Good day ladies and gentlemen and welcome to the Quarter Two 2008 Hanover Insurance Group Incorporated Earnings Conference Call. My name is Michelle and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. [Operator Instructions]. And as a reminder, this conference is being recorded for replay purposes. And I would now like to turn the presentation over to your host for today's conference, Ms. Sujata Mutalik, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good morning and thanks for joining our call for the second quarter earnings conference call. Participating in today's call are Fred Eppinger, our President and Chief Executive Officer; Gene Bullis, our Executive Vice President and CFO and Marita Zuraitis, President of Property & Casualty Companies. Before I turn the call over to Fred for a discussion of our results, let me note that our earnings press release and a current report on Form 8-K were issued last night. Our press release, statistical supplement and a complete slide presentation for today's call are available in the Investors section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today other than statements of historical fact may include forward-looking statements. There are certain facts that could cause actual results to differ materially from those anticipated by the press release, slide presentation and conference call. We caution you with respect to reliance on forward-looking statements and in this respect, refer you to the forward-looking statement section in our press release and slide 2 of our presentation deck. Today's discussion will also reference certain non-GAAP financial measures such as segment income after taxes, total segment income and segment results excluding the impact of catastrophes, ex-cat loss ratios and accident year loss ratio among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release or the statistical supplement which are posted on our website as I mentioned earlier. With those comments, I will the turn the call over to Fred.

Good morning everyone and thank you for joining the call today. I am very pleased with the second quarter results. After-tax segment earnings were $55.5 million or $1.07 per share. Combined ratio was 95.5% and annualized P&C levered operating return on equity was 13%. Net written premium growth exceeded 3% for the quarter and was in line with our expectations given the competitive market conditions. Additionally, as you know, we announced yesterday we have entered into a definitive agreement to sell our remaining run-off life business to Goldman Sachs... a Goldman Sachs entity, resulting in a modest GAAP loss as expected while generating about $220 million of incremental liquidity for us at the holding company. This provides additional financial flexibility for us and allows us for more efficient capital management. Gene and Marita will review the specifics of this quarter's results in their remarks. My comments will focus on how we are fairing relative to our expectations so far this far and taking into consideration the market challenges why we believe we can continue to compete successfully and outperform and industry and many of our peers. We withstood the highly active cat quarter well. Our cat losses of $38 million, while very high for this quarter, was at the low end of our expected range given the overall 6 billion reported loss sustained by the industry and our market share in the affected geographies. I think everyone knows that Michigan was one of those places hard hit. As you know, cat management has been one of our priorities for the past five years and we have taken many steps to diversify and manage our cat exposure. We continue to proactively manage our cat concentration using model data to set underwriting guidelines for our field and to monitor the quality of…

Thank you, Fred. Good morning everyone. As usual, a slide presentation accompanies my remarks and I trust all of you have this available. Please turn to slide 5 for a review of our recent announcement on FAFLIC. As you know, yesterday, we announced the sale of our remaining run-off life business, First Allmerica, or FAFLIC to Commonwealth Annuity, a Goldman Sachs company. We have been working towards this for some time and we are very pleased with the outcome. Commonwealth Annuity is a company that has worked well... we have worked well with before. As some of you may recall, in 2005, we sold our variable annuity business to Commonwealth Annuity. This transaction is expected to close in the four quarter of 2008 and is subject to regulatory approvals that are customary for such deals. The businesses included in the FAFLIC sale are the closed block of traditional life insurance policies, group retirement business and guaranteed investment contract businesses. Hanover will continue to retain FAFLIC's accident and health assumed [ph] pool business through a reinsurance agreement. The accident health business has been in run-off since 1999 and its projected total net GAAP insurance liabilities of about $130 million represents about 10% of the total insurance liabilities of FAFLIC. As we announced in our press release, we expect total net proceeds from the sale including pre-close dividends to approximate $220 million after certain transaction costs and intercompany account settlements. In connection with the closing of this transaction, Hanover is seeking approval from the Massachusetts Department of Insurance for a pre-close dividend consisting of various assets valued at approximately $160 million. The company expects to sell the majority of the dividended assets such as the home office building, certain tax attributes and other assets that were held at FAFLIC to its wholly…

Thanks Gene. Good morning everybody and thanks for joining our call. We had another solid quarter as you can see from last night's release. And I am particularly pleased with the strength of our earnings despite a high level of catastrophe losses in the quarter. Catastrophes contributed over 6 points to our combined ratio, yet our overall combined ratio is 95.5%, reflecting strong underwriting. Our ex-cat accident year loss ratio was under 52% for the quarter or 3 points better than the prior year quarter and favorable development of prior year reserves continued to remain solid. I am proud of our disciplined underwriting teams who have maintained a solid book of business under challenging conditions while delivering growth consistent with our expectations. This high quality underwriting provided us the flexibility to absorb unseasonably high catastrophe losses this quarter while still exceeding our targeted return on equity. Let me provide a little more color on the $38 million of catastrophe losses sustained in the quarter. As you know, this was a sizable event for the industry with over $6 billion in reported losses in many states across the country. In most of these states, we have meaningful presence. However, about a third of the catastrophe losses in the quarter were from the storm that impacted Michigan where, as you know, we have the fourth largest market share. Our overall losses and losses from individual storms that impacted the quarter were either proportionate or lower than our market share would indicate. Catastrophes are part of our business, which is why we have spent the last five years managing this risk and diversifying our exposures to minimize earnings volatility and preserving our capital. I am pleased with how we have faired through this highly active cat quarter and it gives me confidence that…

Thank you, Marita. Operator, we will now take questions. Question And Answer

[Operator Instructions]. And your first question comes from the line of Jay Gelb of Lehman Brothers. Please proceed.

Thanks. Good morning.

Good morning Jay.

Fred, I think you've spoken over time about the potential for a return on equity enhancement after the sale of the life insurance is complete and you are able to deploy those proceeds. What's your thoughts in terms of how much enhancement might be anticipated as a result of when that transaction is fully completed and the proceeds deployed?

Yes, I think you can do the math. But as we look at the holding company, it's a combination of really two things, Jay. One is obviously there was... if you think about it... there was dead capital, amount of dead capital that's out there if you think about the ROE based on the GAAP number of almost $300 million. Obviously, our GAAP level of capital changes because of one [ph], the losses, but also all of a sudden, that becomes liquid and goes to the holding company. So if you think about the math of that drag of that 300, obviously, if that is deployed towards businesses that are in 12 plus reten... percent ROE or is given back to shareholders, the math just is one to one with every dollar that I can make that happen. The other thing, the complexity I think that will unfold over time is obviously our capital structure and the way our debt is structured et cetera is kind of a legacy of where we were and our rating status et cetera and the risk of having this dead business on your books. And so as we get more clarity at the end of the year with the rating agencies, particularly Best, about where we are now with our rating on the P&C side and the liquidity needed, my views will become more regular when you look at our capital ratios and combining your holding company with your P&C. Now that's yet to unfold as we talk to the rating agencies, but obviously we had this odd situation which we had "contagion risk" from this life book that has been decreased over time because we got out of the volatile stuff. But now, we are basically out of all those risks. I mean…

Right. All right. And thanks for that answer. And then in terms how the overall company wide GAAP book value impact is, my sense is that the proceeds from the sale of the life company were at least higher than we were expecting.

Yes.

It looks like with that GAAP capital going out and then getting the cash back in, if my math is right, it doesn't look like there is going to be much dilution at all to book value at the end of the day. Is that right?

Exactly. I mean if you have think about what most people had estimates out there, right, they had somewhere around a $3 million detriment to GAAP. That was kind of... if you look across most of you guys and how you looked at it. And as turned out, it's not; it's about 1.25. So I am very pleased with the outcome. I mean I couldn't have been happier with it. And plus, it's with a great counterparty. So, Goldman is a very stable company. So both are... I think the regulators are going be very pleased and in our early conversations, they are with the quality of the company that it's going to plus we have already done a transaction with them. So the little hidden things that you sometimes get in these kind of transactions we believe will be minimal because we have already gone through a more complex transaction with the same entity. So I just believe on all fronts, the certainty of it is great, the outcome for shareholders and for the regulator is great and the financial implications, at least when I look at what you guys estimated and frankly, what I thought, it's a very good outcome.

Right. And then on a broader issue, I mean with just one day post-announcement, now that Hanover is pure play property casualty company and we're seeing some other regional pure play property casualty companies getting taken out at two times book or higher. Is that some thing that's coming up more on your radar screen?

It's interesting. Again, we'll... I believe our job is to maximize the value... the shareholder value of this institution and do it by making sure the franchise is as valuable as it possibly can because of the capabilities and the strengths of it. And I believe that we have set ourselves up. And again, I believe very strongly that '09 is going to have a very challenging accident year results for a lot of our competitors. I also believe you are going to see a ton of transactions hit the street. I see a lot of big guys are going to be selling divisions and parts of their P&C businesses. You are going to see a flood of that in the next 12 or 18 months, as you do in most cycles. So I don't how that's going to play out. But what I do know is that we have positioned the company with a unbelievably strong balance sheet with great capabilities and the ability to create a heck of a lot value in a disruptive market. The rest of it I can't control. But I can tell you with a hell of a lot stronger company than we were three years ago, two years ago, six months ago. And I think that for partner agents, we are a very attractive option to them. So I look at it and I see we have more shareholder value creation opportunities today than we ever had. I mean there... if you could imagine how many calls I get now from very good teams that are scared and the disruption that's being created by these transactions and the fallout of these transactions create a lot of different ways to create value for our shareholders. And we are open to all of them. That's our job; to make sure that we are thoughtful and we open to all of them. But I can tell you that things are unfolding just as we expected them three years into a soft market.

Excellent. Thanks very much.

Yes.

Your next question comes from the line of Dan Farrell of Fox-Pitt Kelton. Please proceed

Hi, good morning.

Good morning Dan.

Good morning.

I think obviously you said given that you've got so much capital now at the holding company over... you are going to be a little over 450 million, you are going to look towards repurchase and doing deals. Can you talk about your view of the environment for those sort of smallish transactions that you did like the PDI and Verlan, which clearly have done well I think so far and just maybe talk about what you can do going forward?

Yes, exactly. I mean obviously, we are not the kind of player that's going to go out and pay two times book for something. I mean people with expectations of 4% ROE don't even register with me very [ph]. So when I look at the environment, what I believe is that the pricing for these acquisitions are going to come down dramatically over the 12 to 18 months. There is going to be a flood of them. The results, and particularly in the specialty business that are coming home to roost. If you look at some of the specialty turns underneath peoples [ph] data, you are seeing these accident years, particularly in some of the liability lines that came pretty rapidly. And I was that the S&P conference and I agree with what Bill Berkley [ph] said when we were doing the presentation together. '09 looks to be a troubling year for some of these weaker players. And so when I look at this, I believe that the ability to pick up teams that have distinctive kind of brand recognition and capability are going to be there and they're going to be there where we can make the economics make sense. And now, if they're not, we won't do it. But I just... I look at every day we have opportunities with from private companies or equity-based companies that are a little subscale, but they have a good position in one thing or another that are under the radar screen that other people are not going to be that interested in because of their size and ability to move the needle that really make a difference to us given our strategy. So I think on one front, there's a lot of opportunity. The second point I would make is that…

Okay. That was a very helpful answer. Thank you.

Yes.

Your next question comes from the line of Rohan Pai of Banc of America Securities. Please proceed.

Hi, good morning.

Good morning Rohan.

Hi. I just wanted to... I mean the questions I had were on the specialty lines. Did you guys... and maybe I missed it, but did you guys give the contribution of Verlan and PDI in this quarter for the premiums written?

Yes, we did not specifically break it out. The list would be relatively small when you add it to everything. We had about 20% growth across specialty, 14% in the core, it would be included in that. The interesting thing about PDI and Verlan to Fred's earlier comments is it's the reason these type of acquisitions give us some early lift and we have a lot of confidence in the future lift is because all of our agents have this business. It fits very clearly in our appetite in our wheelhouse, it's what we do. And with agents having these capabilities with us, knowing what partner agents have it, we can see the future lift. But early on, they are relatively small and they wouldn't really begin to show up in the numbers yet. But we are starting to see that lift with the limited number of agents that we brought these capabilities to so far, and there is a lot more to come.

Okay. And so I guess the sequential margin improvement that you see in this specialty line, it seems that the combined ratio ex cat and reserves has gone down to below 80%. So I guess that's not coming from these new lines; it's on your core inland marine and surety?

Yes, most to that would be coming just by the share numbers from bond and inland marine.

Yes.

Okay, great. And then finally just on the bond book, if you could for one, tell us if there's any benefit you are getting from maybe the dislocation from liberty mutual surety I mean and Safeco. And also what you are seeing on the credit side, maybe not on your own book, but just generally across the market, if you are seeing any deterioration there?

Yes, what I would say about the overall is we intentionally gave you all a very clear break down of our surety business and investor day and those numbers percentage vise really haven't changed but you are exactly right this disruption on has allowed us to take advantage of individual account opportunities with partner agents on the surety segment without comprising our under writing or changing our appetite there is if you are wiling to keep you underwriting powder drive if you will there is a lot of opportunity out there that are very good underwriting team can take advantage of but clearly some of it would come from that as well as others and we think that there is even more opportunity as we continue to take a disciplined approach to growth while we are hanging tight with a very strong underwriting drill around that.

Okay. Great. And Marita, just one more thing on the credit environment overall, not on your own book, because I realize that you guys are being much more conservative and narrow focused. But just the surety market overall, are you seeing any deterioration in trends?

Well, we wouldn't. Again, we have tightened up our underwriting criteria, we have a very small percentage of larger contracts surety type things. And because of our appetite and where we play, we can either avoid or underwrite the types of things that you're talking about. So no, we don't see... we obviously know the trends are there, but we don't see any change in our trends.

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of Michael Phillips of Stifel Nicolaus. Please proceed.

Thanks. Good morning everybody.

Good morning.

Questions at around personal lines, if I could for a minute.

Sure, sure.

How much of your... everything I guess I'm going to say is I hear what you are saying on those four states that you mentioned at the beginning: Michigan, Florida, Louisiana and Mass. But how much of the drag of those four states is, it is a home owner's drag versus another drag. Since I get mostly in home owners drag. Except from mains obviously?

Yes. I mean we can break that all those for you specifically but I would say in general that's probably not the case. That it's all the home owners drag. I mean obviously when you look at Michigan and the size of that state it really does rive our numbers. And the economy is having impact in both farm owners and other. And the overall personal lines markets in that state is shrinking. We are able to meditate some of that business aligning ourselves with the right agent. And looking hard on managing getting as much price increases we can with improvements in the product and working with those agents to you know maintenance as flat of a position as we can. But the personal lines market and in that economy is just shrinking. So I would say it's just as much auto as it is homeowners in that state. Obviously, in Florida and Louisiana, it is homeowners. We sold our homeowners business Florida, we are taking very tough action in Louisiana as we... as the population moves north. But that is obviously being driven on homeowner side. So it really gets down to an individual state dissection of the numbers. We tried to give you transparency on --

And let me make a... I want to make a comment on personal lines because I think there is a real change in the marketplace that we are kind of excited about. And it's a two-fold change. Word is that there is a price... obviously, everybody is talking about pricing. But what's interesting about it is I would argue that part of the reason why the big guys in particular are being so aggressive at pricing in auto right now is that they expanded too many agents. And so so many of them have appointed so many agents and then they try to go head to head with each other and they are getting adverse selection. And the deterioration in their auto that they have had to really take aggressive pricing. And what's interesting to us is that their pricing umbrella is good, but what's also good about it for us, because we go to our agents with this notion of a limited distribution. It has made all our agents more interested in giving us an unfair advantage over the national guys because they are commoditizing the business because they are giving every aggregator access to their products. So one of the things we haven't built into our thinking yet is this level of conservations we are starting to have with so many agents about giving us more of an unfair advantage because, one, we go at it on a account basis versus a line of business auto basis and two, they are really nervous about the commoditization these big guys are doing by giving aggregators. And one of the biggest example was Safeco before they sold. They had expanded their agents dramatically. You heard them talk about how many agents. And that kind of things scares agents at kind…

Okay, great, thanks. And the comments I guess on the pricing action of the competitors in personal lines, particularly auto I guess is a good segue to make my follow-up question. We are seeing that turn I think already for some of the big guys as they progress [ph].

Absolutely right.

Recently in the past X number of months, pretty recent. I think that's in contrast to what... I guess what I understood from you guys the past pretty consistent modest, albeit modest rate increases when you could for the past couple of years.

What you do... again, our philosophy is a little different, because our game is about account rounding and retention. Our view is you stay ahead of inflation in every state every quarter every month. And so we don't go... we don't do price discounts, we don't do price reductions, we don't compete on price. A lot of these guys have 14, 10, 12% reductions in the last couple of years. What you have seen us do constantly is get it over inflation. Now are they giving us an umbrella because of this disruption? You bet. When they were taking decreases, we were steady. And if you looked at our home owners, we were taking very steady increases. So what's happening now is because they are having to take 14% in Tennessee, we are able to shift underneath them. But you won't see us go for 14; you'll see us go for 5. Because what we will do is build in the extra margin, but enhance the retention of our agents. We will... we don't have to do the knee-jerk reaction that they do in some of these states because of their adverse selection. And what I am hoping is that you will see our 2... or whatever it is now... 2.5 creep up. And again, so, I'm pretty bullish. The other thing you are seeing in their rate increase, you've got to understand we don't have a Florida book. A lot... if you look at their books, they are [indiscernible]. We don't Texas personal lines, we don't have California personal lines and we don't have Florida personal lines. That's what the high premium per policy is. And what you are seeing in those states, particularly Texas and Florida, they are getting behind. And so we don't have a lot of those to make big numbers come out. We are a very Midwestern, North Eastern company. But it is an interesting time because they are having to dramatically adjust where I am very comfortable that we will improve our accident years given the prices we have already filed and we are in the process of filing in the states we are in. So it's a little different philosophy of pricing.

Fred's right. I mean the solid 2.8% we got in the quarter outside of Massachusetts, I feel good when you combine that to retention trends holding and improving. It tells you you can continue to take that approach that he outlined quarter after quarter.

Yes. We believe we will see accident year improvement. And I don't think... so many of the other folks aren't talking about that yet.

Thanks. I think that's a big point. Was that... roughly, was that 2.8, Marita, was that just auto excluding Mass, or was that everything?

That's everything.

That's everything.

I think it's everything. We'd have to go back and check, but I think it is everything.

That's okay. Thanks so much.

Yep.

Thank you.

And that does conclude the question and answer session. I will now turn it back to Sujata for closing remarks.

Thank you everyone and thanks for joining our call again and we'll be here to answer any follow-up questions.

Ladies and gentleman, that does conclude the presentation for today. You may now disconnect. Have a great day.