The Hanover Reports Record Fourth Quarter Net Income and Operating Income of $4.53 and $3.38 per Diluted Share, Respectively; Full Year Net Income and Operating Income of $11.49 and $8.73 per Diluted Share, Respectively

WORCESTER, Mass., Feb. 2, 2022 /PRNewswire/ -- The Hanover Insurance Group, Inc. (NYSE: THG) today reported net income of $163.5 million, or $4.53 per diluted share, in the fourth quarter of 2021, compared to $164.6 million, or $4.43 per diluted share, in the prior-year quarter. Operating income⁽⁷⁾  was  $122.1 million, or $3.38 per diluted share, for the fourth quarter of 2021. This compared to operating income of $112.0 million, or $3.02 per diluted share, in the prior-year quarter. The difference between net and operating income in the fourth quarter of 2021 was primarily due to the after-tax increase in the fair value of equity securities of $42.0 million, or $1.16 per fully diluted share, which is excluded from operating income.

Net income for the full year 2021 was $418.7 million, or $11.49 per diluted share. This compares to net income of $358.7 million, or $9.42 per diluted share, in the prior year. Operating income was $318.3 million, or $8.73 per diluted share, in 2021, compared to operating income of $355.0 million, or $9.32 per diluted share, in the prior year.

"2021 was an exceptional year for our company, as we enhanced our competitive position, continued our positive financial momentum and advanced our unique culture," said John C. Roche, president and chief executive officer at The Hanover. "We delivered strong performance in the fourth quarter, with record operating earnings of $3.38 per diluted share, as well as net premiums written growth of 9.2%. Our performance in the quarter and the year underscores the effectiveness of our distinctive strategy, the relevancy of our product and service offerings, and the strength of our agency partnerships. At the same time, we made important progress across all of our businesses throughout the year. In Personal Lines, our thoughtful pricing strategy, combined with continued strong performance, has positioned us to deliver sustained, profitable growth and value creation in the year ahead. In Commercial Lines, robust rate increases generated meaningful margin expansion, particularly in our specialty business, while our focus on innovative products and technology advancements continued to drive impressive growth. Our ability to generate broad-based profitability, along with our superior underwriting and advanced data and analytics capabilities, proved to be more critical than ever in 2021, as we navigated extremely dynamic market conditions and challenges. We begin 2022 with a proven strategy and a talented, committed team, eager to build on our unique competitive advantage and position us for even greater success."

"We are very pleased with the outstanding financial results we delivered this year," said Jeffrey M. Farber, executive vice president and chief financial officer at The Hanover. "Our fourth quarter results reflect a sub-90s ex-CAT combined ratio and an excellent operating return on equity⁽⁸⁾ of 16.8%, providing an incredibly strong ending to an already successful year. We delivered a full-year operating return on equity of 11.2%, despite significant catastrophe activity and increasing severity trends. Furthermore, our business is delivering underlying profitability above pre-pandemic levels, which speaks to the sustainability of our strong financial performance. In line with prior guidance, we achieved a 30-basis-point improvement in our full-year expense ratio, reflecting the benefit of growth and operational efficiencies generated by our investments in technology and data analytics. We continued to be responsible stewards of our capital and deliver value to our shareholders in 2021, returning $265 million through dividends and share repurchases. We start the new year with great optimism and enthusiasm, in an excellent financial position, supported by a strong balance sheet and a high-quality investment portfolio."

	Three months ended				Year ended
	December 31				December 31
($ in millions, except per share data)	2021		2020		2021		2020
Net premiums written	$1,214.9		$1,112.1		$4,993.4		$4,598.5
Net income	163.5		164.6		418.7		358.7
per diluted share	4.53		4.43		11.49		9.42
Operating income	122.1		112.0		318.3		355.0
per diluted share	3.38		3.02		8.73		9.32
Net investment income	79.5		70.2		310.7		265.1
Book value per share	$88.59		$87.96		$88.59		$87.96
Ending shares outstanding (in millions)	35.5		36.4		35.5		36.4
Combined ratio	92.9 %		92.4 %		97.0 %		94.4 %
Prior year development ratio	(1.2)%		(0.5)%		(1.2)%		(0.3)%
Catastrophe ratio	3.1 %		3.0 %		8.4 %		6.3 %
Combined ratio, excluding catastrophes	89.8 %		89.4 %		88.6 %		88.1 %
Current accident year combined ratio,      excluding catastrophes(1)	91.0 %		89.9 %		89.8 %		88.4 %

Fourth Quarter Operating Highlights

Commercial Lines
Commercial Lines operating income before taxes was $120.9 million in the fourth quarter of 2021, compared to $103.2 million in the fourth quarter of 2020. The Commercial Lines combined ratio was 90.7%, compared to 91.5% in the prior-year quarter. Catastrophe losses in the fourth quarter of 2021 were $15.5 million, or 2.1 points of the combined ratio. This compares to catastrophe losses of $10.0 million, or 1.5 points of the combined ratio, in the prior-year quarter.

Fourth quarter 2021 results included $11.4 million, or 1.5 points, of net favorable prior-year reserve development, driven primarily by continued favorability in workers' compensation. This compared to net favorable prior-year reserve development of $6.3 million, or 0.9 points, in the fourth quarter of 2020.

Commercial Lines current accident year combined ratio, excluding catastrophes, decreased 0.8 points to 90.1% in the fourth quarter of 2021, from 90.9% in the prior-year quarter. The current accident year loss and LAE ratio, excluding catastrophes, decreased by 0.4 points to 55.9%, primarily driven by earning-in rate increases, most notably in other commercial lines, where most of the specialty business is reported.

The expense ratio⁽⁹⁾ decreased 0.4 points to 34.2% in the fourth quarter of 2021, compared to the prior-year period, primarily attributable to fixed cost leverage from premium growth.

Net premiums written were $712.7 million in the quarter, up 9.6% from the prior-year quarter, driven primarily by rate and exposure increases. Core commercial average base rate increased 6.3% for the fourth quarter, while pricing⁽²⁾ increases averaged 9.5%.

The following table summarizes premiums and the components of the combined ratio for Commercial Lines:

Personal Lines
Personal Lines operating income before taxes was $40.9 million in the fourth quarter of 2021, compared to $50.8 million in the fourth quarter of 2020. The Personal Lines combined ratio was 96.2%, compared to 93.4% in the prior-year quarter. Catastrophe losses in the fourth quarter of 2021 were $23.5 million, or 4.7 points of the combined ratio, compared to $25.1 million, or 5.3 points of the combined ratio, in the prior-year quarter.

Fourth quarter 2021 results included net favorable prior-year reserve development of $3.0 million, or 0.6 points, compared to no net impact in the fourth quarter of 2020.

Personal Lines current accident year combined ratio, excluding catastrophe losses, increased by 4.0 points to 92.1% in the fourth quarter, from 88.1% in the prior-year quarter. The current accident year loss and LAE ratio, excluding catastrophes, increased by 5.1 points to 64.8% in the fourth quarter of 2021, compared to the fourth quarter of 2020, attributable to increased property severity and auto loss frequency, although loss frequency in auto remains below pre-pandemic levels.

The expense ratio decreased by 1.1 points to 27.3% in the fourth quarter of 2021, primarily attributable to lower performance-based agency compensation and higher net premiums earned.  

Net premiums written were $502.2 million in the fourth quarter of 2021, up 8.7% from the prior-year quarter, driven by higher new business. Personal Lines average rate increases in the fourth quarter of 2021 were 2.0%.

The following table summarizes premiums and components of the combined ratio for Personal Lines:                              

Full Year Operating Highlights

Operating income before income taxes and interest expense was $432.3 for the full year of 2021, with a combined ratio of 97.0%. In 2020, operating income before income taxes and interest expense was $484.7 million, with a combined ratio of 94.4%.

Catastrophe losses were $402.6 million, or 8.4 points of the combined ratio in 2021, compared to $286.7 million, or 6.3 points, in the prior year. Net favorable prior-year reserve development, excluding catastrophes, was $56.1 million, or 1.2 points, in 2021. For 2020, net favorable prior-year reserve development, excluding catastrophes, was $15.5 million, or 0.3 points.

The current accident year combined ratio, excluding catastrophe losses, was 89.8% in 2021, compared to 88.4% in 2020, driven by an increase in the current accident year loss and LAE ratio, primarily due to higher property severity and auto loss frequency, though loss frequency in auto remains below pre-pandemic levels. Relative to the comparative period of 2019, the underlying loss experience remains favorable. Partially offsetting the increase in the loss ratio was a 0.3-point improvement in the expense ratio, primarily due to fixed cost leverage from premium growth.

Total net premiums written were $5.0 billion in 2021, up 8.6% from 2020, including Commercial Lines growth of 9.2%, reflecting strong contributions from the specialty business, and Personal Lines growth of 7.7%.

Commercial Lines operating income before taxes was $269.9 million in 2021, which included $227.3 million, or 8.0 points, of catastrophe losses, and $34.0 million, or 1.2 points, of net favorable prior-year reserve development. In 2020, Commercial Lines operating income before taxes was $275.4 million, which included $132.2 million, or 4.9 points, of catastrophe losses, and $19.0 million, or 0.7 points, of net favorable prior-year reserve development.

The Commercial Lines current accident year combined ratio, excluding catastrophe losses, was 90.8%, compared to 91.6% in the prior year, driven by an improvement in the current accident year loss and LAE ratio, which benefited from rate increases earning-in and a decrease in the expense ratio.

Personal Lines operating income before taxes was $158.5 million, which included $175.3 million, or 9.1 points, of catastrophe losses, and $23.1 million, or 1.2 points, of net favorable prior-year reserve development. In 2020, Personal Lines operating income before taxes was $212.5 million, which included $154.5 million, or 8.4 points, of catastrophe losses, and immaterial favorable prior-year reserve development.

The Personal Lines current accident year combined ratio, excluding catastrophes, increased to 88.3% from 84.0% in the prior year, driven primarily by an increase in the personal auto current accident year loss and LAE ratio from increasing severity and decelerating, but still favorable, loss frequency benefits. The company's Personal Lines current accident year loss and LAE ratio remains below the pre-pandemic 2019 ratio by 2.1 points.

Investments
Net investment income was $79.5 million for the fourth quarter of 2021, compared to $70.2 million in the prior-year quarter. The increase was driven by unusually high income from limited partnerships, and to a lesser degree, continued investment of higher operating cash flow, partially offset by lower new money yields. The average pre-tax earned yield on fixed maturities was 2.90% and 3.15% for the quarters ended December 31, 2021, and 2020, respectively. Total pre-tax earned yield on the investment portfolio for the quarter ended December 31, 2021, was 3.69%, up from 3.45% in the prior-year quarter.

Net realized and unrealized investment gains recognized in earnings were $50.4 million in the fourth quarter of 2021 and $65.2 million in the fourth quarter of 2020, primarily consisting of changes in the fair value of equity securities.

Net investment income was $310.7 million for the full year 2021, compared to $265.1 million in 2020. The increase was driven by unusually high income from limited partnerships, and to a lesser degree, continued investment of higher operating cash flow, partially offset by lower new money yields. The average pre-tax earned yield on fixed maturities was 2.99% and 3.33% for the years ended December 31, 2021, and 2020, respectively. Total pre-tax earned yield on the investment portfolio for the year ended December 31, 2021, was 3.70%, up from 3.35% in 2020.

Net realized and unrealized investment gains were $123.0 million in 2021 compared to $5.0 million in 2020. This increase was primarily due to changes in the fair value of equity securities.

The company held $9.4 billion in cash and invested assets on December 31, 2021.  Fixed maturities and cash represented approximately 85% of the investment portfolio. Approximately 95% of the company's fixed maturity portfolio is rated investment grade. Net unrealized gains on the fixed maturity portfolio as of December 31, 2021, were $209.1 million before taxes, a decrease in fair value of $89.7 million since September 30, 2021, due to higher interest rates and wider credit spreads, and a decrease in fair value of $299.7 million since December 31, 2020, due to higher interest rates.

Shareholders' Equity and Capital Actions                                       
On December 31, 2021, book value per share was $88.59, up 1.8% from September 30, 2021, and up 0.7% from December 31, 2020. The increase was primarily driven by net income, partially offset by a decrease in unrealized gains on fixed income securities. Excluding net unrealized gains on fixed maturity investments, net of tax, book value per share increased 4.4% from September 30, 2021, and 9.4% from December 31, 2020.

During the quarter, the company repurchased approximately 154,000 shares of common stock in the open market for $20.0 million. In 2021, the company repurchased approximately 1.2 million shares of common stock in the open market for $162.6 million. Additionally, through February 1, the company repurchased approximately 49,000 shares of common stock in the open market for $6.6 million. The company has approximately $354 million of remaining capacity under its existing share repurchase program.

Additionally, in the fourth quarter, the Board of Directors approved an increase to the quarterly dividend of 7.1% to $0.75 per common share. The company paid ordinary dividends of $26.6 million in the fourth quarter and $102.2 million in the year.

Earnings Conference Call
The company will host a conference call to discuss its fourth quarter and full year results on Thursday, February 3, at 10:00 a.m. E.T.  A PowerPoint slide presentation will accompany the prepared remarks and has been posted on The Hanover's website.  Interested investors and others can listen to the call and access the presentation through The Hanover's website, located at www.hanover.com, in the "Investors" section. Investors may access the conference call by dialing 1-844-413-3975 in the U.S. and 1-412-317-5458 internationally. Web-cast participants should go to the website 15 minutes early to register, download and install any necessary audio software. A re-broadcast of the conference call will be available on The Hanover's website approximately two hours after the call.

About The Hanover
The Hanover Insurance Group, Inc. is the holding company for several property and casualty insurance companies, which together constitute one of the largest insurance businesses in the United States. The company provides exceptional insurance solutions through a select group of independent agents and brokers. Together with its agent partners, the company offers standard and specialized insurance protection for small and mid-sized businesses, as well as for homes, automobiles, and other personal items. For more information, please visit hanover.com.

Contact Information

Definition of Reported Segments
Continuing operations include three operating segments: Commercial Lines, Personal Lines and Other. The Commercial Lines segment offers a suite of products targeted at the small to mid-size business markets, which include commercial multiple peril, commercial automobile, workers' compensation and other commercial coverages such as management and professional liability, marine, Hanover Programs, specialty industrial and commercial property, monoline general liability, surety and other commercial lines. The Personal Lines segment markets automobile, homeowners and ancillary coverages to individuals and families. The "Other" segment includes Opus Investment Management, Inc., which provides investment management services to institutions, pension funds and other organizations, the operations of the holding company, as well as a block of run-off voluntary property and casualty pools business in which we have not actively participated since 1995.

Financial Supplement
The Hanover's fourth quarter and full-year earnings news release and financial supplement are available in the "Investors" section of the company's website at hanover.com.

The following is a reconciliation from operating income to net income⁽¹⁰⁾:

Forward-Looking Statements and Non-GAAP Financial Measures
Forward-Looking Statements
Certain statements in this document and comments made by management may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as, but not limited to, "believes," "anticipates," "expects," "may," "projects," "projections," "plan," "likely," "potential," "targeted," "forecasts," "should," "could," "continue," "outlook," "guidance," "modeling," "moving forward" and other similar expressions are intended to identify forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. The company cautions investors that any such forward-looking statements are estimates, beliefs, expectations and/or projections that involve significant judgment, and that historical results, trends and forward-looking statements are not guarantees and are not necessarily indicative of future performance. Actual results could differ materially from those anticipated.

These statements include, but are not limited to, the company's statements regarding:

• The company's outlook and its ability to achieve components or the sum of the respective period guidance on its future results of operations including: the combined ratio, excluding or including both prior-year reserve development and/or catastrophe losses; catastrophe losses; net investment income; growth of net premiums written and/or net premiums earned in total or by line of business; expense ratio; operating return on equity; and/or the effective tax rate;
• The continued impacts of the global pandemic ("Pandemic") and related economic conditions on the company's operating and financial results, including, but not limited to, the impact on the company's investment portfolio, changes in claims frequency as a result of fluctuations in economic activity, severity from higher cost of repairs due to, among other things, supply chain disruptions, inflation, declines in premium as a result of, among other things, credits or returns to the company's customers, lower submissions, changes in renewals and policy endorsements, public health guidance, and the impact of government orders and restrictions in the states and jurisdictions in which the company operates;
• Uses of capital for share repurchases, special or ordinary cash dividends, business investments or growth, or otherwise, and outstanding shares in future periods as a result of various share repurchase mechanisms, capital management framework, especially in the current environment, and overall comfort with liquidity and capital levels;
• Variability of catastrophe losses due to risk concentrations, changes in weather patterns including climate change, wildfires, severe storms, hurricanes, terrorism, civil unrest, riots or other events, as well as the complexity in estimating losses from large catastrophe events due to delayed reporting of the existence, nature or extent of losses or where "demand surge," regulatory assessments, litigation, coverage and technical complexities or other factors may significantly impact the ultimate amount of such losses;
• Current accident year losses and loss selections ("picks"), excluding catastrophes, and prior accident year loss reserve development patterns, particularly in complex "longer-tail" liability lines, as well as the inherent variability in short-tail property and non-catastrophe weather losses;
• Changes in frequency and loss severity trends;
• Ability to manage the impact of inflationary pressures, as a result of the Pandemic or otherwise, including, but not limited to, supply chain disruptions, labor shortages, and increases in cost of goods, services, and materials;
• The confidence or concern that the current level of reserves is adequate and/or sufficient for future claim payments, whether due to losses that have been incurred but not reported, circumstances that delay the reporting of losses, business complexity, adverse judgments or developments with respect to case reserves, the difficulties and uncertainties inherent in projecting future losses from historical data, changes in replacement and medical costs, as well as complexities related to the Pandemic, including legislative, regulatory or judicial actions that expand the intended scope of coverages, or other factors;
• Characterization of some business as being "more profitable" in light of inherent uncertainty of ultimate losses incurred, especially for "longer-tail" liability businesses;
• Efforts to manage expenses, including the company's long-term expense savings targets, while allocating capital to business investment, which is at management's discretion;
• Mix improvement, underwriting initiatives, coverage restrictions and pricing segmentation actions, among others, to grow businesses believed to be more profitable or reduce premiums attributable to products or lines of business believed to be less profitable; balance rate actions and retention; offset long-term and/or short-term loss trends due to increased frequency; increased "social inflation" from a more litigious environment and higher average cost of resolution, increased property replacement costs, and/or social movements;
• The ability to generate growth in targeted segments through new agency appointments; rate increases (as a result of its market position, agency relationships or otherwise), retention improvements or new business; expansion into new geographies; new product introductions; or otherwise; and
• Investment returns and the effect of macro-economic interest rate trends and overall security yields, including the macro-economic impact of the Pandemic, inflationary pressures and corresponding governmental and/or central banking initiatives taken in response thereto, and geopolitical circumstances on new money yields and overall investment returns.

Additional Risks and Uncertainties
Investors are further cautioned and should consider the risks and uncertainties in the company's business that may affect such estimates and future performance that are discussed in the company's most recently filed reports on Form 10-K and Form 10-Q and other documents filed by The Hanover Insurance Group, Inc. with the Securities and Exchange Commission ("SEC") and that are also available at www.hanover.com under "Investors." These risks and uncertainties include, but are not limited to:

• The severity, duration and long-term impact related to the Pandemic, including, but not limited to, actual and possible government responses, legislative, regulatory and judicial actions, changes in frequency and severity of claims in both Commercial and Personal Lines, impacts to distributors (including agent partners), and the possibility of additional premium adjustments, including credits and returns, for the benefit of insureds;
• Changes in regulatory, legislative, economic, market and political conditions, particularly in response to COVID-19 and the Pandemic (such as legislative or regulatory actions that would retroactively require insurers to cover business interruption or other types of claims irrespective of terms, exclusions or other conditions included in the contractual terms of the policies that would otherwise preclude coverage, mandatory returns and other rate-related actions, as well as presumption legislation in regards to workers' compensation);
• Heightened investment market volatility, fluctuations in interest rates (which have a significant impact on the market value of the investment portfolio and thus book value), U.S. Federal Reserve actions, inflationary pressures, default rates, prolonged global market conditions and other factors that affect investment returns from the investment portfolio;
• Data security incidents, including, but not limited to, those resulting from a malicious cyber security attack on the company or its business partners and service providers, or intrusions into the company's systems or data sources;
• Adverse claims experience, including those driven by large or increased frequency of catastrophe events (including those related to terrorism, riots and civil unrest), and severe weather;
• The uncertainty in estimating weather-related losses or the long-term impacts of the Pandemic, and the limitations and assumptions used to model other property and casualty losses (particularly with respect to products with longer-tail liability lines, such as casualty and bodily injury claims, or involving emerging issues related to losses incurred as the result of new lines of business, such as cyber or financial institutions coverage, or reinsurance contracts and reinsurance recoverables), leading to potential adverse development of loss and loss adjustment expense reserves;
• Litigation and the possibility of adverse judicial decisions, including those which expand policy coverage beyond its intended scope and/or award "bad faith" or other non-contractual damages, and the impact of "social inflation" affecting judicial awards and settlements;
• The ability to increase or maintain insurance rates in line with anticipated loss costs and/or governmental action, including mandates by state departments of insurance to either raise or lower rates or provide credits or return premium to insureds;
• Investment impairments, which may be affected by, among other things, the company's ability and willingness to hold investment assets until they recover in value, as well as credit and interest rate risk and general financial and economic conditions;
• Disruption of the independent agency channel, including the impact of competition and consolidation in the industry and among agents and brokers;
• Competition, particularly from competitors who have resource and capability advantages;
• The global macroeconomic environment, including actions taken in response to the Pandemic, inflation, global trade wars, energy market disruptions, equity price risk, and interest rate fluctuations, which, among other things, could result in reductions in market values of fixed maturities and other investments;
• Adverse state and federal regulation, legislative and/or regulatory actions (including recent significant revisions to Michigan's automobile personal injury protection system and related litigation, and various regulations, orders and proposed legislation related to business interruption and workers' compensation coverages, premium grace periods and returns, and rate actions);
• Financial ratings actions, in particular, downgrades to the company's ratings;
• Operational and technology risks and evolving technological and product innovation, including risks created by remote work environments, and the risk of cyber-security attacks on or breaches of the company's systems and/or impacting our outsourcing relationships and third-party operations, or resulting in claim payments (including from products not intended to provide cyber coverage);
• Uncertainties in estimating indemnification liabilities recorded in conjunction with obligations undertaken in connection with the sale of various businesses and discontinued operations; and
• The ability to collect from reinsurers, reinsurance pricing, reinsurance terms and conditions, and the performance of the run-off voluntary property and casualty pools business (including those in the Other segment or in Discontinued operations).

Investors should not place undue reliance on forward-looking statements, which speak only as of the date they are made, and should understand the risks and uncertainties inherent in or particular to the company's business. The company does not undertake the responsibility to update or revise such forward-looking statements.

Non-GAAP Financial Measures
As discussed on page 38 of the company's Annual Report on Form 10-K for the year ended December 31, 2020, the company uses non-GAAP financial measures as important measures of its operating performance, including operating income, operating income before interest expense and income taxes, operating income per share, and components of the combined ratio, both excluding and/or including, catastrophe losses, prior-year reserve development and the expense ratio. Management believes these non-GAAP financial measures are important indications of the company's operating performance. The definition of other non-GAAP financial measures and terms can be found in the 2020 Annual Report on pages 67-70.

Operating income and operating income per share are non-GAAP measures. They are defined as net income excluding the after-tax impact of net realized and unrealized investment gains (losses), gains and/or losses on the repayment of debt, other non-operating items, and results from discontinued operations. Net realized and unrealized investment gains (losses), which include changes in the fair value of equity securities still held, are excluded for purposes of presenting operating income, as they are, to a certain extent, determined by interest rates, financial markets and the timing of sales. Operating income also excludes net gains and losses from disposals of businesses, gains and losses related to the repayment of debt, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Operating income is the sum of the segment income from: Commercial Lines, Personal Lines, and Other, after interest expense and income taxes. In reference to one of the company's three segments, "operating income" is the segment income before both interest expense and income taxes. The company also uses "operating income per share" (which is after both interest expense and income taxes). It is calculated by dividing operating income by the weighted average number of diluted shares of common stock. The company believes that metrics of operating income and operating income in relation to its three segments provide investors with a valuable measure of the performance of the company's continuing businesses because they highlight the portion of net income attributable to the core operations of the business. Income from continuing operations is the most directly comparable GAAP measure for operating income (and operating income before income taxes) and measures of operating income that exclude the effects of catastrophe losses and/or reserve development should not be misconstrued as substitutes for income from continuing operations or net income determined in accordance with GAAP. A reconciliation of operating income (loss) to income from continuing operations and net income for the relevant periods is included on page 11 of this news release and in the Financial Supplement.

The company may also provide measures of operating income and combined ratios that exclude the impact of catastrophe losses (which in all respects include prior accident year catastrophe loss development). A catastrophe is a severe loss, resulting from natural or manmade events, including, but is not limited to, hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, freeze events, fire, explosions, civil unrest and terrorism. Due to the unique characteristics of each catastrophe loss, there is an inherent inability to reasonably estimate the timing or loss amount in advance. The company believes a separate discussion excluding the effects of catastrophe losses is meaningful to understand the underlying trends and variability of earnings, loss and combined ratio results, among others.

Prior accident year reserve development, which can either be favorable or unfavorable, represents changes in the company's estimate of costs related to claims from prior years. Calendar year loss and loss adjustment expense ("LAE") ratios determined in accordance with GAAP, excluding prior accident year reserve development, are sometimes referred to as "current accident year loss ratios." The company believes a discussion of loss and combined ratios, excluding prior accident year reserve development, is helpful since it provides insight into both estimates of current accident year results and the accuracy of prior-year estimates.

The loss and combined ratios in accordance with GAAP are the most directly comparable GAAP measures for the loss and combined ratios calculated excluding the effects of catastrophe losses and/or reserve development. The presentation of loss and combined ratios calculated excluding the effects of catastrophe losses and/or reserve development should not be misconstrued as substitutes for the loss and/or combined ratios determined in accordance with GAAP.

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SOURCE The Hanover Insurance Group, Inc.