 $ 14.9

The benefit payments are based on the same assumptions used to measure the Company's benefit obligations at the end of 2010. Benefit payments related to the qualified plans will be made from plan assets, whereas those payments related to the non-qualified plans will be provided for by the Company.

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Table of Contents

Defined Contribution Plan


In addition to the defined benefit plans, THG provides a defined contribution
401(k) plan for its employees, whereby the Company matches employee elective
401(k) contributions, up to a maximum percentage of 6% in both 2010 and 2009 and
5% in 2008. The Company's expense for this matching provision was $16.5 million,
$14.2 million and $12.0 million for 2010, 2009 and 2008, respectively. In
addition to this matching provision, the Company can elect to make an annual
contribution to employees' accounts. There was no additional contribution in
2010 and the Company's cost for additional contributions in 2009 and 2008 was
$2.0 million and $5.4 million, respectively.

10. OTHER POSTRETIREMENT BENEFIT PLANS


In addition to the Company's pension plans, the Company also has postretirement
medical and death benefits that it provides to certain full-time employees,
former agents and retirees and their dependents. Benefits include hospital,
major medical and a payment at death up to retirees' final annual salary with
certain limits. Dependent coverage is generally provided for up to two years
after death of the retiree. The medical plans have varying co-payments and
deductibles, depending on the plan.

Generally, employees who were actively employed on December 31, 1995 became
eligible with at least 15 years of service after the age of 40. Effective
January 1, 1996, the Company revised these benefits so as to establish limits on
future benefit payments to beneficiaries of retired employees and to restrict
eligibility to then current employees. In 2009, the Company changed the
postretirement medical benefits, only as they relate to current employees who
still qualify for participation in the plan under the above formula. For these
participants, the plan now provides for only post age 65 benefits. The
population of agents receiving postretirement benefits was frozen as of
December 31, 2002, when the Company ceased its distribution of proprietary life
and annuity products. These plans are unfunded.

The Company applies the guidance in ASC 715 and as such, has recognized the
funded status of its postretirement benefit plans in its Consolidated Balance
Sheet. Since these plans are unfunded, the amount recognized in the Consolidated
Balance Sheet is equal to the accumulated benefit obligation of these plans. The
components of accumulated other comprehensive income or loss are reflected as
either a net actuarial gain or loss or a net prior service cost. There are no
unrecognized transition assets or obligations associated with these plans.

Obligation and Funded Status

The following table reflects the funded status of these plans:



DECEMBER 31                                                      2010            2009
(In millions)
Change in benefit obligation:
Accumulated postretirement benefit obligation, beginning
of year                                                         $  44.7         $  50.1
Service cost                                                        0.1             0.2
Interest cost                                                       2.7             2.8
Net actuarial losses                                                0.8              -
Plan amendments                                                      -             (4.5 )
Benefits paid                                                      (2.5 )          (3.9 )

Accumulated postretirement benefit obligation, end of year 45.8

44.7

Fair value of plan assets, end of year                               -               -

Funded status of plans                                          $ (45.8 )       $ (44.7 )



A plan amendment in 2009 resulted in a benefit of $4.5 million. The amendment
modified the level of benefits provided to active participants, resulting in
decreased plan costs to the Company.

Benefit Payments


The Company estimates that benefit payments over the next 10 years will be as
follows:



                     FOR THE YEARS ENDED DECEMBER 31
                     (In millions)
                     2011                              $  4.8
                     2012                                 4.6
                     2013                                 4.4
                     2014                                 4.1
                     2015                                 3.9
                     2016-2020                           16.5

The benefit payments are based on the same assumptions used to measure the Company's benefit obligation at the end of 2010 and reflect benefits attributable to estimated future service.

Components of Net Periodic Postretirement (Benefit) Expense


The components of net periodic postretirement (benefit) expense were as follows:



          FOR THE YEARS ENDED DECEMBER 31        2010        2009        2008
          (In millions)
          Service cost                          $  0.1      $  0.2      $  0.5
          Interest cost                            2.7         2.8         3.2
          Recognized net actuarial loss            0.4         0.3         0.4
          Amortization of prior service cost      (5.9 )      (5.8 )      (5.0 )

          Net periodic postretirement benefit   $ (2.7 )    $ (2.5 )    $ (0.9 )





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The following table reflects the balances in Accumulated Other Comprehensive (Income) Loss relating to the Company's postretirement benefit plans:



                    DECEMBER 31               2010         2009
                    (In millions)
                    Net actuarial loss       $   7.7      $   7.3
                    Net prior service cost     (16.5 )      (22.4 )

                                             $  (8.8 )    $ (15.1 )


The following table reflects the estimated amortization to be recognized in net periodic benefit cost in 2011:



            Estimated Amortization in 2011 Expense (Benefit)
            (In millions)
            Net actuarial loss                                 $  0.3
            Net prior service cost                               (5.3 )

                                                               $ (5.0 )



Assumptions

ASC 715 requires that employers measure the funded status of their plans as of
the date of their year-end statement of financial position. As such, the Company
has utilized a measurement date of December 31, 2010 and 2009, to determine its
postretirement benefit obligations, consistent with the date of its Consolidated
Balance Sheets. Weighted-average discount rate assumptions used to determine
postretirement benefit obligations and periodic postretirement costs are as
follows:



        FOR THE YEARS ENDED DECEMBER 31                     2010       

2009

Postretirement benefit obligations discount rate 5.50 % 6.00 %

        Postretirement benefit cost discount rate            6.00 %     

6.63 %

Assumed health care cost trend rates are as follows:

DECEMBER 31                                                        2010     

2009

Health care cost trend rate assumed for next year                      8 %  

9 % Rate to which the cost trend is assumed to decline (ultimate trend rate)

                                                            5 %            5 %
Year the rate reaches the ultimate trend rate                       2015    

2015



A one-percentage point change in assumed health care cost trend rates in each
year would have an immaterial effect on net periodic benefit cost during 2010
and accumulated postretirement benefit obligation at December 31, 2010.
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