Good day, ladies and gentlemen, and welcome to The Hanover Insurance Group Fourth Quarter Conference Call. My name is Mark and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to host for today, Oksana Lukasheva, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good morning and thank you for joining us for our fourth quarter conference call. We will begin today’s call with prepared remarks from Joe Zubretsky, our President and Chief Executive Officer; and Chief Financial Officer, Jeff Farber. Available to answer your questions after our prepared remarks are Dick Lavey, President, of Personal Lines, Jack Roche, President of Commercial lines and Johan Slabbert, Chief Executive Officer of Chaucer. Before I turn the call over to Joe, let me note that our earnings press release, financial 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, include forward-looking statements. 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 two of the presentation deck, and our filings with the SEC. Today’s discussion will also reference certain non-GAAP financial measures, such as operating income and accident year loss and combined ratios excluding fourth quarter and full year domestic development and catastrophes 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, the slide presentation, or the financial supplement, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Joe.

Thank you, Oksana. Welcome everyone to our fourth quarter earnings call. Today, I will discuss overall results and our business performance, Jeff will cover financial details and an in-depth discussion of the results of our annual reserve analysis, and then I will provide some framing statements about our upcoming investor day before opening the line for your questions. In the quarter, we had an after tax operating loss of $19.7 million or $0.46 per share and a consolidated combined ratio of 107.7%. For the year, we earned operating income of $184.4 million or $4.27 per fully diluted share and produced a consolidated combined ratio of 98.6%, generating an operating return on equity of 7%. Our results were significantly impacted by the $174 million domestic reserve charge we recorded in the fourth quarter for prior year reserve development, the outcome of our annual loss reserve review. This, combined with some less significant prior year development in each of the first three quarters of the year resulted in domestic prior year development of $235.6 million for the full year. Excluding the domestic prior-year development, operating earnings after tax for the quarter were $94.3 million, an increase of 6.8% from $88.3 million a year ago. For the full year, excluding the domestic prior year development, operating earnings after tax were $337.5 million, an increase of 13.7% from $296.8 million in 2015. This comparison, which includes favourable reserve development at Chaucer, is a more meaningful portrayal of the current business trends and the continued improvements we have made to our business mix and under writing and pricing discipline. Chaucer’s favourable development has historically been stable and more consistent. I will first provide my perspective on our reserve position and then discuss our operating performance excluding the impact of domestic prior year reserve development. We…

Thank you Joe, As previously mentioned, the strengthening of domestic prior-year loss reserves by $174 million had a major impact on our fourth-quarter results leading to a net loss of $14 million or $0.32 per basic share in the fourth quarter 2016 compared with net income of $78 million or$1.76 per diluted share in the prior year quarter. For the year, we reported net income of $155 million or $3.59 per diluted share compared to $332 million or $7.40 per diluted share in 2015. On an after-tax operating income basis, our loss for the quarter was $19.7 million or $0.46 per basic share compared to income of $80.3 million or $1.82 per diluted share in the prior year quarter. For the year, after-tax operating income was $184.4 million or $4.27 per diluted share compared to $280 million or $6.25 per diluted share in 2015. Operating earnings, excluding domestic development for all periods were $94.3 million for the quarter, up from $88.3 million and $337.5 million for the full year compared to $296.8 million in 2015. As Joe mentioned, based on a reserve and business analysis, we selected our best estimates. The estimates reflect our desire to be more conservative given the inherent uncertainty of the reserving process taking into consideration the unfavorable development in a number of recent quarters. Overall, the prior year domestic reserves strengthening of $174 million represents roughly a one point increase in the ultimate loss ratio to each year from 2013 the 2015 and a half point increase to about 2011 and 2012. However, as you would expect, accident years did vary by line. I will now review the impact of the reserve charged by line starting with commercial multi peril and general liability. In commercial multi peril and general liability, prior-year reserve additions of $68.8…

Thank you, Jeff. When we consider the underlying metrics of our business, the quality and volume of new business, renewal retention rates, accident year loss ratios, returns on allocated capital, we see a strong foundation on which to grow. Putting the strengthening of the balance sheet behind us with a necessary step in order to move forward and execute our gross strategy. We will be sharing our strategic thoughts with you at our Investor Day on February 23rd in New York. During this time, we will describe the key tenets of our go forth strategy. One, leveraging the inherent strength of our core agency business by making some modest additional investments to gain market share and more prominent shelf space with our 2280 partners. We believe the first wave of significant growth to be harvested from our solid market position in this channel. Two, expanding and growing our specialty capabilities both domestically and with Chaucer, we can capture more specialty business opportunities within the independent agent channel by modestly expanding our risk appetite, while leveraging Chaucer's capabilities in the U.S. and globally. Three, innovating with new business models and technologies to help our distribution partner succeed in a world in which risk pools, customer preferences and the competitive environment are changing and we will provide our 2017 guidance and long-term financial targets. With that, we will now open the line for your questions. Operator?

[Operator Instructions] Your first question comes from the line of Charles Sebaski from BMO Capital Markets. Please proceed.

Good morning.

Good morning.

Thanks for all the detail and color on the reserve charge and action. It was helpful. I guess going forward what I’d like to try to better understand is in the commercial segment, looking forward into 2017 on an accident year basis. And so, if I look at the fourth quarter versus the full year 2016, fourth quarter was a little bit higher than full year 2016 and given some of your commentary on loss trend being a little bit higher than earned rate, is fourth quarter accident year a better proxy to think about 2017 coming out? Or do you think full year 2016 is – on how we think about or how you think that business is going to evolve over the next year?

Joe here. Really you need to look at the full year. So let me take you through how we look at this. We looked at the discrete portfolios of business and we try to understand the underlying trends that were causing us to increase our loss estimates. As soon as we were done, being comfortable with our loss reserve picks for 2015 and prior, we immediately begin to look at current accident year. And what you see in the fourth quarter, take the CMP line for instance, you’ll see a significant increase in the fourth quarter, because we took a new view of the liability experience in our CMP portfolio for the full accident year. So, even though the CMP loss ratio is down 100 basis points year-over-year on a full year basis, because the property component is outperforming and the liability component is underperforming, we really took a full year view in the fourth quarter for 2016 based on what we learned on 2015 and prior.

Okay. So that fourth quarter kind of includes your true-up for the calendar year 2016?

That is correct.

Excellent. That is helpful. Thanks. I guess the other question I had was in personal and an auto trend that you’re seeing there, it seems like things are trending well and there is growth going, but you don't see anything that’s concerning about BI trend in personal auto?

No, not at all. There’s a lot to like in the Personal Lines story for the quarter and the full year. You see the 5.2% top-line growth. We’re able to put four points of rate in the market which is comfortably above loss trend. Our discount is growing again. And our retention rates are 83% and rising, so there’s a lot to like there and no, we haven't seen the increase in severity probably due to demographic mix and geographic mix of our book, compared to some of our competitors. But we have seen a slight uptick in severity on what the physical damage component and the liability component which is fully reflected in our results.

Okay. And I guess just finally capital management going forward into 2017, you’ve taken these actions for the legacy years and get back onto a strong earnings story. What’s the thought process around capital management going into 2017?

I’ll kick it to Jeff in a second, but as we said, Jeff and I share a common view on this. We like a balanced approach to capital deployment. We know that delivering superior returns and a superior evaluation is going to require steady and measured book value per share growth, and ROE production leveraging our fixed expense base and increasing our profitability and leveraging our expense base to produce a better ROE, but we’re big fans of the balanced deployment of capital, share buybacks opportunistically, and to maintain a good competitive dividend.

Just to amplify a bit, obviously a balanced approach couldn't agree more. Deploying capital in our businesses is obviously important, and we are going to allocate capital to our businesses where we think it has the most appropriate best returns, and then thinking balance basis between dividends and stock buybacks and other uses will be appropriate.

Great. Thanks a lot for all the answers and good luck in 2017.

Thanks, Chuck.

Thank you.

Your next question comes from Paul Newsome from Sandler O’Neill. Please proceed.

I just want to make sure that I'm putting pen to paper, that I am doing this right. Just to reiterate that if I’m thinking of the perspective accident year results for the commercial and personal Lines unit, is the full year number that you reported in 2016 is the right base per say, to think what the profitability of the book is. Is that fair?

Yes. That is the right way of looking at it.

Okay. Even thought there’s a bit of a true-up in the fourth quarter for all these reserve issues?

Yes. As I mentioned previously Paul, anything we learned about our business as a result of the deep dive into the reserve in the business reviews, we then took into the 2016 accident year and updated our assumptions embedded in the accident year loss pick. And we did that in the fourth quarter, so the fourth quarter tended to be a little choppy and lumpy, but the full-year view is the correct way to look at it.

Is that the same way I should – should I think about the same way on the Chaucer side? Was there anything that would have changed the accident year pick given the process that you went through?

No. We maintain the same reserving methodology and process at Chaucer given the nature of the business, the complexity, the risk it writes, the high excess layers in which it operates. It's always prudent to hold a current conservative, current accident year loss pick and let it runoff of favourably, and we did not disrupt that methodology at all. The choppiness you saw was basically large man-made losses, which was offset by incredibly benign global catastrophe environment.

Great. Thank you very much.

Your next question comes from Larry Greenberg [ph]. Please proceed, sir.

Hi. Thank you very much. So just a couple of questions on the reserving study. So, will anything change either conceptually or quantitatively in your reserving framework or processes going forward? And then curious, I assume you use a range of estimates and then a best estimate within that. And is that process similar for both Chaucer and the domestic companies? And would the best estimate be set at a similar point or given the nature of Chaucer's business. Does that require a more conservative pick?

I’ll kick at the Jeff in a moment, but I would characterize our U.S. domestic reserving process as a best estimate with a conservative bias. Reserves are going to runoff favorably or unfavourably, we’d always like to see them run off favourably. And Jeff and I share that view. And Chaucer, it’s really a different business model. It’s more of the nature of the business. Jeff I don’t know if you want to expand on that.

So just to start off, Larry, we took a really thorough process in the fourth quarter which culminated quarterly process we do, and we would anticipate continuing that process, continuing the thoroughness, continuing the conservatism in which we have built that up. As we think about the Chaucer reserves, we largely didn't change the process that we had always gone through. So we've always been appropriately conservative with our best estimate there. We made some changes in how we thought about domestic, but we’re going to really continue with that model.

Okay. Thank you. And Joe, you mentioned investing in and leveraging your strong agency position. Will this put pressure on domestic expense ratios in 2017?

No. I think we have the investment capacity to do what we need to do from a channel perspective, a product perspective etcetera. There is still a tremendous amount of expense leverage as we grow the business across our agency plant, which as you know is a largely fixed cost and pretty expensive to run, but there's a lot of headroom there in leveraging a fixed expense base, so no, I don't view any upward pressure on expense ratio here in the U.S.

Thank you.

Your next question comes from Meyer Shields from KBW. Please proceed sir.

Thanks. Good morning and congratulations on a phenomenal reserving process and description thereof. That was tremendously helpful.

Thanks Meyer

Within Chaucer's is there any way of sort of quantifying the benefit of low global cats against the above average large losses? Do those washout is one of those a bigger provision in the beginning of the year.

I’ll kick it to Jeff and maybe on the Chaucer guys, but you know Jack here. Basically with the count profile that they write, we sort of target roughly 10% of premium on an annual basis for catastrophes. And this year it came in at less than 1%. The target combined ratio for the business is 95. We've always said that we expect to deliver that with better and as you know cumulatively since we’ve owned the property, it has produced cumulatively a 90% combined ratio. So, we're happy with the profitability of the business. The cat environment certainly helped this year. Business has an inherent volatility and quarter to quarter it will produce that volatility, Jeff, I don’t know if you have anything to add to that.

Yes. I think as we’ve spoken about before the previous five years were really low attritional and large losses in the business of Chaucer and in this year particular we had some higher losses and it just sort of as a reversion to the mean kind of a concept and the cats will come when they come, but somewhere south of 95% I think is a good overall combined ratio. It was 90% this year and it has been 90% or lower in other years, and I think it's a is going to move around a little bit but it provides for a nice model. Johan?

Yes. Just to add that there’s no correlation between the cat risks and the large loss account. We do write risk towards the catastrophe line. So, the fact that we've had very low activity on that side, but yet a higher number of large losses, just to point out that the actual number of or the quantum of large losses paid out in the four quarter, reserved in the fourth quarter is almost the exact same numbers for 12 running quarter average is. So it’s not so it is not that much higher than now history shows.

Okay. That's very helpful. Second also in Chaucer, as you increase the reinsurance purchases, should that have a significant impact on I guess the expense ratio for Chaucer next year?

I’ll kick that Johan. Go ahead Johan.

Yes. So you’re in the fact that the higher the reinsurance purchasing is, low the net premium will be, and that would put pressure on expense ratio itself. We have in 2016 actually reduced expenses, but you could probably expect which we normally targeted the 45% expense ratio, but that’s going to be subject to volatility in the foreign exchange rate.

Okay. That makes a lot of sense. And then finally within Personal Lines, your experience has been a lot better than some major competitors who are raising rates dramatically. Should we expect that to accelerate the growth rate, I’m thinking either auto or packaged auto and home in 2017?

I’m going to kick it to Dick Lavey for the answer.

Yes. So, as you know, we’ve been really kind of thoughtful and measured our rate strategy and frankly have been ahead of the market by a point or two varying by line. So, we’re going to continue that strategy and we do see as our competition takes more rate that we may become more competitive on a relative basis for that very state-by-state, but generally speaking we also will take some additional rate opportunistically in certain states. So we have sort of wings here and there. But generally the net of it will be that you should expect kind of mid single-digit growth on a go forward basis.

Okay. Thank you very for your answers.

I would now like to turn over to Oksana for closing remarks. Please proceed.

Thank you very much for your participation on the call today. And we are looking forward to speaking with you next quarter.