Good morning and welcome to The Hanover Insurance Group first quarter 2010 Earnings Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Bob Myron, Senior Vice President, Finance. Please go ahead.

Good morning and thank you for joining us for our first quarter conference call. Participating in today’s call are Fred Eppinger, our President and Chief Executive Officer, Marita Zuraitis, President of Property & Casualty Companies and Steve Bensinger, our Executive Vice President and CFO. Before I turn the call over to Fred for a discussion of our results, let me note that our earnings 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 facts, include forward-looking statements. These include statements regarding expectations of segment earnings, after-tax segment earnings per share, pricing, accident year results, premiums, expenses, development of loss and LAE reserves, returns on equity and other projections for 2010. There are certain factors that could cause actual results to differ materially from those 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 statement section in our press release, slide 2 of the presentation deck, and our filings with the SEC. Today’s discussion will also reference certain non-GAAP financial measures, such as total segment income, after-tax earnings per share, segment results excluding the impact of catastrophes, ex-CAT loss ratios 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 everyone, and thanks for joining us. I will give you some context to our results for the quarter as well as discuss how I view our progress. The first quarter of 2010 was particularly challenging for our industry due to an elevated level of catastrophe. While we incurred catastrophe losses of $34 million during the quarter, which was about $10 million or $11 million above our expectations, I'm nonetheless very pleased with our results. As shown on slide 4, net income per share for the quarter was $0.87. Our operating EPS of $0.66 represents an increase over the prior year quarter, reflecting strong underlying trend. As shown on slide 5, our book value per shared increased 3.8% in the quarter and 34% in the last 12 months, driven by our operating results, gains in our investment portfolio and our share buyback activity. We have made good progress this quarter on all the leverage to improve our operating results that I discussed with you last quarter. First, we had good momentum in growing our Specialty and Commercial Lines businesses and leveraging the investments we have made in these areas. Second, we improved our geographic and business mix, which drive improved and more stable results in our future. Third, we continue to get improved pricing in both Personal and Commercial Lines, and finally, we continue to take thoughtful capital management actions, so I'll briefly review each of these areas. First, on reaching what I would call better scale in Commercial Lines, in the first quarter, we grew 33% driven by our renewals rights transaction with OneBeacon, as well as our growth with Specialty Lines. While it is too early to give a forecast of how much the OneBeacon business will ultimately renew, we feel very good about how the arrangement…

Thanks, Fred. Good morning, everyone and thanks for listening to our call. I'm pleased with our results in the first quarter. While the insurance environment this quarter was as difficult as it has been for the past several quarters in terms of economic and pricing conditions, our underlying trends have improved. I would like to review the sources of that improvement and also touch on some areas of focus on our businesses, starting with Personal Lines on slide seven. Our first quarter produced $34 million of pre-tax segment income compared to $3 million in the prior year quarter, driven by lower catastrophe losses, but most importantly driven by better underlying loss margins in both our auto and homeowners lines. First, a couple of observations on catastrophes. Our cat losses in the quarter were lower on a relative basis than many of the other competitors in the industry. Our aggressive catastrophe management over the past has resulted in the reduction of our coastal risk in the Northeast, as well as in other parts of the country. In addition, the tracks of the first quarter storm missed much of our Northeast footprint. Most of this quarter's winter storm activity was in the Mid-Atlantic where we have relatively modest Personal Lines market share. So despite the fact that we maintained a significant presence in the Northeast, our losses were mitigated. We had our fair share of snow and freeze losses as we always have and expect to have in the first quarter, but we were spared from the excessive water and wind damage that affected many other companies. We realized the importance of continuing diversification and aggressive catastrophe management and we continue to make this a priority. Excluding the impact of catastrophes, our Personal Lines combined ratio in the current quarter was 93%,…

Thank you, Marita. Good morning, everyone and thank you for joining our call. This is my first conference call with The Hanover and I am very pleased to be here. Today, I will be reviewing the company's financial results, referencing the slide presentation and starting with slide 12. I'd like to provide some color on reserve development and touch on a couple of non-segment earnings items on our income statement before I move on to discussing our balance sheet. Our pre-tax P&C segment earnings of approximately $58 million this quarter included $24 million of favorable loss reserve development. This compares to favorable loss development in the first quarter of 2009 of $32 million which included adverse development from 2008 year-end non-cap other events. Accordingly in line with our expectations, we are experiencing lower favorable loss development than we have seen in the recent past. We expect this trend to continue as we take favorable development from prior years into consideration when making current accident year selections. Also included in the current quarter result was approximately $10 million of favorable LAE development related to the decrease in the cost factors utilized for establishing unallocated loss adjustment expense reserves. We had not updated these factors for several yeas. Accordingly, we do not have an expectation that we'll have an adjustment of this magnitude in future periods, but the first quarter of 2010 also benefited from realized investment gains of almost $11 million, resulting from some portfolio repositioning. Turning to slide 13, I'd like to briefly touch on our investment portfolio and yields. At the end of March, we held $5.1 billion in cash and invested assets. Cash and fixed maturities represent 99% of our total invested assets, roughly 93% of our fixed income securities are investment-grade. The average duration of the portfolio…

Thanks, Steve. Operator, could you please now open the line for questions?

(Operator Instructions) The first question comes from Michael Phillips of Stifel Nicolaus.

I was going to ask if it safe to assume that the $67 million from OneBeacon could be annualized? Well, it sounds line from Marita's comments, she said something about expect increased competition there, it sounds like that might not be the case, is it safe to do that?

I think that the point is that if you look at traditional renewal rate fields, they tend to come in about 50%. Clearly, we're running better than that right now and I feel very good about what's happening with our agent partnerships and how well they are working with us. We are just cautious about obviously that Mike we are going to watch pricing and we are going to still get the pricing we need to get to make sure that the margin is good and we are obviously always watching competition as it kind of price to compete for that business as well. We are cautiously optimistic about it continuing, but wouldn’t be surprise if it didn’t, but are managing this as we said when we did the deal through March and getting our rate increase just like we are getting rate increase through rest of our book and we are trying to keep the business that has attracted to us as we look forward, but again I would tell you we are optimistic about what's happening. What's important I think is the fact that I feel wonderful about the partnerships we've built with these agents already. We have gone out and we've met every single one of them. We've had great conversations. They are our kind of guys and so when you look at the 500 in total and the 300 new, this is a terrific step forward for us particularly in the new geography is going to help us for long now. We are going to be in a good place with them. I don’t know, Marita, if you want to add any color to that.

Yes, the only thing I'd add is obviously we really pleased with the way its going. This is business that we know, in classes that we know well, with agents that we know well. So we are pleased with the way its going. The only thing I’d add is because of the way we did this with closing and announcing virtually at the same time, we got a nice jump on this. So, as natural competitiveness starts to occur, we can see that trail off a little bit, but we are very pleased with the ways it’s going in bullish that we have done a good thing here.

If I can turn to personal auto for a second, I have got the impression that some of the stuff you talked about before in terms of re-underwriting that to get it more out of focus had largely been done and so that with new stuff you did last year like the Think Hanover initiatives and things like that, would've maybe seen a better turn in shift than we saw for personal auto than we did. So, why don’t you talk about that? It's still negative. In fact, more negative than the last quarter. So, I was surprised by that?

Yes, one thing I would say that you have to keep in mind that Massachusetts and potentially New York may have lagged that a little bit as managed competition came to Massachusetts, but you are right the majority of our heavy listing, our shift of mix, our focus on multi car, multi account business, our ability to push rate is also is certainly paying off in the profitability, but you got to remember that there is a couple of states there that are lagging a little bit in that turn. We are pleased with the profitability of that line and where it’s going.

I think it’s a good observation. On the Think Hanover and the Hanover Household, a lot of the ease use stuff that has been rolling out in the first quarter, it is starting to work in a growth state. So I do feel that we'll hold our own there as we go forward, particularly in the growth states and I would just tell you that because of the way the weather unfolded last year in the non-Cat weather, we've been really aggressive, even with our full account on pricing in our core state, and I think we're seeing the result of that a little bit in the Northeast. Again, I'm comfortable with that. If you look at our partner agent retention, it's better than our general agent retention and the mix of businesses is equitation. We are working hard and as I said in the last call, what we've done in Hanover Household is very powerful. We're going to start get more into what I call new influences. We're going to continue to have a better and improved mix in our growth states, and so I feel that we're not giving up on Personal Lines. I just think it was important for us to make sure we mange profitability right now, and we'll continue to get the mix better going forward.

Last one for me now. Speaking of lagging states. In Massachusetts, does the fact the new direct guys coming in are now right are now in a triple digit loss ratios. Does that help you? Or is it the customer base is too different?

Yes. No, it is a great observation.

Whatever we had leftover that was single auto with non-core partners I can tell you.

It's bound to haul.

It's bound to haul, right. They are being very aggressive, and now what's encouraging? It happens everywhere. You watched New Jersey, three years ago, four years ago, when I went to competition, there's a 10% of the market that's truly is what I call is self-served market that goes back. It's the guys that have just one car not a lot of substance as far as other assets, and what we've seen is that's gone quickly to the players. Now, what you've also seen, to your point, that these guys are registering triple digit kind of the results, and so you've seen Progressive take pretty significant rate increases and we expect to see it settle in. Now, we don’t have a big auto on the book. We have seen the hit more aggressively in our competitors that are various due to auto. There is a couple, as you know guys that are at Massachusetts are only players that are very, very heavy in auto and they have lost quite a bit of share. So we did. We lost. If you look at it, we lost some auto that we had, particularly without outside best agent partners but I do think that will settle because I do see rate increases coming and expect it and I feel good about it where we are.

Okay. Thanks, Fred. I appreciate it.

The next question comes from Cliff Gallant of KBW. Please go ahead.

Just a couple of questions on investment income and how we should think about that over the next year, year and half. They are in two parts. One is, as the OneBeacon book grows and accrues you, how much investment income benefit would that get us next year? And then secondly, with the cash that you are spending or how we view the risk profile, the investment portfolio, would you consider trying to improve the yield or increase the yields with a higher risk appetite?

Okay. Well, let me take the last question first, if I may, Cliff. In terms of the quality and the risk nature of our portfolio, frankly, I think its just right for the current environment. It's very conservative. I think it has the right balance of mix right now in terms relatively small components of high yield and equity but principally focused on conservative fixed maturities. I think the duration is about right given where we are and the lettering of the book is right. So, I would say, overall, I don’t think you should expect to see much. The environment right now is sort of back to where you really not getting paid very well for the risk that you are taking if you go further out on the yield curve or if you go into higher risk issuances. So I really don’t think that's prudent for us at this point in time and it served the company very well to be as conservative as it has. So we'll maintain that. As I said in my remarks in response to your first question, its hard to give specific components of what's going to add what to new invested asset creation. It’s a mix of many, many factors but right now they've seen everything we see. We think that the gradual build-up for the investment portfolio in response to our growth shows us that what we see right now as declining yields and no money and as we said we think the first quarter is relatively good indicator for the rest of year right now.

The next question comes from Sam Hoffman of Lincoln Square Capital.

I just had a couple of questions. On the pension, I just wanted to clarify when you say that its fully funded, does that mean that there is no risk to the company either if interest rates go down, equity markets go down and that there shouldn’t be any expense going forward in the other expense line?

No. You can never say there is no risk in defined benefit pension plan. It is because it depends on exogenous factors that are outside of our control, but based upon all of the factors that we were able to consider, in January at that point in time and I would say it's still probably the case right now, but that $100 million contribution created a fully funded situation. If there is dramatic changes in market conditions again where you see losses in value in securities, in the future if that were to happen on a significant basis that could certainly change those assumptions.

Should we assume that under a normal market scenario there is a longer any charge or expense for that item going forward?

No, you should not assume that I think in the first quarter we had a little over $3 million of total pension expense and that should be the ongoing quarterly run rate based on the current assumptions.

Second question is on the debt capital risk. This on your comment on the call, should we assume that you are going to be maintaining roughly the same amount of debt going forward or is that meant for refinancing the existing debt at some point.

I think what I said was that, our current debt to capital ratio of 21.5% is well within rating agency tolerances and guideline. That doesn’t mean that it couldn’t fluctuate higher or lower depending on the circumstances and the activities that we need to.

And Sam, if you think about what we did, if we can’t go back full 12 months, we took advantage of the disruption in the market place and once we got the upgrade we refinanced a bunch of our older debt and we were able to go to the Federal Home Bank Board and get attractive capital that we put in the insurance company. It is above 5.5% or so, but we only put up about 125 because I wanted to make sure that some of debt was with the holding company and I think about it as getting our debt level at about the place we wanted to be the second tranche of debt. So, I feel very good about this 20 plus percent where we are and I like the mix of what it is, but if you think about it from 12 months ago, we obviously took about $30 million gain from the refinancing. I like our mix now and obviously in the same time we released and bought back a lot of shares. So that our cost of capital is a little bit more like the best companies now. I just thought we were little bit out of wreck, and now I think we're back in wreck. To Steve's point, depending on how we grow and how you think about potential future transactions, we will keep in mind kind of rating agency guidelines, but we're at the low end within our ratings structure, so we have plenty of room, if you will, if we had to we thought it was needed, but I'm very comfortable with the current structure. It's very typical than some of the better companies relative level.

Can you give the holding company catastrophe under the core there and comments on your priorities for the use of it?

Yeah, it's about $348 million and obviously, we have gone to a quarterly dividend now, so we'll obviously have a commitment to that. We have our debt and our debt payment that we typically do out of the holding company as well, but I think your broader question is do I feel that we are still adequately capitalized or have excess capital. I would tell you in a normal world, I think we still have excess capital, and by the end of the year, we're going to have more excess capital even with our current growth rate, and so that as always the first priority for the company is to have profitable growth beat the cost of capital and if there is opportunities to continue to do that, we'll do it. If not, we'll think about other ways to make sure we use the capital appropriately, and as we decided in the last couple of years, we've given some back, and I always think about that and we will think about that going forward, because I do think we're at a point where we still have some room here as we look at the future. Now I would tell you that the market is playing out just like we expected it, people are talking about the market being little a rough ride. I never expected it to turn quick. I think that a lot of the financial disruptions was a sideshow to the underlying structure in the industry and I think as the market turns in the next 12 to 18 months, weaker players are going to have problems. You are going to have significant underwriting. I think we are going to have significant opportunities, and I think we have positioned ourselves to capitalize on that, so some of this capital I would like to make sure we have enough powder dry so we have a lot of capabilities we now built, and so as the market turns and when it turns and people stub their toe, we will be ready, so some of it, as we get closer to the turn is to make sure that we have excess capital to capitalize on the opportunities that present itself. As always, Sam, we try to be soft about the balance between the business opportunities in front of us and then given shareholders the money back, if we feel we don’t have appropriate use.

Okay, and finally, given the soft market, given net interest rates, it sounds like your yields are going to continue to be low and you are taking a conservative investment posture. What can you update us on the timeframe that you think you can achieve your corporate ROE objective?

Well, again, it’s a great question. I still am very focused, as I said last quarter. I have got this six quarter view of we are going to move forward and improve every single quarter. These yields, as you mentioned, that affects perhaps your thought process, but it also affects your cost to capital, obviously, if it's permanent and as many people are worried about inflation as lower yields. My view is that we are improving. If you look at what we have done, both on the capital side and on our mix of business and if you look at our percentage with the partners, if you look at the kind of quality of business we re bringing on, I am very focused on improving every quarter and I believe we can get to our targets in that six-quarter timeframe. Again, if we see opportunities that present themselves to us that I make the case to our shareholders, I am going to do it. If I think there are additional opportunities that are presented to ourselves that we want to invest in, but right now I feel very good about it and if you think about our plan, this plan has more improved in quarter-to-quarter then typically at least in the six-and-half years I have been here, but I would say that purposely this way, because of these opportunities we saw that we took advantage of in the fourth and the first and second quarter and I think we are in a good spot to kind of continue to improve performance through the year and we got to do that. We got to demonstrate that.

The next question comes from Larry Greenberg of Langen McAlenney.

With the OneBeacon and even going back over the last couple of years, there has been so much noise in the expense ratio line, I am just wondering as you look at the company now positioned with more Commercial than Personal Lines business. If you could just look out and try to normalize the expense structure, what type of expense ratio, do you think the company is ultimately moving towards?

Great question. Obviously I talk about this a lot, and it's odd this year, because we are going to improve probably our expense ration almost every line and it could go up because the mix is going to be so skewed towards commercial versus personal but if you kind of normalize it for mix of business, what I have said is that I believe we are about a 1.5 point heavy. Again, you got to normalize it for mix of business, because as we go up, our bonds business, our marine business obviously they all have different expense, but if you look at the total thing, I have it purposely invested 1.5 point, that was by the way 2.5 at the beginning of our journey, because we are so commodity-driven as a business. It’s a 1.5 or so I would say and this year I believe that we will make progress somewhat in the individual lines of business, but we are very top heavy in the first couple of quarters in particular on expenses and again people can work right you can't you get last, but remember also [washy] looking Personal Lines is going to be account-oriented, near fluent, total account writer, and then the same thing in commercials there will be a lot of niche, it's going to be a lot of fragmented business and so we actually look at this line-by line-by-line and I got additional expense in some geographies of upscale, I have some additional expense in these merging businesses and we have additional expense because of leaders, I will call real leadership because of our strategy and our conversional partner or agent. Those were the big categories and within that, if you look at it there is still a bit of infrastructure cost. In the last…

There are no more questions at this time. However, we now see a follow-up from Michael Phillips of Stifel Nicolaus.

One more follow-up, if we have a second here.

Sure.

Part of your strategy is always confusing me, if you can talk about it. When you do the Verlan thing and you get into a specialty business like Verlan, and when you do PDI how you get into that, but then later, I guess when you first talk about PDI. This is for a certain niche the lawyers and then benchmark comes along, and it's certain niche for our Architects and Engineers. I had thought that when you did PDI, the idea was to expand that somehow within that current framework and not find somebody else like the benchmark. Its clearly I was wrong, and I guess I'm missing something there.

It’s a great question. I confuse a lot of people, including my wife, so. What we did? DPI is the platform four our Professional Lines. What benchmark is essentially is a group of accounts that underwriters. That’s all it is. We didn’t buy for its infrastructure. We didn’t buy. So what we have done is, we have built PDI and the LTL, use that infrastructure and then we are going to tag on, architects, engineers, accountants, where you will see us do that. You will see us do miscellaneous and sometimes that takes the form of just hiring a team of four people. In this particular case, there was an MGU that had six very talented underwriters that came together that we chose to do it and get a little bit of business to leverage the infrastructure we have invested in, but it’s not like we had to reinvent the wheel on our IT or our infrastructure, our rating and etcetera. Now, obviously, I have to extend those rating. Every time you go to EPA or you do a little bit of difference, but you are absolutely right. "We didn’t necessarily have to buy a company" to get into Architects and Engineers. So every time we make a choice. Now, for instance, I didn’t talk about, when we got into the private company B&L that we bought a company, but we bought a team. We brought in and in that case, six people and we tag that on to some other infrastructure we bought. Now, we could have just easily bought of group of six they call themselves something. So because, as you know most of the acquisitions we talk about our team from a premium point of view. These aren’t big, but they are fill-in to our strategy around…

That’s helpful. Actually confusion just from my part, but as you expand Verlan in to the specialty industrial these guys are used to be property only, does that mean you are hiring casualty on risk?

Risk on trade let’s go in there. So what’s great about in our industrial is that, that was Verlan right, but within their business they were in cosmetics, they did a little bit out, but they had limited capacity. We have spent last 18 to 24 months building that capacity and that expertise that extends from coding. So that we can in to all kinds of plastics etcetera, it still it is hard small HPR industrial risk that we are good at and it properties stop to blow ups. Now the casualty side of that, we actually broker out. We don’t do it ourselves and we build a value proposition to our agents, where we bundle the both, but we actually are brokering out the liability portion for the most part. So we build a brokerage capability within it and we are now providing full solution with those small accounts. All the side we have a broader portfolio and a more complete portfolio, but it was based on the expertise that we acquired and then we have extended that through a few hires. Rita, I don’t know if there any.

The only I would add to sum it up, when you think about Verlan, PDI, now Engineers and Architects. It’s all very consistent with our total account strategy to give our partner agents one stop shopping to right their best submit a market accounts and it works quite well for the partner agents be able to have one place to go for those capabilities and very consistent with what we have been saying from the very beginning.

In that particular case, some times we don’t like high severity lifes. We like small base value, more consistent because I want people to see that we are building an earning power that’s very consistent. So, we often outsource "if you will", and in that particular case, we don't want to take on that severity that the Causality Lines tied to those lines present. They're a much better people than us that specialize in that business and I rather access them, but what we do is? We assemble. We assemble our small account in efficient way and deliver it to these top thousand agents in this country and it gives them the ability to maximize their earnings and retention, while we don't take on volatility we're not comfortable with. Again, what we've been talking about long is really starting to come together for us; you're starting to see us as a pretty nice alternative to some of the national companies. We were at our partner's club this week and a lot of our agents are talking about that the national company with regional approach, right. The broad capability, but know them well and think of them as a partner and so its starting to come together.

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Myron for any closing remarks.

Thanks very much to everyone for participating. We'll talk to you in a quarter's time.