Good day, ladies and gentlemen, and welcome to The Hanover Insurance Group Second Quarter Earnings Conference Call. My name is Whitley and I will be your operator for today. At this time, all participants are in 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 will now turn the conference over to your host for today Oksana Lukasheva, Vice President of Investor Relations. Please proceed.

Thank you, Whitley. Good morning and thank you for joining us for our second quarter conference call. We will begin today’s call with prepared remarks from Joe Zubretsky, our President and Chief Executive Officer; and our Interim Chief Financial Officer, Gene Bullis. Available to answer your questions after our prepared remarks are: Dick Lavey, President of Personal Lines; and Robinson, President of Specialty Lines; Jack Roche, President of Business Insurance; 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, including our 2016 outlook. 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 to 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 operating income and accident share loss and combined ratios excluding 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 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. Good morning and welcome to our second quarter earnings call. I would like to start by saying how pleased I am to have the opportunity to lead The Hanover. I have a deep appreciation for the work my predecessor and the entire team have done to build one of the most respected franchises in the independent agency space. The Company has developed a broad and innovative product portfolio, a disciplined underwriting acumen, and a reputation for responsiveness service that has driven improved earnings over time. While certainly successful in the past, the organization also presents significant prospects for margin expansion, growth, and superior shareholder value creation. I look forward to working with all of you who have invested in our future. This morning, I will provide the highlights of second quarter results. Gene will review our financial performance and business results by segment. I will then offer my initial observations about our strategic position and value creation, and then our entire management team and I will take your questions. We have reported net income of $2 million or $0.05 per fully diluted share, which included a one-time charge for the debt retirement we announced in April. Operating income was $54 million, or $1.24 per fully diluted share, generating an operating return on equity of 8%. Overall, net written premiums were flat, excluding the impact of the UK motor sale in June of last year. This reflected a very good growth in personal lines; moderate growth in commercial lines; and a decline at Chaucer, where we are taking advantage of reinsurance prices to proactively manage the risk profile of the book. Our consolidated combined ratio of 97.3% reflects the impact of previously announced large losses and catastrophes in the current accident year at Chaucer, as well as unfavorable…

Thank you, Joe and good morning, everyone. On a consolidated basis, second quarter of 2016 net income was $2 million, or $0.05 per diluted share compared to $120.7 million, or $2.68 per diluted share in the second quarter of last year. Current quarter net income included a non-operating charge of $56 million after tax associated with the redemption make-whole provisions of a 7.5% and six and three eight senior debt, which we refinanced in April. Second-quarter 2015 net income included the $40 million realized gain on the sale of the UK motor business. So $96 million of the swing is attributable to these two unusual items. Operating income was $54 million, or $1.24 per diluted share, compared to $70.4 million or $1.56 per diluted share in the second quarter of last year. The overall combined ratio was 97% compared to 96% in the prior-year quarter. I'll begin by providing financial color on our second-quarter underwriting results by business segment, starting with commercial lines. We realized over 2 points improvement in the current accident year loss ratio, excluding catastrophes, to 55%, with contributions from all core lines of business. We remain focused on executing disciplined underwriting within our well-defined risk appetite targeted pricing. Workers' compensation was a source of meaningful improvement, with consistent accident year loss ratio performance and favorable reserve releases. We continued to benefit from our focus on smaller policy sizes and business classes with lower risk profiles. Moving on to commercial auto, the accident year loss ratio improved by 1 point in comparison to the prior year quarter. Although improved, the lines still remain below our target profitability. Due to some continuing claim development in prior accident years, we added to prior-year bodily injury ultimate loss pics. As a whole, we remain encouraged by our recent progress and…

Thanks, Gene. Though it has only has been a few weeks, I would like to share my initial observations on our Company's strategic position and value-creation potential. We have a very strong operating platform, supported by loyal distribution relationships and talented professionals with knowledge of their markets. There are ample opportunities to be harvested from this platform, focusing on three main areas in particular. First is the opportunity to further penetrate our existing 2,200 independent agents with our high -ouch model and increase market share with them. Our relevance with these agents increased markedly over the last several years; however, many of these relationships are still sub-optimized. Gaining share and becoming a top three to five carrier on more agents shelves would lead to higher quality growth and expense leverage, as a significant portion of the agency operating expense is fixed. Second is the opportunity to more effectively and broadly leverage our existing domestic specialty products and evaluate adjacent capabilities. For instance, we have developed businesses in high-growth industries such as technology and healthcare, we have excess and surplus lines platforms to take advantage of the expanding and contracting nature of the admitted market, and we have yet to import any of Chaucer's vast capabilities to the U.S. We have considerable upside in these often higher-margin lines to generate above-average growth and to create additional expense leverage, while taking advantage of emerging industry demand in some of the highly technical underwriting classes. Third are the opportunities embedded in the high intellectual capital platform represented by Chaucer. Its underwriting capability sets the business apart as a leader in some of the most complex risk classes in the London market. Looking forward, we can expand existing regional platforms and develop regional partnerships, such as our partnership with Oxa [ph] in Africa, to…

At this time operator we would like to open the call for questions.

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

Thank you, and Joe congratulations on your first quarter with Hanover.

Thank you very much.

I guess the question and where I’d like to focus is on the commercial business and the reserves. Having a pretty good quarter along the way and accident year results, this is kind of third quarter in a row where we’ve seen some true up on back years. And I guess just hoping to get a little bit more clarity on helping investors get comfortable that there – isn't leading up to a large charge. I guess when you kind of see this happen, $20 million a quarter for a few in a row, and all of a sudden or maybe it does need to be done, and there is $100 million charge or something. But I guess – what you guys are going through and what you are seeing, if it’s from different lines, why we should not think of it that way or not?

Well, Charles, let me start off by making some framing comments. Clearly, the all in result was favorable development. But if you adjust for the Forex embedded in the Chaucer development, it is favorable quarter-over-quarter. We shouldn't ignore the $12 million of favorable development on Chaucer catastrophes as well. The real issue we are focusing on is the commercial line of business both in CMP and other. I’m going to kick it to Jack in a minute to talk about the liability of component of CMP which is causing distress, which is slip-and-fall claims in three major metro areas, giving rise to soft tissue injuries, and attorney involvement, and it’s causing some late reported claims and some increased estimates on existing case reserves. Yes, we continue, the CMP line of business is still very profitable. The property piece is performing very well. And it’s the mainstay of our commercial product in the agency business. But these isolated areas really are causing distress and I’m going to turn it to Jack to talk about from a pricing, underwriting, and claims management perspective and what we're doing about it.

Okay. Thanks, Joe. Chuck, as we said in the past we are trying to address these claims trends early to avoid big surprises. And our philosophy has moved aggressively in that fashion over the last few years as you know. In terms of the news of the quarter, there really isn't anything new in terms of the type of claims or what we are seeing other than slightly larger level. As we said in the past, we have some isolated spikes and large losses that are resulting from slip-and-fall cases in the major metropolitan areas like New York City and Los Angeles. The good news is we do not have outsized penetration in those areas, so we are addressing the performance gap relatively quickly. And as you’ve said, a few quarters ago, we saw something that looked like the duration of those claims was drawing out, it looked at different than our development patterns, traditionally have been, so we went to work and started to recognizing some of that in our results, and also getting more aggressive about some of our underwriting actions. So we adjusted pricing and underwriting appetite in those geographies. We took steps in the claims determined to better identify and monitor these claims and quickly move specific claims into our major case unit for handling. In particular, we saw some labor law and sidewalk laws type claims in New York that where better served in that large claim units earlier in the process. And so we're doing so with the expectation that we will get better outcomes into the future as we've gotten better at identifying those cases. And last but not least, we did have some specific larger accounts that quite frankly given the new trends pose an opportunity to either retire or be more aggressive with regard to our pricing and underwriting actions. Net-net, we're pretty confident that we have our arms around this. And while we are disappointed that we had a little bit more activity in the quarter, we feel good about the fact that we can keep the CMP line performing as one of our top volumes.

Okay.

I want to address the last part of your question two about charges et cetera. We have a lot of confidence in the strength of our balance sheet at June 30. We obviously will be conducting our annual exhaustive bottoms up, a reserve analysis either in the third or fourth quarter depending on the arrival of a new CFO. It will be overseen and reviewed by independent actual rail consultant and of course you cannot speculate as to whether that’s going to result in an increase, decrease or re-balancing of the reserve portfolio we have to wait for the results of the study. But that is an annual review. Nothing special but bottoms up and it will be exhausted and it will be overseen by a permanent CFO when he or she arrives.

All right. I appreciate all that color, it’s certainly helpful. I guess just two clarifying backups to that that I would have is I think that Eugene mentioned that obviously the ultimates have been taken up. Can give us an idea of what the mark is now and what it is adjusted from? I'm trying to at least get my head around the size of this move and what that means in actual expected ultimate loss for the pick and then also – if the development was all case development or was there some IBNR development due to things you have learned in this true up?

Well, the activity that produces the difference between actual to expected as all case incurred, which flows into the reserve analysis and as a result of that we’ve responded to that in our picks for all of those accident years. And the outcome of that is what you see reflected in the stat sub. We feel confident that our reviews are thorough and that we’re being responsive to all of those changes. When we get down to actual loss picks for accident years I’m not sure that I have that in the top of my head. But I would say all of them are responsive to the activity that we are seeing and we are trying to stay ahead of it. We think we are in pretty good shape.

Okay. But this is case adjustment on the development right as opposed to we’ve got a different view of exposure and so we are going to increase IBNR in these back years because this is – what’s happening? That’s what I’m trying to understand.

Well, it traction case and that leads into your ultimate for the accident year. The activity that you see is driven by case and that affects your estimate of how much IBNR you need to hold and that all blends into a full loss pick. And ultimate but not only case incurred but paid all flows into your ultimate for that accident year.

Okay. I appreciate that and I guess just other on the personal lines obviously you are really strong quarter and fortunate and property events in the quarter. But I guess otherwise what’s the pricing is – any other commentary on the loss trend and pricing outside of the property event that obviously turned out pretty well would appreciate.

Yes. I will make some framing comments on that. The personal lines did have a really, really good quarter everything sort of clicked. You saw premiums up 4.5% and a 91.3% combined. We were able to get rates at about 5% of the market, which are still above loss costs. And we focus on that a lot. We had stabled PIF accounts that are now turned positive. We had retention increased by 100 basis points, we had benign weather affecting the property line which came in positive. And of course you can see the cat line is being favorable quarter-over-quarter. So all things hit in the quarter we are not saying this is 91% business forever it is probably a mid-90s business. That’s our target combined to produce really good low teens ROE. So everything worked really well in the quarter. I will turn it to Dick to talk about specific pricing phenomenon that he is seeing in the market.

Yes, Chuck, thanks and I think we covered it well with those comments. But just a little more color. We are pleased that we’re not seeing the frequency trends that our competition is seeing as we discussed that in the past. It’s really been flat for several quarters that down in some really across all coverage parts in auto, collision BD and BI. And certainly some of that’s driven by the mild winter that we had in the first quarter. But going back prior quarters, we are seeing the same phenomenon. So we are cautiously optimistic there is nothing endemic in our book that is going to pop that frequency year-over-year comparisons of course next year could see a slight increases. But we are really pleased and we’ve talked before about sort of what the drivers of that may be certainly our quality mix of business or account mix. We believe provides us some insulation to the employment and low gas price trends that you see that increase your miles driven. But net, net as Joe said our pricing is covering our loss cost trends, our severity is ticking up to low mid-single digits. But we explain that with the new model cars and the cost of technology and some large losses that we have seen in BI out of Michigan. So we feel really good, we feel really good about our pricing and our ability to maintain those kind of stable 5% rate. We were opportunistically looking for places where we can increase auto rates and that may provide a bit of a headwind to our growth for the remaining part of the year. And that all of the KPI is still really solid to us.

Thanks a lot for all of the answers and good quarter in light of the challenging additions.

Thanks.

Your next question comes from the line of Meyer Shields with KBW. Please proceed.

Thanks. I guess two broad questions. The first in general we’re seeing modest deterioration in the course of rate increases, is that a function of improved performance or intense like competition? Is there any way of choosing that out?

This is Jack. If I heard you correctly, you’re talking about the market environment itself versus our results?

Yes.

Yes, I think, what you have heard from some of our competitors is consistent with our belief that the market environment is somewhat stabilizing, but also a touch schizophrenic in that, the larger account market still tends to be pretty aggressive and logically so based on the returns that are probably being generated in that sector. And on the lower end of the scale, you see pretty substantial price stability even though at least for us the small commercial portfolio is performing well. So, there is somewhat of – overall stabilization in the pricing, but in any one line for any one carrier that can change. So, you are seeing some bumping around. Now related to that there is always stress on new business versus a renewal book, I would argue that the new business differential to renewals is still – it’s more stable than I predicted. And so we are enjoying some stability there also. But I will say that part of our view is somewhat influenced by our strategy to stay in the small to midsized account range to work with select distributors to tighten that dialogue and to leverage the product work we’ve done over the last five years to make our business more sticky. So I think we continue to show pretty favorable pricing in commercial lines based on those three major attribute of our strategy.

Okay, that’s very helpful. Joe you talked a little bit about importing underwriting skill sets from Chaucer into the U.S. And that seems to sort of align with critically painful timing for specialty businesses. What time frame are you talking about I guess?

Well, we’re in the very early stages of exploring how to leverage the intellectual capital of Chaucer here in the U.S., particularly through the excess and surplus lines market in the reverse flow business. The business that actually is generated from the U.S. that end ups in the London market Chaucer happens to get it to market share, but why can’t we work through our distribution system to not just let it happen, but to channel at. So Jack is actually working with Johan and a working group on looking for areas of potential where Chaucer can brings its underwriting capacity to the U.S. market and capture some more of that reverse flow business. All part of the strategic plan were embarking upon and we have ideas on that, you’ll hear about it at our Investor Day in early 2017.

Okay. Thank you very much.

Your next question comes from the line of Larry Greenberg with Janney. Please proceed.

Good morning and thank you. So on the commercial lines accident year loss ratio excluding cats being down, I don’t know, I calculate about three points versus the average of the last four or five quarters. And that’s in the phase of this adverse development kind of two pieces that don’t usually go together. I hear you that the property losses are down, which I guess explains the lower loss pick in CMP. And then the small case workers comp doing well. But can you give us a breakdown in the commercial lines pricing change between peer price and exposure change and what you think the peer price is doing relative to loss trend?

This is Jack. I’ll take the first shot at this and ask my colleagues to add in. We’ve been a little bit careful in the past talking about breaking down overall pricing. I would tell you now that across the core lines while we’re generating four points of what we call new money, which is that combination of rate and exposure; approximately half of the exposure, which is about 2.5 points of that in the small commercial line is coming through as property insurance to value. A little less so in the middle market sector. So, all in we take our kind of rate plus insurance to value in the property side of the exposure put that together to give ourselves the best estimate of what we’re getting terms of price versus exposure that, may translate into additional loss cost. So we’re still performing right at about our long-term, maybe slightly below our long-term loss trend in commercial lines for the core lines and fell reasonably comfortable that given where we are in the market.

Larry this is Andrew. Just to sort of maybe cover bit on the specialty side. First, in terms of rate for this past quarter on a written basis while we don’t disclose sort of the specifics in aggregate. We are riding business, renewing our business right around where loss cost trends are for the long-term. And of course, on an earn basis leading up to this quarter, we have been seeing rate in excess of loss cost. So there’s still some benefit that’s going to flow through. The other part of, just kind of connecting sort of where we are with accident years relative to the adverse development. I think part of that is just to remind you that at AIX and within our program business the adverse development is coming from terminated programs 13 and prior. And so there is a tad bit of discontinuity of our active book relative to where these adverse trends are emerging from. And so, in addition to that there was obviously a range things that occurred since 2013 that helped give us a good deal of confidence in our more recent accident years. And so therein lies just the connection between some of those other trends that you are seeing in this quarter.

Thank you. That’s helpful.

Your next question comes from the line of Wayne Archambo with Monarch Partners. Please proceed.

Yes, thank you. You sort of alluded to considering acquisitions down the road. Could you give us some better sense of the framework for what you are looking for, what type of multiples you are willing to pay, level of accretion, geographies, new lines of business, both on. I mean, can you just give us a little bit more details there?

Sure. I mean obviously M&A follow up strategy and we’re still developing our strategy, which will take a good six months. But I think you can remain confident that the cornerstone of our strategy would be highly leveraging the valuable agency plan that we already have. There’s a lot of headroom there. There is a huge amount of expense leverage. There’s market share gains to be had there, their specialty penetration that take place there. So, while we have done with our strategic plan I think you can remain confident that those will be tenants of our emerging strategy. But, you think about that book of business purchases, renewal rates deals like the commercial – the OneBeacon deal we did a few years ago. Agency partnerships and joint ventures, I would think broadly about business development and not just M&A. It could take the place of buying managing general agencies not only for their own revenue flow, but for the underwriting capacity of waivers on the paper. So think about business development more broadly than just raw M&A. But it is going to follow up strategy and our strategy surrounds the independent agency channel

Do think you will have the strategic plan in place before the Analyst Day in the beginning of the year?

That would be the primary purpose of having the Analyst Day in early 2017 is to showcase the management team and emerging strategy.

Great, excellent. Thank you.

There are no further questions in queue. I’ll now turn the call back over to Oksana for closing.

Thank you all for your participation today. And we look forward to speaking to you next quarter.

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.