Good day ladies and gentlemen and welcome to the Third Quarter 2008 Hanover Insurance Group Incorporated Earnings Conference Call. My name is Dan and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Mr. Bob Myron, Treasurer of the Company. Please proceed.

Thank you operator. Good morning and thank you for joining us for our third quarter 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 and 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 in responses to your questions today, other than statements of historical fact include forward-looking statements. These includes statements regarding expectations of earnings, pricing, accident year results, premiums, expenses and other projections for the year 2008 and beyond. There are certain factors that could cause actual results to differ materially from these anticipated by this 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 statements section in our press release, slide two of the presentation document, and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures such as total segment income, segment results excluding the impact of catastrophes, X count loss ratio's, and accident year loss ratios 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 turn the call over to Fred.

Good morning, thanks Bob. I want to thank everybody for joining our call. And today with all that is going on in the insurance marketplace and the credit market in general, I thought it would be helpful to focus my remarks this morning on our observations about the industry, our current position both financially and strategically, and to provide some brief comments on our performance. Obviously Marita and Gene will provide a lot more insight about our third quarter results and our year-to-date trends. In essence there are three messages that I would like to leave you with today. Of course while the quarter was challenging for us given the significant level of catastrophes and the turmoil in the financial markets, I like our current financial position and our ability to take advantage of the market turbulence now and in the future. Our capital and liquidity position gives us the ability to thoughtfully capitalize on business opportunities that are becoming more abundant. In addition, our investment portfolio is very conservative given our very limited exposure to equities and alternative investments which gives us confidence in our ability to successfully manage in today's economic conditions and still focus on profitable business growth. Our portfolio is also every transparent and easy to understand. And we hope that the information we provided in the press release and in today's call will make it even more so. Second, though the market has been competitive, we see real progress and impact from our strategic initiatives around our partner conversions and our specialty business growth. This gives me confidence in our ability to grow profitably even in the current economic environment and deliver on our promises to our shareholders and our other stakeholders. Third, the significant investments we have made across our company over the past…

Thank you, Fred. Good morning everyone, and thank you for joining our call. As usual the slide presentation accompanies my remarks and I trust all of you have this available. Please turn to slide 5, which presents our consolidated results for the quarter. For the quarter, we reported a net loss of $62 million, or $1.21 per share compared to income of $54 million or $ 1.03 per share in the third quarter of 2007. Net loss in the third quarter of 2008 reflects realized losses on investments from our continuing operations of $53 million as well as losses on investments of $16 million realized in discontinued operations. The total realized losses of $69 million reflect pre-announced impairments associated with holdings at Lehman Brothers and Washington Mutual of $37 million as well impairments on other fixed income securities in the financial and other sectors. The net loss for the third quarter also includes an additional loss of the pending sale of FAFLIC, comprised of the aforementioned $16 million of loss on invested assets as well as other adjustment of about $6 million principally related to estimated tax effects on the transaction, but overall FAFLIC lost $22 million in the third quarter of 2008. As you remember, in the second quarter of 2008, we reported a loss related to the FAFLIC sale of $68 million. The third quarter results and adjustments bring our total year-to-date FAFLIC loss, including the expected loss on sale to $93 million. The FAFLIC closing process is on track, and it is still our expectation that we will complete this transaction in this fourth quarter. Let's now turn to slide 6 for a discussion of our segment earnings. Our P&C operations generated $14 million of pretax income, down from $88 million in the prior quarter, primarily due…

Thanks, Gene. Good morning everybody and thanks for joining the call. As both Fred and Gene have discussed catastrophe losses and the turmoil in financial markets have provided significant challenges in the quarter. However, we remain very pleased with the underlying trends and the momentum of our business. Specifically, catastrophes contributed 16 points to the third quarter results, bringing our combined ratio to a 108%. Our ex-cat combined ratio was 92.6%. This represents an increase of 1 point from prior year driven primarily by a higher incident of large losses in the quarter and our Commercial Multi Peril Line into a lesser degree of Personal Auto Line. However, large losses can be lumpy in our business, in any given quarter. On a year-to-date basis, our large loss activity in CMP and auto is down. In fact our full year ex-cat accident year combined ratio has improved from last year, which is notable if considering the adverse weather patterns, we and the industry had experienced in 2008. We have a disciplined underwriting culture and we've maintained a solid book of business in this challenging environment, while delivering on our expectation of above average growth. Let me provide you with some perspective on the $98 million of catastrophe losses occurred in the quarter. As you know this quarter was marked by several sizeable catastrophe events, with Hurricanes Ike and Gustav being the largest. Catastrophe activity was obviously a major event for the industry, with, as we believe over $20 billion of industry losses in the quarter. Gustav's damage was concentrated in Louisiana where we have made good progress in managing our catastrophe exposure in both Personal and Commercial Lines. This resulted in overall losses from Gustav, being lower than our respective market share reflecting the impact of exposure management efforts. Ike was…

Thank you, Marita. That concludes our prepared remarks. Operator, could you now please open the call to questions. Question And Answer

[Operator Instructions]. Your first question comes from the line of Michael Phillips from Stifel Nicolaus. Please proceed.

Thanks and good morning everybody.

Good morning, Michael.

Couple of questions. First, I guess high level on Personal Lines, with the new leadership at the top there, I guess for about two months. What have you heard from Gary, in terms of what he sees is his top priorities going forward in Personal Lines? I'll start off with that.

The key in Personal Lines for us as you know from the beginning is where Personal Lines is small commercial is what we call balance for our overall strategy with partner agents. We're a little bit different than most, we don't try to attack at one risk at a time. What we're trying to do as they consolidate their shelf space with fewer players, is to have more of our partner agents give us a significant share of their Personal Lines but really that's dormant, what I mean by that is account based business that they had for quite a while. We clearly have and that's really been the focus of our strategy and so much for our investment portfolio and so before Marita talks about the specifics, I just want to talk a little bit about why we went out and got Gary. My view is that the opportunity in Personal Lines is greater than we anticipated, probably 5 years ago. Given what I'm seeing is that portion of an agent business is becoming more important part of their profit pool. It is more stable, it is more consistent, and as they go through the pressures of the economic downturn and churns in the economy maybe even consolidation of the number of customers they have, that is becoming more important even to the wining on more significant agents in the country, and when Gary became, it was clear to me that there was some turmoil at his prior place. It was important for us to get somebody that had been a CEO for quite a while in that business and could handle a significant business, so we're thrilled to have him on board. So with that Marita, if there are any specifics you want to share with him about strategy.

Yes, I think what it all blows down to is the reason why Gary joined us when as Fred said we went after him and it was because he thought the strategy was right. He believed in what we were doing and the account base strategy with partner agents and growing the majority of our business with franchised partners, he believed was the right way to maximize profitability and growth in this market. So he is really looking forward to continuing to advance that strategy and believes that what we're doing in the marketplace is right.

Okay, thanks. I guess kind of a dud line follow-up to that is, can you give us some details on what you see is the [indiscernible] is doing well there?

That's a great question. One of the things that's happening, as you know, our mix of business is becoming more balanced around kind of pre-stools. When we started we were probably a Personal Lines business. Six, seven years ago that did small commercial and accommodation. We now have a three store approach. Right, we have the Personal Lines, we have commercial core which has both small and very effective, what we call shmiddle, low end to middle market. And we have a specialty business that is growing significantly in breadth and capability, particularly in niche area. If you think about, the... not the top 2 or 3 but the top BI 100 if you will, across the country, those agents that have significant guys and scope. We are becoming one of the most interesting markets for them because they are seeing consolidation in their markets and turmoil. And as we have grown our portfolio, while it's still very small face value, the breadth we have like in some of the legal liability area, the niches, those folks have significant portions of that business and so, it was important for us to have somebody that looked across region if you will. And... because most of these cross different regions and frankly in some cases are organized around different niches or lines of business and it was important for us to have some senior executive that could match up with the CEO's of these the institutions and really coordinate our efforts. Both the actions still occur, location by location, underwriter by underwriter. But that coordination we think has real time for it. And again I would suggest that we have become interesting to them because they're facing consolidation of their shelf space with fewer, better players and are looking for a little bit of diversity in the market they deal with and we are building a better capability that's more relevant for them. So Jim on my view that's an important role for us and it is the right time for us to do it now that we have these other capabilities that are more appropriate for that customer segment.

Yeah and I think building off that success was important over the last couple of years, one of the largest growth pocket, that we have seen in success with the Assurex Partners across the U.S., and building off of that success, Jim has really hit the ground running, tapped into a lot of the things that have already been successful for us, and is really getting some traction and momentum sharing best practices and driving some of those more complicated relationships across the footprint.

That's perfect, thanks a lot. Last one now for me, still in Personal Lines. It sounds like Marita's comments on Michigan where a little bit more positive than in the past and isn't that good to hear, but in Personal Auto the stiff declines are still a little bit surprising, it doesn't sound like that has much of a Michigan drag as in the past. But kind of what else is going on there, that's bringing the PIFs down now to negative numbers?

Yes, there is still some Michigan drag in there. You have to remember that we filed rate increases in Michigan as I mentioned that is helping there and Michigan is still a very tough environment. We're helped by playing insider baseball if you will in that State knowing the agents, knowing the environment, and our opportunities we feel are still strong. Focusing on margin is the key for us. It is a lot of work, and a lot of attention to do that but we're bullish on the fact that we can continue to do that but make no mistake, Michigan is a tough environment. Across the board, we are seeing a premium increase, step is beginning to stabilize. But this is a quarter by quarter...

And I would also say that PIF decline is pretty severe both to Florida, Louisiana, and Michigan. And again, we believed that and as you know, the legal limits in some of those you've got to be thoughtful and deliberate but we got out of Homeowners essentially and that's working it's way through it. If you look at our PIF reductions, it's really concentrated in those three states. And so I feel pretty good about all those decisions and also on Michigan, let me just... one of the nice... one thing that has happened in Michigan that makes it a little bit easier is the weather in Michigan has been significantly impacting our regional counter price. And so the combination of a tough economy and the weather that Michigan has experienced in the second and third quarter has created a lot of aggressive behavior in our regional guide to catch up with rate. So I would see that the stabilization of Michigan will continue. I mean people are catching up with us on rate in a pretty fast order because of their problems financially. So... but the PIF decline as I said is very concentrated in those three states. There is probably a little bit and a couple of start up dates as we reconfigure the product a little bit by region, but it is really driven by that.

Okay, that's perfect. Thanks a lot guys.

[Operator Instructions]. Your next question comes form the line of Rohan Pai from Banc of America Securities.

Good morning Rohan.

Good morning. Fred first question, you've highlighted in the past the Hanovar's value proposition to agents with a strong financial position and product relative to mutual and regional companies. At this point are you seeing any signs of capital stress among the mutual companies due to the equity markets?

That's a question and it's one that's not as visible for the market because they're not big companies and doesn't get written about it. But to me Rohan, it is unbelievably pairings. I think you know, if anybody falls for mutual, but you know as they tend to carry a little bit more surplus because of their scale, their size. And what most mutuals do is they run their insurance company traditionally with kind of bond and fixed income. But they'll take what they consider "excess" and invest it in equity. So almost every mutual has a greater percentage of equities than a typical stock company. What you have seen is a dramatic decrease actually in those portfolios. So what is excess has gone down dramatically. We actually created database for our own benefit competitively of the top 100 mutuals in the country and look at their investment portfolio. If you look at that, the vast majority of them have taken surplus hits on their equity side. In conjunction with that, those mutuals have also had very tough swarm seasons. Most of them are focused in Midwest companies. We've had two quarters of very difficult weather and when you add those to the fact that the reinsurance cost that those guys are going to have to incur, because remember, those guys buy down more than regular companies that you are used to. So they buy way down. The reinsurers now are taking their concentration into consideration. Because what we are learning in Iowa, in Ohio is that if you're too concentrated in one state, you have a above average risk for reinsurers. So as you see, reinsurance rates go up, and you will, because of their capital issues. It will hurt the mutuals more than people that are spread. So…

Thanks for the detail and possible answer. Second one, so assuming we head in to a dislocated PNC marketplace in 2009, how will you view your Specialty Commercial business, is it a segment that's going to expand in the new niche classes or will it still be the hook for agents to write your standard business which is...?

Another good question. What we've tried to do is, as you know, in general the specialty businesses we have tried to get in through the cycles tend to have higher margins than some of these core lines. So we just didn't get into specialty businesses randomly. We are with small phase value stuff, that's high expense connection to it that is sticky. What you are going to see is a lot of those businesses should expand, and continue to expand because they tend to be businesses that are more monopoly [ph] because fewer people are in there. So there are places that require typically little bit more surplus reserves that are in them. So if you are asking price in my view in those both solidify and increase maybe they'll even do a greater rate. But the reason we're in those businesses is to get the overall franchise. So we will grow those business and I'd like the diversity of the income that come with it, but what we always do is ask for... we don't give that capacity to agents without having the conversation that says we want a partnership across other lines. So it will continue to always be about the partnership, but it does present an opportunity for us and I would go a step further. The disruption in the market place is allowing us, as you know we've hired 2,500 to 2,800 people in the last 36 to 48 months. The amount of people that are terrific, that will be available in some of those interesting specialty lines is going up quite a bit. And so our view in a thoughtful way, we are continuing to do that. We have continued to interview and it allows us like in its human services that Marita talked about we think that it's a tremendous opportunity for us. The amount of quality people we brought in to do that is tremendous. And so again, I could see specialty continuing to grow faster than the rest of our business for quite sometime, as we thoughtfully expand the niches and the penetration. The other point I would make is when you look at our, right, school was a great example, if you look at our mix. We are pretty thoughtful about roll out, so we've been in the school business for 3 years now. We've been incubating that. We've got a great team, we built the capability, but we're not even in all our states yet. I mean we are just barely probably in 50% of the states effectively at the end of the last quarter. It's going to be a lot greater in January, but some of this growth, just is from simply rolling out these niches to these additional states. So, we are both bullish on the specialty growth as well as on it's continued ability to leverage the core. I mean, is that fair Marita.

I mean, I think its right. I think that's the whole beauty of the specialty business. It's got to double whammy, it's got the first by itself they are high margin good specialty businesses, but then they offer service looked to build stronger, deeper agency relationships. So you get both benefits from, I think you're absolutely right.

Thanks, and finally for Marita, What is the commercial strategy in Louisiana again. I know you've been reducing your exposure for the last two or three years, but it somehow seems that even if you have a large event once every 5 or 8 years, it will be hard to make money in commercial lines in the state?

Yes, we agree. We've taken an overall approach to the state and quite frankly have significantly reduced our Commercial's exposures to offset the fact that we can't by regulation get the personal line exposures as well as we might ultimately want to get them. So balancing that and looking at that as a combined property writing in the state is how we've approached this from the very beginning. We have been very conservative with commercial business in the state and the majority of our new business writings is really coming from the Casualty Lines as we take a very conservative approach to cap management in the state. You're absolutely right. And we manage those concentrations down quarter by quarter.

Great, thanks Fred, thanks Marita for the answers.

[Operator Instructions]. We have no further questions in queue. I would now like to turn the call back over to Mr. Bob Myron for closing remarks.

Well, thanks to everyone for participating on our conference call and we look forward to speaking to you again next quarter.

Thank you very much everybody.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day. .