TABLE OF CONTENTS



               Introduction                                       39
               Executive Overview                              39-41
               Description of Operating Segments                  41
               Results of Operations                           41-64
               Property and Casualty Segment Results           44-61
               Discontinued Operations: Life Companies         61-62
               Other Items                                     63-64
               Investment Portfolio                            65-73
               Income Taxes                                    73-74
               Critical Accounting Estimates                   75-77
               Other Significant Transactions                  77-78
               Statutory Capital of Insurance Subsidiaries        78
               Liquidity and Capital Resources                 78-80
               Off-Balance Sheet Arrangements                     81
               Contingencies and Regulatory Matters            81-83
               Rating Agency Actions                              83
               Recent Developments                                83
               Risks and Forward-Looking Statements               83
               Glossary of Selected Insurance Terms            84-86

INTRODUCTION

The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist readers in understanding the interim consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and subsidiaries ("THG") and should be read in conjunction with the interim Consolidated Financial Statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q and the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Our results of operations include the accounts of The Hanover Insurance Company ("Hanover Insurance") and Citizens Insurance Company of America ("Citizens"), our principal property and casualty companies; and certain other insurance and non-insurance subsidiaries. Our results of operations also included the results of First Allmerica Financial Life Insurance Company ("FAFLIC"), our former run-off life insurance and annuity subsidiary through December 31, 2008. On January 2, 2009, we sold FAFLIC to Commonwealth Annuity and Life Insurance Company ("Commonwealth Annuity"), a subsidiary of The Goldman Sachs Group, Inc. ("Goldman Sachs"). As of December 31, 2008 and for all prior periods presented, operations from FAFLIC have been reclassified as discontinued operations. Additionally, as of December 31, 2008, FAFLIC's balance sheet accounts were classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.

EXECUTIVE OVERVIEW

Our property and casualty business includes our Personal Lines segment, our Commercial Lines segment and our Other Property and Casualty segment. As noted above, on January 2, 2009, we sold FAFLIC to Commonwealth Annuity. Total net proceeds from the sale after transaction expenses were approximately $230 million. Coincident with the sale transaction, Hanover Insurance and FAFLIC entered into a reinsurance contract whereby Hanover Insurance assumed FAFLIC's discontinued accident and health insurance business.

During the first nine months of 2009, the U.S. and global financial markets and economies have been and remain strained, as market values have fluctuated significantly during this period and could continue to fluctuate. Defaults in corporate bonds have and are expected to continue to increase, particularly with respect to non-investment grade securities; however, it is difficult to predict the specific issuers or industries that may be affected. Credit spreads, however, have continued to tighten during the period resulting in a substantial improvement in unrealized losses during the first nine months of 2009. This improvement has resulted in our investment portfolio having an unrealized gain position at September 30, 2009. Although the first nine months of 2009 have shown positive momentum in the financial markets, uncertainty still exists in these markets and around possible implications of governmental funding, as well as the potential impact of the current difficult economy.

Our investment holdings totaled $5.2 billion at September 30, 2009 and consist primarily of investment grade fixed maturities and cash and cash equivalents, with net unrealized gain positions of approximately $120 million. The improvement in our unrealized loss position at December 31, 2008 to this unrealized gain position at September 30, 2009, particularly in investment-grade securities, is due primarily to market appreciation. We recognized impairment charges of $29.3 million during the first nine months of 2009. These impairment charges primarily related to credit-related losses on below investment grade fixed maturities in the industrial sector and perpetual preferred securities in the financial sector.

Several U.S. and global government programs have been implemented over the last year to assist in stimulating an economic recovery. There is still uncertainty regarding what the continuing effect the government programs will have on the financial markets. We believe, however, that these ongoing government actions to support the banking and financial sectors, the quality of the assets we hold, and our relatively strong capital position will allow us, over time, to realize the anticipated long-term economic value related to securities we hold, including those that are in a gross unrealized loss position. We have a substantially liquid portfolio with a laddered duration structure which provides for periodic maturities and thus expect to have the ability to hold any securities that are currently in a gross unrealized loss position for the period of time anticipated to allow for a recovery in fair value.

With respect to underwriting results, the first nine months of 2009 were relatively flat compared to the same period in 2008. Pre-tax catastrophe losses were $92.3 million, a decrease of $63.3 million from the same period in 2008. This was essentially offset by higher current year claims, lower favorable development on prior year's loss and loss adjustment expense ("LAE") reserves, and higher expenses. The higher current year claims were primarily the result of an unusually high level of non-catastrophe weather-related losses.

We have made an explicit decision to invest further in our business despite the fact that our expense ratio is higher than that of some of our peer companies and other competitors. In Personal Lines, we are investing to improve the competitiveness of our products and in technology and systems enhancements intended to make our interactions with agents more efficient. In Commercial Lines, most of our investments in people and information systems are directed toward expanding our product capabilities and offerings in various niches and differentiated products. We continue to invest in systems improvements, particularly with respect to small commercial business. In addition, we recently started to expand into the western part of the country with our middle market niche business and segmented products, along with a full breadth of specialty offerings. We expect to incur costs associated with this westward expansion ahead of premium growth in this region. Our ability to improve profitability in the future will depend in part on our ability to profitably grow our net written premiums and reduce our expense ratios accordingly.

During May 2009, A.M. Best Company upgraded the financial strength ratings of our property and casualty companies to an "A" rating from their prior rating of "A-". A.M. Best also upgraded the rating related to our Senior Debt to "bbb" from a prior rating of "bbb-". We believe that these upgrades, which occurred at a time of such uncertainty in the financial services industry, reflect the strength of our balance sheet, our solid capital position, and the results of our investments in the business over the past several years. These upgrades are expected to provide access to certain business groups and markets, particularly in Commercial Lines, that have previously not been significant in our mix of business. However, there can be no assurance that the ratings upgrades will produce the results expected.

Personal Lines

In our Personal Lines business, we are focused on making investments that are intended to help us maintain profitability, build a distinctive position in the market and provide us with profitable growth opportunities. Current market conditions continue to be challenging as pricing pressures and economic conditions remain difficult, especially in Michigan, impacting our ability to grow and retain business in this, our largest state, and elsewhere. We are working closely with our partner agents in Michigan to remain a significant writer with strong margins. Also, in 2009 we continued our mix management initiatives relating to our Connections® Auto product to improve the overall profitability of the business. We are focused on reducing our growth in less profitable automobile segments and increasing our multi-car and total account business consistent with our strategy. We believe that market conditions will remain challenging and competitive in Personal Lines. Despite these challenges, we experienced relatively flat growth levels in Personal Lines and expect that trend to continue during the fourth quarter of 2009 as the industry continues to be impacted by the difficult economic environment.

Our Connections Auto product is available in eighteen states. We believe that this product will help us profitably grow our market share over time. The Connections Auto product is designed to be competitively priced for a wide spectrum of drivers through its multivariate rating application, which calculates rates based upon the magnitude and correlation of multiple risk factors. At the same time, a core strategy is to broaden our portfolio offerings and write "total accounts", which are accounts that include multiple personal line coverages for the same customer. Our homeowners product, Connections® Home, is available in sixteen states. It is intended to improve our competitiveness for total account business by making it easier and more efficient for our agents to write business with us and by providing more comprehensive coverage options for policyholders. We continue to refine our products and work closely with high potential agents to increase the percentage of business they place with us and to ensure that it is consistent with our preferred mix of business. Additionally, we remain focused on diversifying our state mix beyond our four core states of Michigan, Massachusetts, New York and New Jersey. We expect these efforts to contribute to profitable growth and improved retention in our Personal Lines segment over time.

Commercial Lines

The Commercial Lines market remains competitive. Price competition requires us to be highly disciplined in our underwriting process to ensure that we grow the business only at acceptable margins. We focus on mid-sized agents and target small and first-tier middle market clients, whose premiums are generally below $200,000. We also continue to develop our specialty businesses, which on average are expected to offer higher margins over time and enable us to deliver a more complete product portfolio to our agents and policyholders. Our specialty lines, including marine and bond lines, now account for approximately one third of our Commercial Lines business, based upon premiums. Additional growth in our specialty lines continues to be a significant part of our strategy. Our ongoing focus on expanding our product offerings in specialty businesses is evidenced by our recent acquisitions. Over the past two years, we have acquired Verlan Holdings, Inc. ("Verlan"), which we market

as Hanover Specialty Property, a specialty company providing property insurance to small and medium-sized manufacturing and distribution companies that are highly protected fire risks, AIX Holdings, Inc. ("AIX"), a specialty property and casualty insurance carrier that focuses on underwriting and managing program business, and Professionals Direct, Inc. ("PDI"), which we market as Hanover Professionals, a professional liability insurance carrier for small to medium-sized legal practices. In addition to our specialty lines, we have developed several niche insurance programs, such as for schools, religious institutions and moving and storage companies, and have added additional segmentation to our core middle market commercial products including real estate, hospitality and wholesale distributors. We believe these acquisitions and the development of our niche businesses and additional segmented products provide us with better breadth and diversification of products, will ultimately provide better underwriting results and will improve our competitive position with our agents.

In January 2009, we introduced another specialty niche for human services organizations such as non-profit youth and community service organizations. As a complimentary initiative, we have introduced products focused on management liability, specifically non-profit directors and officers liability and employment practices liability and we plan to extend coverage for private company directors and officers liability. In addition, we have made a number of enhancements to our core products and technology platforms that are intended to drive more total account placements in our Small Commercial business, which we believe will enhance margins. Our focus continues to be on improving and expanding our partnerships with agents. We believe our specialty capabilities and small commercial platform, coupled with distinctiveness in the middle market through our development of niches and better segmentation, enables us to deliver significant value to our agents and policyholders in our target markets and to improve the overall mix of our business and ultimately our underwriting profitability.

DESCRIPTION OF OPERATING SEGMENTS

Our primary business operations include insurance products and services in three property and casualty operating segments. These segments are Personal Lines, Commercial Lines and Other Property and Casualty. Personal Lines includes personal automobile, homeowners and other personal coverages, while Commercial Lines includes commercial multiple peril, commercial automobile, workers' compensation and other commercial coverages, such as bonds, inland marine business and professional liability. In addition, the Other Property and Casualty segment consists of: Opus Investment Management, Inc. ("Opus"), which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets, as well as voluntary pools business in which we have not actively participated since 1995. Prior to its sale on June 2, 2008, Amgro, Inc. ("AMGRO"), our premium financing business, was also included in the Other Property and Casualty segment. Additionally, prior to the sale of FAFLIC on January 2, 2009, our operations included the results of this run-off life insurance and annuity business as a separate segment. We present the separate financial information of each segment consistent with the manner in which our chief operating decision maker evaluates results in deciding how to allocate resources and in assessing performance.

We report interest expense related to our corporate debt separately from the earnings of our operating segments. Corporate debt consists of our senior debentures, our junior subordinated debentures, surplus notes and advances under our recently established collateralized borrowing program with the Federal Home Loan Bank of Boston ("FHLBB"). Subordinated debentures are held by the holding company and several subsidiaries.

RESULTS OF OPERATIONS

Our consolidated net income includes the results of our three operating segments (segment income), which we evaluate on a pre-tax basis, and our interest expense on corporate debt. In addition, segment income excludes certain items which we believe are not indicative of our core operations. The income of our segments excludes items such as federal income taxes and net realized investment gains and losses, because fluctuations in these gains and losses are determined by interest rates, financial markets and the timing of sales. Also, segment income excludes net gains and losses on disposals of businesses, discontinued operations, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from segment income may be significant components in understanding and assessing our financial performance, we believe segment income enhances an investor's understanding of our results of operations by highlighting net income attributable to the core operations of the business. However, segment income should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles ("GAAP").

Catastrophe losses are a significant component in understanding and assessing the financial performance of our business. However, catastrophic events, such as Hurricanes Katrina, Ike and Gustav make it difficult to assess the underlying trends in this business. Management believes that providing certain financial metrics and trends excluding the effects of catastrophes helps investors to understand the variability in periodic earnings and to evaluate the underlying performance of our operations.

Our consolidated net income for the third quarter of 2009 was $49.7 million, compared to a net loss of $61.8 million for the same period in 2008. The $111.5 million improvement in earnings is primarily due to an improvement in net realized losses. In the third quarter of 2009, we did not have any net realized losses, whereas in the same period of 2008, we incurred $52.8 million of net realized losses, primarily due to impairments. In addition, a decrease in after-tax catastrophe related activity of $47.8 million also contributed to this improvement. Also, in 2008 we recognized a $21.8 million loss associated with the discontinued FAFLIC business due to its then pending sale.

Our consolidated net income for the first nine months of 2009 was $139.9 million, compared to a net loss of $13.5 million for the same period of 2008. The $153.4 million improvement is primarily due to a $92.9 million loss recognized in 2008 associated with the discontinued FAFLIC business due to its then pending sale. This loss did not recur in 2009. In addition, there was an improvement in net realized investment losses of $51.0 million. In 2009, we recognized a pre-tax gain of $34.5 ($22.3 million net of taxes) related to the retirement of corporate debt in connection with the repurchase of our mandatorily redeemable preferred securities and our senior debentures (see also "Significant Transactions"). These increases in earnings for the period compared to the same period in 2008 were partially offset by the recognition, in 2008, of a $10.1 million gain on the sale of AMGRO.

The following table reflects segment income as determined in accordance with generally accepted accounting standards, and a reconciliation of total segment income to consolidated net income.

                                                      Quarter Ended              Nine Months Ended
                                                      September 30,                September 30,
(In millions)                                      2009          2008           2009           2008
Segment income (loss) before federal income
taxes:
Property and Casualty
Personal Lines                                    $  27.4       $  18.1       $    56.1       $  83.8
Commercial Lines                                     38.7          (6.6 )         137.2         114.1
Other Property and Casualty                           7.5           2.3             6.5           6.8

Total Property and Casualty                          73.6          13.8           199.8         204.7
Interest expense on corporate debt                   (6.3 )       (10.0 )         (27.2 )       (29.9 )

Total segment income before federal income
taxes                                                67.3           3.8           172.6         174.8

Federal income tax expense on segment income        (22.0 )        (0.5 )         (56.9 )       (58.4 )
Federal income tax settlement                          -            6.4              -            6.4
Net realized investment losses                         -          (52.8 )          (9.7 )       (60.7 )
Gain on retirement of corporate debt                  0.2            -             34.5            -
Federal income tax benefit (expense) on
non-segment income (loss)                             3.1          (0.4 )          (8.6 )        (0.4 )

Income (loss) from continuing operations, net
of taxes                                             48.6         (43.5 )         131.9          61.7

Discontinued operations (net of taxes):
Gain (loss) from discontinued FAFLIC business
(including estimated loss on assets
held-for-sale of $6.1 and $72.2 in the quarter
and nine months ended September 30, 2008)             0.4         (21.7 )           6.3         (92.9 )
Gain (loss) from discontinued accident and
health business                                       0.7            -             (2.4 )          -
Income from operations of AMGRO (including
gain on disposal of $11.1 in 2008)                     -             -               -           10.1
Gain on disposal of variable life insurance
and annuity business                                   -            2.7             4.1           8.1
Other discontinued operations                          -            0.7              -           (0.5 )

Net income (loss)                                 $  49.7       $ (61.8 )     $   139.9       $ (13.5 )

Property and Casualty Segment Results

The following is our discussion and analysis of the results of operations by business segment. The segment results are presented before taxes and other items which management believes are not indicative of our core operations, including realized gains and losses.

The following table summarizes the results of operations for the Property and Casualty group for the periods indicated:

                                              Quarter Ended       Nine Months Ended
                                              September 30,         September 30,
      (In millions)                          2009      2008       2009        2008
      Segment revenues
      Net premiums written                  $ 688.8   $ 651.6   $ 1,981.8   $ 1,920.7


      Net premiums earned                   $ 637.4   $ 621.1   $ 1,899.4   $ 1,858.1
      Net investment income                    62.1      65.3       187.9       193.3
      Other income                             10.0       9.4        29.1        31.0

      Total segment revenues                  709.5     695.8     2,116.4     2,082.4


      Losses and operating expenses
      Losses and LAE                          403.0     474.2     1,225.1     1,239.7
      Policy acquisition expenses             146.8     139.7       434.7       416.1
      Other operating expenses                 86.1      68.1       256.8       221.9

      Total losses and operating expenses     635.9     682.0     1,916.6     1,877.7


      Segment income                        $  73.6   $  13.8   $   199.8   $   204.7

Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008

The Property and Casualty group's segment income increased $59.8 million, to $73.6 million, in the third quarter of 2009, compared to $13.8 million in the third quarter of 2008. Catastrophe related activity decreased $73.5 million in the third quarter of 2009, compared with the same period in 2008. During the third quarter of 2008, we incurred approximately $88 million of catastrophe losses related to Hurricanes Ike and Gustav. Excluding the impact of catastrophe related activity, segment income would have decreased $13.7 million. This decrease is primarily due to higher expenses and lower net investment income, partially offset by improved non-catastrophe current accident year results and increased favorable development on prior years' loss and LAE reserves. Underwriting, loss adjustment and other operating expenses increased approximately $24 million, of which approximately $7 million relates to higher pension costs. Additionally, there were higher employee and employee benefit costs, increased costs in our specialty lines of business, including the addition of our recently acquired AIX subsidiary, an increase in variable compensation, and higher technology costs. In addition, net investment income was lower by $3.2 million. These decreases were partially offset by more favorable current accident year non-catastrophe results of approximately $6 million, primarily in commercial lines, as well as favorable development on prior years' loss and LAE reserves of $10.3 million from our run-off voluntary pools business.

Production and Underwriting Results

The following table summarizes GAAP net premiums written and GAAP loss, LAE,
expense and combined ratios for the Personal Lines and Commercial Lines
segments. These items are not meaningful on a stand alone segment basis for our
Other Property and Casualty segment.



                                                                    Quarter Ended September 30,
                                                           2009                                     2008
                                                GAAP       GAAP       Cata-              GAAP       GAAP       Cata-
                                                Net        Loss      strophe             Net        Loss      strophe
                                              Premiums    Ratios       loss            Premiums    Ratios       loss
(In millions, except ratios)                  Written     (1)(2)    ratios (3)         Written     (1)(2)    ratios (3)
Personal Lines:
Personal automobile                          $    249.1      59.9          0.3        $    260.8      58.9          0.5
Homeowners                                        136.5      62.8         12.7             125.8      81.0         34.8
Other personal                                     11.1      38.1          3.1              10.9      41.2         13.4

Total Personal Lines                              396.7      60.3          4.2             397.5      64.9         10.8


Commercial Lines:
. . .