UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For the fiscal year ended December 31, 20052006

OR

For the transition period from:                    to                    

Commission file number: 1-13754

THE HANOVER INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (508) 855-1000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx No¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ Nox

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes¨ Nox

Based on the closing sales price of June 30, 20052006 the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $1,947,115,251.$2,396,698,724.

The number of shares outstanding of the registrant’s common stock, $.01 par value, was 53,115,82251,271,040 shares outstanding as of February 28, 2006.16, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of The Hanover Insurance Group, Inc.’s Proxy Statement relating to the 20062007 Annual Meeting of Shareholders to be held May 16, 200615, 2007 to be filed pursuant to Regulation 14A are incorporated by reference in Part III.

PART I

ITEM 1 — BUSINESS

ORGANIZATION

The Hanover Insurance Group, Inc. (“THG”), formerly known as Allmerica Financial Corporation, is a holding company organized as a Delaware corporation in 1995. Our consolidated financial statements include the accounts of THG; The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), which are our principal property and casualty subsidiaries; and First Allmerica Financial Life Insurance Company (“FAFLIC”), which is our life insurance and annuity subsidiary; and certain other insurance and non-insurance subsidiaries. In addition, our results of operations prior to December 30, 2005 include Allmerica Financial Life Insurance and Annuity Company (“AFLIAC”). On December 30, 2005, we sold AFLIAC through a stock purchase agreement, and reinsured 100% of the variable life insurance and annuity business of FAFLIC (see Life Companies on pages46 to 49 in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information). The results of operations for AFLIAC are reported as discontinued operations.

On December 1, 2005, we changed the name of our holding company from “Allmerica Financial Corporation” to “The Hanover Insurance Group, Inc.” and our stock, which is traded on the New York Stock Exchange, began trading under the symbol “THG” instead of the previous symbol of “AFC”.

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

Our business includes financial products and services in two major areas: Property and Casualty, and Life Companies. Within these broad areas, we conduct businesshave ongoing operations principally in fourthree operating segments. These segments are Personal Lines, Commercial Lines, and Other Property and Casualty, andCasualty. Our fourth operating segment, Life Companies.Companies, is in run-off. We report interest expense related to our corporate debt separately from the earnings of our operating segments. Corporate debt consists of our junior subordinated debentures and our senior debentures.

Information with respect to each of our segments is included in “Segment Results” on pages 3035 to 4249 in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 16 on pages 103106 to 105108 of the Notes to the Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.

DESCRIPTION OF BUSINESS BY SEGMENT

Following is a discussion of each of our operating segments.

PROPERTY AND CASUALTY

GeneralGENERAL

Our Property and Casualty group accounted for $2.4 billion, or 93.2%, of consolidated segment revenues and provided $113.7 million of segment income before federal income taxes for the year ended December 31, 2005. This group manages its operations principally through three segments, identified as Personal Lines, Commercial Lines and Other Property and Casualty. We underwrite personal and commercial property and casualty insurance through Hanover Insurance and Citizens, primarily through an independent agent network concentrated in the Midwest, Northeast, and Southeast United States. Additionally, our Other Property and Casualty segment consists of:of our premium financing business, our investment management services business and our voluntary pools business, in which we have not actively participated since 1995; our premium financing business; and our investment management services business.1995.

Our strategy in the Property and Casualty group focuses on the fundamentals of the business, namely disciplined underwriting, pricing, quality claim handling, strong agency relationships, active agency management, effective expense management and customer service. We have a strong regional focus. Our Property and Casualty group constituted the 31st largest property and casualty insurance group in the United States based on 20042005 direct premiums written, according to A.M. Best.

RisksRISKS

The industry’s profitability and cash flow can be significantly affected by: price; competition; volatile and unpredictable developments such as extreme weather conditions and natural disasters, including catastrophes; legal developments affecting insurer and insureds’ liability; extra-contractual liability; size of jury awards; acts of terrorism; fluctuations in interest rates and other factors that may affect investment returns; and other general economic conditions and trends, such as inflationary pressures, that may affect the adequacy of reserves. Additionally, the economic conditions in geographic locations where we conduct business, especially those locations where our business is concentrated, may affect the profitability of our business. The regulatory environments in those locations where we conduct business, including any pricing, underwriting or product controls, shared market mechanisms or mandatory pooling arrangements, and other conditions, such as our agency relationships, may also affect the profitability of our business. In addition, our loss and loss adjustment expense (“LAE”) reserves are based on our estimates, principally involving actuarial projections, at a given time, of what we expect the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events,

estimates of future trends in claims

frequency and severity and judicial theories of liability, costs of repairs and replacement, legislative activity and other factors. Changes to these estimates may affect our profitability.

Reference is also made to Item 1A – Risk Factors on pages 21 to 23 and “Risks and Forward-Looking Statements” on page 67 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

Lines of BusinessLINES OF BUSINESS

We underwrite personal and commercial property and casualty insurance coverage. In 2005, we introduced new product suites for both lines of business.

Personal Lines

Our Personal Lines segment accounted for $1.5 billion, or 57.9%57.1%, of consolidated segment revenues and provided $143.2$186.7 million of segment income before federal income taxes for the year ended December 31, 2005.2006. Personal Lines comprised 63.4%61.9% of the Property and Casualty group’s net written premium in 2005.2006. Personal automobile accounted for 68.8%68.9% and homeowners accounted for 28.4% of total personal lines net written premium in 2005.2006.

Products

Personal Lines coverages include:

Personal automobile coverage insures individuals against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured’s vehicle, and property damage to other vehicles and other property. In 2006, we continued to introduceConnections™Auto,our multivariate auto product, which is now available in seventeen states.Connections Auto utilizes a multivariate rating application which is intended to allow agents to write a wide spectrum of drivers.

Homeowners coverage insures individuals for losses to their residences and personal property, such as those caused by fire, wind, hail, water damage (except for flooding), theft and vandalism, and against third party liability claims. In September of 2006, we released an upgrade to our homeowners product that enhanced our agents’ ease of doing business and decreased quote times. We expect to introduce further homeowners’ product enhancements in several states during the first half of 2007.

Other personal lines is comprised of miscellaneous policiescoverages including inland marine, umbrella, fire, personal watercraft and earthquake.

Markets

Our top ten personal lines markets and the percent of our 20052006 personal lines’ net written premium represented by these markets are:

For the Year Ended December 31, 2005

Personal Lines

In Michigan, according to A.M. Best, based upon direct written premium for 2004,2005, we ranked 4^th in the industry for personal lines business, with approximately 9%8% of the state’s total market. Approximately 66%67% of theour Michigan personal lines business is in the personal automobile line. Approximately 42%41% of our total personal automobile net written premium is in Michigan. In addition, approximately 32%31% of theour Michigan personal lines business is in the homeowners line. Approximately 48%46% of our total homeowners net written premium is in Michigan. In Michigan, we are a principal provider with many of our agencies, averaging over $1.3$1.1 million of total written premium per agentagency in 2005.2006.

In Massachusetts, approximately 75% of our personal lines business is in the personal automobile line and 22% is in the homeowners line.

Commercial Lines

Our Commercial Lines segment accounted for $0.9$1.0 billion, or 34.2%36.0%, of consolidated segment revenues and incurred aprovided segment lossincome before federal income taxes of $35.0$120.3 million for the year ended December 31, 2005.2006. Commercial Lines comprised 36.6%38.1% of the Property and Casualty group’s net written premium in 2005.2006. Commercial multiple peril net written premium accounted for 41.1%40.0%, commercial automobile 24.5%22.0% and workers’ compensation 15.2%12.5% of total commercial lines net written premium in 2005.2006. In addition, the combination of our inland marine, ocean marine and bond business accounted for 19.5% of total commercial lines net written premium in 2006.

Products

OurAvenues^TM commercial lines product suite provides agents and customers with products designed for small, middle, and specialized markets. Commercial Lines coverages include:

Commercial multiple peril coverage insures businesses against third party liability from accidents occurring on their premises or arising out of their operations, such as injuries sustained from products sold. It also insures business property for damage, such as that caused by fire, wind, hail, water damage (except for flooding), theft and vandalism.

Commercial automobile coverage insures businesses against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured’s vehicle, and property damage to other vehicles and other property.

Workers’ compensation coverage insures employers against employee medical and indemnity claims resulting from injuries related to work. Workers’ compensation policies are often written in conjunction with other commercial policies.

Other commercial lines is comprised of miscellaneous policiesvarious coverages including inland and ocean marine, fidelity and surety bonds, umbrella, general liability, and fire.

Markets

We manage our commercial lines portfolio with a focus on growth from the most profitable industry segments, which varies by line of business and geography.

Our top ten commercial lines markets and the percent of our 20052006 commercial lines’ net written premium represented by these markets are:

For the Year Ended December 31, 2005

Commercial Lines

Approximately 42.0%38.9% of commercial lines written premium is comprised of small policies having less than $10,000 in premium. Policies with premium between $10,000 and $100,000 account for an additional 46.5%49.1% of the total. The commercial lines segment seeks to maintain effectivestrong agency relationships as a strategy to secure and retain our agents’ best business. The quality of business written is monitored through an ongoing quality assurance program, accountability for which is shared at the local, regional and corporate levels.

Other Property and Casualty

The Other Property and Casualty segment consists of AMGRO, Inc. (“AMGRO”), our premium financing business; Opus Investment Management, Inc. (“Opus”), which provides investment advisory services to affiliates and to other institutions, including unaffiliated insurance companies, retirement plans and foundations; and run-off voluntary pools business in which we have not actively participated since 1995; AMGRO, Inc. (“AMGRO”), our premium financing business; and Opus Investment Management, Inc. (“Opus”), which markets investment management services to institutions, pension funds and other organizations.1995. In addition, the Other Property and Casualty segment includes earnings on holding company assets.

Premium Financing Services

Through AMGRO, we engage in the business of financing property and casualty insurance premiums to commercial customers, primarily those of unaffiliated carriers. Generally, these installment finance receivables are secured by the related unearned insurance premiums on such policies. The customers of AMGRO are those personsfirms or firmspersons that borrow from AMGRO to finance insurance premiums.

Investment Advisory Services

Through our registered investment advisor, Opus, we provide investment advisory services to affiliates and to other institutions, including unaffiliated insurance companies, retirement plans foundations and a closed-end mutual fund.foundations. At December 31, 2005,2006, Opus had assets under management of approximately $8.7$7.3 billion, of which approximately $852 million$1.1 billion represented assets managed for entities unaffiliated with us. Included

Voluntary Pools

We have terminated our participation in the $8.7 billion were approximately $1.1 billion of assetsvirtually all voluntary pool business; however, we continue to be subject to claims related to our Allmerica Investment Trust Funds. These fundsyears in which we were transferred in January 2006 as part of a fund reorganization associated with the disposal of our variable life insuranceparticipant. See also “Reinsurance Facilities and annuity business (see Life CompaniesPools – OverviewVoluntary Pools” on pages 16 and 17page 11 of this Form 10-K and Note 2 on pages 82 and 83 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K).10-K.

Marketing and DistributionMARKETING AND DISTRIBUTION

On December 1, 2005, we changed the name of our Delaware holding company from “Allmerica Financial Corporation” to “The Hanover Insurance Group, Inc.” This change is part of an overall re-branding effort intended to clearly position our corporation as principally a property and casualty company, and to build brand recognition and brand equity in our markets. The company markets itself in all states except Michigan as The Hanover Insurance Group. In Michigan, where “Citizens” has well-established brand equity, we market the Company as “Citizens Insurance, a member of The Hanover Insurance Group.”

We are licensed to sell property and casualty insurance in all fifty states in the United States, as well as the District of Columbia. In 2005,2006, our top ten personal and commercial markets based on total net written premium in the state were:

FOR THE YEAR ENDED DECEMBER 31, 2005
		Personal Lines						Commercial Lines						Total
(In millions, except ratios)		GAAP Net Premiums Written			% Of Total			GAAP Net Premiums Written			% Of Total			GAAP Net Premiums Written			% Of Total
Michigan		$	591.1		43.4	%		$	166.8		21.2	%		$	757.9		35.2	%
Massachusetts			245.7		18.0				94.5		12.0				340.2		15.8
New York			100.9		7.4				97.4		12.4				198.3		9.2
New Jersey			118.0		8.7				58.3		7.4				176.3		8.2
Louisiana			40.9		3.0				39.0		5.0				79.9		3.7
Maine			32.1		2.3				41.1		5.2				73.2		3.4
Indiana			39.3		2.9				25.3		3.2				64.6		3.0
Florida			25.5		1.9				31.5		4.0				57.0		2.7
Connecticut			33.9		2.5				21.5		2.7				55.4		2.6
Illinois			19.3		1.4				34.2		4.3				53.5		2.5
Other			116.3		8.5				177.8		22.6				294.1		13.7
Total		$	1,363.0		100.0	%		$	787.4		100.0	%		$	2,150.4		100.0	%

In June of 2005, we began offering our new personal lines’ automobile product,ConnectionsAuto,which was distributed in eight states by the end of the year.ConnectionsAuto utilizes a multivariate rating application which is intended to allow agents to quickly and accurately quote a wide spectrum of drivers. We have already experienced increased agent interest in this product and have appointed 307 new personal lines agents in 2005.

We have a strong regional focus. Our Property and Casualty group maintains twenty-onetwenty-three local branch sales and underwriting offices in seventeennineteen states. Additional processing support is provided in Atlanta, Georgia; Worcester, Massachusetts; and Howell, Michigan. Administrative functions are centralized in our headquarters in Worcester, Massachusetts. This regional strategy allows us to maintain a strong focus on local markets and the flexibility to respond to specific market conditions. It also is a predominant factor in the establishment and maintenance of long-term relationships with larger,mid-sized, well-established independent agencies.

Independent agents provide specialized knowledge of property and casualty products, local market conditions and customer demographics. Independent agents account for most of the sales of our property and casualty products. Our growth strategy is closely aligned to our relationship with the independent agency force. We compensate agents primarily through regular commissions and through a profit sharingbonus plan that is tied to agency level written premium and profitability. This encourages agents to select customers whose risk characteristics are aligned with our underwriting philosophy.

Agencies are appointed based on profitability record, financial stability, staff experience and professionalism, and business strategy. Once appointed, we monitor each agency’s performance and, in accordance with applicable legal and regulatory requirements, take actions as necessary to change these business relationships, such as discontinuing the authority of the agent to underwrite certain products or revising commissions or profit sharingbonus opportunities.

We sponsor local and national agent advisory councils as forums to enhance relationships with our agents. These councils provide input on the development of products and services, help us to coordinate marketing efforts, provide support to our strategies, and help us enhance our local market presence.

For our Other Property and Casualty segment business, investment advisory services are marketed directly through Opus, while premium financing services are generally marketed through independent insurance agents primarily thoseto customers of unaffiliatedmany property and casualty carriers. Less than 1% of our premium financing services’ business is provided to customers of our Commercial Lines segment.

Pricing and CompetitionPRICING AND COMPETITION

We seek to achieve a targeted combined ratio in each of our product lines regardless of market conditions. The targeted combined ratios reflect current investment yield expectations, our loss payout patterns, and target returns on equity. This strategy is intended to better enable us to achieve measured growth and consistent profitability. In addition, we seek to utilize our knowledge of local markets to achieve superior underwriting results. We rely on market information provided by our local agents and on the knowledge of our staff in the local branch offices. Also, we seek to gather objective and verifiable information during the underwriting process, such as past driving records and credit histories. Since we maintain a strong regional focus and a significant market share in a number of states, we can apply our knowledge and experience in making underwriting and rate setting decisions.

The property and casualty industry is a competitive market withmarket. Our competitors include national, agency companies, direct writers, and regional and local insurers competingcompanies that sell insurance through various distribution channels, including independent agencies, through a captive agency force and/or directly to consumers. We market through independent agents and

compete for business on the basis of bothproduct, price, agency and service. Manycustomer service, local relationship and ratings, among other things.

In Personal Lines, we face competition from national, agency, regional and local companies that sell insurance through independent agents, captive agents and/or directly to consumers. We believe that our emphasis on maintaining strong agency relationships and concentrate on both commerciala local presence in our markets, coupled with investments in products, operating efficiency and personal lines. We market through independent agents and, therefore,technology, will enable us to compete with both direct writers and other independent agency companies for business in each of the agencies representing them. Such competition is based upon, among other things, pricing and availability of products, product design, agency and customer service, and ratings.effectively.

In our Michigan personal lines business, where we market our products under the Citizens Insurance brand name, we compete with a number of national direct writers and regional and local companies. Principal personal lines competitors are AAA Auto Club of Michigan, State Farm Group and Auto Owners. We believe our agency relationships, Citizens Insurance brand recognition, the Citizens Best program and our November 2005 introduction ofConnections Auto Auto in the state enable us to distribute our products competitively in Michigan.

Based on net written premium, approximately 20.7%16% of our 20052006 personal automobile business was written in Massachusetts. The Massachusetts Commissioner of Insurance (the “Commissioner”) sets the rates for personal automobile business in the state. Effective January 1, 2006, theThe Commissioner issued a decision decreasing the state-wide average rate by 11.7% effective April 1, 2007. Rates were decreased by 8.7%, whereas on January 1, 2005, rates were decreased by2006, and 1.7% and on January 1, 2004, rates increased 2.5%.2005. The impact of the rate change on our average policy premium as a result of the prior year changes was a decrease of 7.4% for 2006 and 1.2% for 2005 and an increase of 5.5% for 2004.2005.

Due to the unique nature of the personal lines’ rate setting process and the residual market mechanism in Massachusetts, we carefully manage our business in this state. In 20052006 and 2004,2005, our efforts included the termination of several agencies, the reduction or elimination of certain group business, and an enhanced cession strategy relating to the Massachusetts residual market. Also, we placed additional focus on claims handling practices for Massachusetts business. We believe these efforts have improved our Massachusetts underwriting performance compared to prior years. Our underwriting performance in this state couldis expected to be negatively impacted by the 20062007 rate reduction and future rate reductions orreductions; we cannot predict the impact of potential changes to the residual market mechanism.

In recent years, the Commissioner has proposed changes to the residual market for personal automobile insurance. If enacted, we do not believe that such changes, as currently proposed, would have a material effect on our Massachusetts underwriting performance.

In commercial lines,Commercial Lines, we face competition primarily from national, agency companies and regional and local companies.companies that sell insurance through independent agents or captive agents. We believe that our emphasis on maintaining a local presence in our markets, coupled with investments in products, operating efficiency and technology, will enable us to compete effectively. Also, we seek to develop and maintain strong relationships with our agents. Our Property and Casualty group is not dependent on a single customer or even a few customers, for which the loss of any one or more would have an adverse effect upon the group’s insurance operation.

In our Other Property and Casualty segment, we faceAMGRO faces competition among providers of premium financing services, including from banks, finance companies and property and casualty insurance carriers that offer direct billing plans. Competition is based on price and quality of service. Our premium financing business is not dependent on a single customer or agency relationship for which the loss of any one would have an adverse affect on its operations. Also, in our Other Property and Casualty segment, Opus faces strong competition among providers of investment advisory services. In general, competition is based on a number of factors, including investment performance, pricing and client service. There are few barriers to entry by new investment advisory firms. In 2005 and earlier years, Opus derived a significant portion of its revenue from investment advisory fees received from Allmerica Investment Trust funds (i.e., funds in which the separate accounts of our life insurance subsidiaries invest premiums received from variable life insurance and annuity deposits). The sale of AFLIAC to Goldman Sachs, as well as the reorganization of the Allmerica Investment Trust funds into the Goldman Sachs Variable Insurance Trust funds (see Life Companies – Overview on pages 16 and 17 of this Form 10-K and Note 2 on pages 82 and 83 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K), will result in a prospective reduction of the segment’s financial results. Opus also earns advisory fees from other affiliated and unaffiliated separately managed accounts and we are dependent upon the relationships we maintain with them. In the event that any of these relationships are discontinued, the segment’s financial results may be adversely affected.

ClaimsCLAIMS

We utilize experienced claims adjusters, appraisers, medical specialists, managers and attorneys in order to manage our claims. Our Property and Casualty group has field claims adjusters strategically located throughout our operating territories. Claims staff members work closely with the agents and seek to settle claims rapidly, fairly and in a cost-effective manner.

Claims office adjusting staff is supported by general adjusters for large property and large casualty losses, by automobile and heavy equipment damage appraisers for automobile material damage losses, and by medical specialists whose principal concentration is on workers’ compensation and no-fault automobile injury cases. In addition, the claims offices are supported by staff attorneys who specialize in litigation defense and claim settlements. We also maintain a special investigative unit that investigates suspected insurance fraud and abuse.

We utilize claims processing technology which allows most of the smaller and more routine personal lines claims to be processed at centralized locations. TheIn 2006, we invested in enhancements to our claims related technology and processes and in 2007 we plan to begin to implement new technology and reorganize our claims processes. We believe these enhancements and our centralization helpswill help to increase efficiency and reduce operating costs.costs, although there can be no assurance that we will achieve our objectives or that disruptions caused by such implementations will not adversely affect our operations or financial results.

CatastrophesCATASTROPHES

Property and casualty insurers are subject to claims arising out of catastrophes, which may have a significant impact on their results of operations and financial condition. We may experience catastrophe losses in the future which could have a material adverse impact on us. Catastrophes can be caused by various events, including snow, ice storms, hurricanes, earthquakes, tornadoes, wind, hail, terrorism, fires and explosions. The incidence and severity of catastrophes are inherently unpredictable. We manage our catastrophe risks through underwriting procedures, including the use of deductibles and specific exclusions for floods and terrorism, as allowed, and other factors, through geographic exposure management and through reinsurance programs. The catastrophe reinsurance program is structured to protect us on a per-occurrence basis, as well as to limit losses in the event of multiple catastrophic events.basis. We will continue to actively monitor geographic location and coverage concentrations in order to manage corporate exposure to all catastrophic events. Although catastrophes can cause losses in a variety of property and casualty lines, homeowners and commercial multiple peril insurance have, in the past, generated the majority of catastrophe-related claims.

TerrorismTERRORISM

As a result of the Federal Terrorism Risk Insurance Act of 2002 (“TRIA”) and the Federal Terrorism Risk Insurance Extension Act of 2005, prior terrorism exclusions in insurance policies are void for certified terrorist events (as defined by TRIA). TRIA provides a federal reinsurance arrangement for insured losses resulting from certified terrorist events that exceed certain thresholds on an industry-wide basis. There can be no assurance that TRIA will be extended beyond its current expiration date of December 31, 2007.

As required, we have notified policyholders of their option to elect the terrorism coverage and the cost of this coverage. We seek to manage our exposures on an individual line of business basis and in the aggregate by zip code and, as available, street address. At this time, we have purchased no additional specific terrorism-only reinsurance coverage. However, we are reinsured for certain terrorism coverage within existing Catastrophe, Property per Risk and Casualty Excess of Loss corporate treaties (see Reinsurance – Terrorism Coverage on pages 1314 to 1617 of this Form 10-K). Our retention limit under TRIA in 20052006 was $121.5$111.5 million, representing 11.0%9.2% of year-end 20042005 statutory policyholder surplus, and is estimated to be $111.5$137.4 million in 2006,2007, representing 9.2%9.4% of 20052006 year-end statutory policyholder surplus. In addition, in 2006, we will beWe were required to retain an additional 10% of any claims from a certified terrorist event in excess of our retention.retention in 2006, and will be required to retain 15% of any claims from a certified terrorist event in excess of our retention in 2007. Coverage under TRIA is available for worker’sworkers’ compensation, commercial multiple peril and certain other commercial lines policies.

State RegulationSTATE REGULATION

Our property and casualty insurance subsidiaries are subject to extensive regulation in the various states and jurisdictions in which they transact business and are also supervised by the individual state insurance departments. Numerous aspects of our business are subject to regulatory standards, including premium rates, mandatory risks that must be covered, prohibited exclusions, licensing of agents, investments, restrictions on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the benefit of policyholders, policy forms, and other conduct, including the use of credit information in underwriting, as well as other underwriting and claims practices. States also regulate various aspects of the contractual relationships between insurers and independent agents.

In addition, as a condition to writing business in certain states, insurers are required to participate in various pools or risk sharing mechanisms or to accept certain classes of risk, regardless of whether such risks meet our underwriting requirements for voluntary business. Some states also limit or impose restrictions on the ability of an insurer to withdraw from certain classes of business. For example, Massachusetts, New Jersey, New York, Louisiana and LouisianaFlorida each impose material restrictions on a company’s ability to withdraw from certain lines of business in their respective states. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of insurance business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance departments can impose significant charges on a carrier in connection with a market withdrawal or refuse to approve these plans on the grounds that they could lead to market disruption. Laws and regulations that limit cancellation and non-renewal and that subject withdrawal plans to prior approval requirements may significantly restrict an insurer’s ability to exit unprofitable markets.

OnEmergency Rule 23 (“Rule 23”), which was issued on December 30, 2005 by the Louisiana Insurance Commissioner, issued Emergency Rule 23 suspendingand which suspended the authority of insurance companies to cancel or nonrenewnon-renew certain personal and commercial property insurance policies covering properties in Louisiana that had been damaged by hurricanes Katrina and Rita. The ability to issue notices of cancellation and nonrenewal has been suspended until 60 days after the substantial

completion of the repair or reconstruction of the dwelling, residential property or commercial property or untilRita, expired on December 31, 2006, whichever occurs first. Under2006. Prior to the expiration of Rule 23, companies may cancel for certain reasons such as nonpayment of premium and, with the approval ofAdvisory Letter 06-05 was issued by the Louisiana Insurance Commissioner,Department providing guidance on actions to be

taken before insurers may issue renewal policiessend cancellation or non-renewal notices on properties previously covered by Rule 23. Legislation was enacted in Louisiana to extend the time period for Louisiana homeowners who have policy coverage claims arising out of hurricanes Katrina and Rita to take legal action against their insurance companies from the pre-existing 12 month period to 24 months from the date of loss. The Louisiana Supreme Court has determined that the legislation is constitutional. Legislation was also adopted which increased an insurer’s potential exposure if it is determined to have acted in bad faith in the claim adjustment process.

In January 2007, the Governor of Florida signed into law significant changes affecting the property and casualty insurance market. The legislation reversed two recently approved rate increases for the residual market property insurer, Citizens Property Insurance Corporation, and mandated that private insurer rates be adjusted to reflect projected savings in reinsurance costs realized through purchases of catastrophe reinsurance from the Florida Hurricane Catastrophe Fund. Insurers are presently prohibited by an Emergency Rule from canceling, non-renewing or raising rates with coveragevery limited exceptions, until rate filings reflecting the reduced cost of reinsurance from the Florida Hurricane Catastrophe Fund have been filed with the Office of Insurance Regulation. For further discussion of this legislation, see “Contingencies and premium changes.Regulatory Matters – Other Regulatory Matters” on pages 65 and 66 in Management’s Discussion and analysis of Financial Condition and Results of Operations of this Form 10-K.

The insurance laws of many states generally provide that property and casualty insurers doing business in those states belong to statutory property and casualty guaranty funds. The purpose of these guaranty funds is to protect policyholders by requiring that solvent property and casualty insurers pay certain insurance claims of insolvent insurers. These guaranty associations generally pay these claims by assessing solvent insurers proportionately based on the insurer’s share of voluntary written premium in the state. While most guaranty associations provide for recovery of assessments through subsequent rate increases, surcharges or premium tax credits, there is no assurance that insurers will ultimately recover these assessments, which could be material – particularly following a large catastrophe affecting us and the industry generally or in markets which become disrupted or where we have significant market share.

We are subject to periodic financial and market conduct examinations conducted by state insurance departments. We are also required to file annual and other reports relating to the financial condition of our insurance subsidiaries and other matters.

Residual Markets and Pooling ArrangementsRESIDUAL MARKETS AND POOLING ARRANGEMENTS

As a condition of our license to do business in various states, we are required to participate in mandatory property and casualty shared market mechanisms or pooling arrangements which provide various insurance coverages to individuals or other entities that otherwise are unable to purchase such coverage. Such mechanisms include assigned risk plans, reinsurance facilities and pools, joint underwriting associations, fair access to insurance requirements plans, and commercial automobile insurance plans. For example, since most states compel the purchase of a minimal level of automobile liability insurance, states have developed shared market mechanisms to provide the required coverages and in many cases, optional coverages, to those drivers who, because of their driving records or other factors, cannot find insurers who will writeinsure them voluntarily. Our participation in such shared markets or pooling mechanisms is generally proportional to our direct writings for the type of coverage written by the specific pooling mechanism in the applicable state. We incurredexperienced an underwriting lossprofit (loss) from participation in these mechanisms, mandatory pools and underwriting associations of $34.9$9.7 million and $16.7($43.1) million in 20052006 and 2004,2005, respectively, relating primarily to coverages for personal and commercial automobile,property, personal and commercial property,automobile, and workers’ compensation. The increaseimprovement in the underwriting lossresults in 2005,2006, compared to 2004,2005, is primarily the result of losses fromour participation in the Louisiana Fair Access to Insurance Requirements Plan (“FAIR Plan”), which incurred significant losses in 2005 due to Hurricane Katrina.Katrina, and to our participation in the Massachusetts Commonwealth Automobile Reinsurers (“CAR”) pool.

Reinsurance Facilities and Pools

Reinsurance facilities are currently in operation in various states that require an insurer to write all applications submitted by an agent, regardless of its pricing or underwriting characteristics. As a result, insurers in that state may be writing policies for applicants with a higher risk of loss, or at a lower premium, than they would normally accept. The reinsurance facility allows the insurer to cede this high risk business to the reinsurance facility, thus sharing the underwriting experience with all other insurers in the state. If a claim is paid on a policy issued in this market, the facility will reimburse the insurer. Typically, reinsurance facilities operate at a deficit, which is then recouped by levying assessments against the same insurers.

With respect to our Massachusetts business, we cede a portion of our personal and commercial automobile premiums to the CAR pool. Net premiums earned and losses and LAE ceded to CAR were $44.3 million and $29.5 million in 2006, $53.3 million and $37.1 million in 2005, and $46.6 million and $38.1 million in 2004, and $46.2 million and $61.0 million in 2003, respectively. At December 31, 2005,2006, CAR represented at least 10% of our reinsurance activity.

In addition toAs part of the CAR plan, Massachusetts also maintains an Exclusive Representative Producer (“ERP”) program. An ERP is an independent agency which cannot obtain a voluntary insurance market for personal or commercial automobile business from insurance companies in Massachusetts. For Personal Lines, CAR assigns an ERP agency to an individual insurance carrier, which is then required to write all personal or commercial automobile business produced by that agency (subject to any cessions to the CAR pool). We are required to maintain a level of ERPs consistent with other carriers in the state and proportionate to our overall market share of such business. Once an agency is assigned to an insurance carrier, it is difficult to terminate the relationship. ERPs generally produce underwriting results that are markedly poorer than our voluntary agents, although results vary significantly among ERPs. AsFor Personal Lines, as of December 31, 2005,2006, we had approximately 4716 ERPs assigned to us with annual direct retained written premium of approximately $40.0$24.3 million. As described above under “Pricing“Contingencies and Competition”,Regulatory Matters - Other Regulatory Matters” on pages 65 and 66 of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K, the Massachusetts Commissioner of Insurance has adopted rules to redistribute the residual market although such rules arein 2006 and issued an Order in December 2006 directing the subjectimplementation of an assigned risk plan on a stay orderphased-in basis in April of 2007. In January 2007, the Commissioner of Insurance resigned and the Acting Commissioner issued an Order suspending the implementation of the assigned risk plan until a review could be completed by a state court.the administration of the newly elected Governor. For Commercial Lines, we act as one of six servicing carriers for commercial automobile business.

The Michigan Catastrophic Claims Association (“MCCA”) is a reinsurance mechanism that covers no-fault first party medical losses of retentions in excess of $375,000.$400,000. All automobile insurers doing business in Michigan are required to participate in the MCCA. Insurers are reimbursed for their covered losses in excess of this threshold, which increased from $350,000$375,000 to $375,000$400,000 on July 1, 20052006 and will continue to increase each July 1st in scheduled amounts until it reaches $500,000 in 2011. Funding for MCCA comes from assessments against automobile insurers based upon their proportionate market share of the state’s automobile liability insurance market. Insurers are allowed to pass along this cost to Michigan automobile policyholders. We ceded to the MCCA premiums earned and losses and LAE of $74.3 million and $118.8 million in 2006, $68.9 million and $61.3 million in 2005, and $60.9 million and $12.4 million in 2004, and $46.8 million and $124.2 million in 2003, respectively. At December 31, 2005,2006, the MCCA represented at least 10% of our reinsurance activity.

At December 31, 20052006 and 2004,2005, we had reinsurance recoverables on paid and unpaid losses from CAR of $47.2$42.3 million and $52.0$47.2 million, respectively, and from the MCCA of $436.5$515.0 million and $411.9$436.5 million, respectively. We believe that we are unlikely to incur any material loss as a result of non-payment of amounts owed to us by CAR, because CAR is a mandated pool supported by all insurance companies licensed to write automobile insurance in Massachusetts. In addition, with respect to MCCA, we are unlikely to incur any material loss from this facility as a result of non-payment of amounts owed to us by MCCA because (i) it is currently in a surplus position, (ii) the payment obligations of the MCCA are extended over many years, resulting in relatively small current payment obligations in terms of MCCA total assets, and (iii)(ii) the MCCA is supported by assessments permitted by statute.

Reference is made to Note 18 on pages 105 to 107108 and 109 and Note 21 on pages 110 and 111112 to 114 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.

FAIR Plans and Other Involuntary Pools

The principal shared market mechanisms for property insurance are FAIR Plans, the formation of which were required by the federal government as a condition to an insurer’s ability to obtain federal riot reinsurance coverage following the riots and civil disorder that occurred during the 1960s. These plans, created as mechanisms similar to automobile assigned risk plans, were designed to increase the availability of property insurance in urban areas, but now cover other circumstances where homeowners are unable to obtain insurance, such as a result of hurricanes or other natural exposures. The federal government reinsures those insurers participating in FAIR Plans against excess losses sustained from riots and civil disorders. The individual state FAIR Plans are created pursuant to statute or regulation. The property shared market mechanisms provide basic fire insurance and extended coverage protection for dwellings and certain commercial properties that could not be insured in the voluntary market. A few states also include a basic homeowners form of coverage in their shared market mechanism. Approximately 30 states have FAIR Plans, or similar market mechanisms, including Louisiana, Florida and Massachusetts.

In 2005, the Louisiana FairCitizens FAIR Plan experienced substantial losses primarily from Hurricane Katrina. We have estimated and recorded a liability related to Louisiana’s FairFAIR Plan for accident year 2005 at approximately $2.4 million and $20.0 million.million at December 31, 2006 and 2005, respectively. The maximum annual FAIR Plan assessment that can be levied against an insurer operating in Louisiana is approximately 20%30% of the annual direct premium written by the insurer in the prior year, representingconsisting of a regular FAIR Plan assessment of up to 10%, a regular Coastal Plan assessment of up to 10%, and an emergency assessment of up to 10%. Under the state’s FairFAIR Plan, we are allowed to recover such losses from policyholders, subject to annual limitations. However, due toUnder current regulations, we do not anticipate additional liabilities for the uncertainty in the marketplace in Louisiana, it is unclear whether our current estimate of liability will be sufficient to cover our share of FAIR Plan losses or whether we will be able to recover such costs from policyholders. Also, the2005 accident year. The availability of private homeowners insurance in the state is declining as carriers seek to exit or significantly reduce their exposure in the state. This will increase the number of insureds seeking coverage from the state’s FAIR Plan and could result in increased losses to us through the FAIR Plan.Plan for future events.

The Florida FAIR Plan, hasCitizens Property Insurance Corporation, also experienced considerable losses during 2005 as a result of hurricanes and we believe it has a significant deficit.hurricanes. The Florida Plan has similar authority to the Louisiana FAIR Plan to assess insurers up to an aggregate amount of approximately 20% of direct premium written from the prior year in the form of a regular assessment, not to exceed 10%, and an emergency assessment that may not exceed 10%. WhileIn 2006, we believe we may receivereceived an assessment from Florida’s FAIR Plan of $1.0 million. Florida’s FAIR Plan has experienced significant growth and is expected to continue to grow. In January 2007, the Governor of Florida signed into law significant changes affecting the property and casualty industry, as well as Florida’s FAIR Plan. For a further discussion of this legislation, see “Contingencies and Regulatory Matters – Other Regulatory Matters” on pages 65 and 66 in 2006, the amountManagement’s Discussion and timingAnalysis of any such assessment is uncertain. Therefore, we are unable to estimateFinancial Condition and record a liability related to the Florida Plan atResults of Operations of this time.Form 10-K.

We have recently seen significant growth in the Massachusetts FAIR Plan coastal exposures. We also anticipate the FAIR Plan to have significant hurricane exposures for 100 year or more events, which would likely be material to the FAIR Plan, as well as to participating companies. The Massachusetts FAIR Plan does not purchase catastrophe reinsurance and, as such, we are exposed to our proportionate share of this potential liability.

It should also be noted that such an event would be subject to our reinsurance programs, as described in the “Reinsurance” section on pages 1314 to 1617 of this Form 10-K. Although it is difficult to accurately estimate such exposure, it would likely be material to our financial statements.position and/or results of operations. Two other state FAIR Plans, where our participation is larger as compared to other states, are North Carolina and New York.

The New Jersey Department of Banking and Insurance has proposed establishing a mechanism to subsidize insurers for writing urban personal automobile policies. The Territorial Rating Equalization Exchange is intended to help to avoid future issues of high premiums and reduced availability in urban areas. The New Jersey Department of Banking and Insurance is presently seeking insurer comment and input to more fully develop and implement the proposal.

With respect to commercial automobile coverage, another pooling mechanism, a Commercial Auto Insurance Plan (“CAIP”), uses a limited number of servicing carriers to handle assignments from other insurers. The CAIP servicing carrier is paid a fee by the insurer who otherwise would be assigned the responsibility of handling the commercial automobile policy and paying claims. Approximately 40 states have CAIP mechanisms, including the states of New Jersey, New York, and Louisiana, where our participation is larger as compared to other states.

Assigned Risk Plans

Assigned risk plans are the most common type of shared market mechanism. Many states, including Illinois, New Jersey and New York operate assigned risk plans. Such plans assign applications from drivers who are unable to obtain insurance in the voluntary market to insurers licensed in the applicant’s state. Each insurer is required to accept a specific percentage of applications based on its market share of voluntary business in the state. Once an application has been assigned to an insurer, the insurer issues a policy under its own name and retains premiums and pays losses as if the policy was voluntarily written. With respect to New York’s assigned risk plan, which is called The New York Automobile Insurance Plan (“NYAIP”), we have elected to transfer our assignments to a servicing carrier under a limited assignment distribution (“LAD”) agreement. Under this LAD agreement, the servicing carrier retains the assigned underwriting results of the NYAIP for which it receives a fee from us. In 20052006 and 2004,2005, we incurred expenses of $4.3$0.8 million and $0.1$4.3 million, respectively, related to this agreement.

Voluntary Pools

We have terminated our participation in virtually all voluntary pool business; however, we continue to be subject to claims related to years in which we were a participant. The most significant of these pools is a voluntary excess and casualty reinsurance pool known as the Excess and Casualty Reinsurance Association (“ECRA”), in which we were a participant from 1950 to 1982. In 1982, the pool was dissolved and since that time the business has been in runoff. Our participation in this pool has resulted in average paid losses of approximately $2 million annually over the past ten years. Because of the inherent uncertainty regarding the types of claims in this pool, there can be no assurance that the reserves will be sufficient. Loss and LAE reserves for our voluntary pools were $74.7$74.8 million and $72.0$74.7 million at December 31, 20052006 and 2004,2005, respectively, including $53.3 million and $50.3 million related to ECRA as of December 31, 20052006 and 2004, respectively.2005. Excluding the ECRA pool, the average annual paid losses and reserve balances at December 31, 20052006 were not individually significant.

Reserve for Unpaid Losses and Loss Adjustment ExpensesRESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Reference is made to “Reserve“Property and Casualty – Reserve for Losses and Loss Adjustment Expenses” on pages 3540 to 3946 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

Our property and casualty actuaries review the reserves each quarter and certify the reserves annually as required for statutory filings. Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our settlement and payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and LAE.

We regularly review our reserving techniques, our overall reserving position and our reinsurance. Based on (i) our review of historical data, legislative enactments, judicial decisions, legal developments in impositions of damages, changes in political attitudes and trends in general economic conditions, (ii) our review of per claim information, (iii) our historical loss experience of our property and casualty business andthat of the industry, (iv) the relatively short-term nature of most policies written by us and (v) our internal estimates of required reserves, we believe that adequate provision has been made for loss reserves. However, establishment of appropriate reserves is an inherently uncertain process and there can be no certainty that current established reserves will prove adequate in light of subsequent actual experience. A significant change to the estimated reserves could have a material effect on our results of operations or financial position. An increase or decrease in reserve estimates would result in a corresponding decrease or increase in financial results. For example, each one percentage point change in the aggregate loss and LAE ratio resulting from a change in reserve estimation is currently projected to have an approximate $22 million impact on property and casualty segment income, based on 20052006 full year premiums.

We do not use discounting techniques in establishing reserves for losses and LAE, nor have we participated in any loss portfolio transfers or other similar transactions.

The following table reconciles reserves determined in accordance with accounting principles and practices prescribed or permitted by insurance statutory authorities (“Statutory”) to reserves determined in accordance with generally accepted accounting principles (“GAAP”).

Analysis of Losses and Loss Adjustment Expenses Reserve DevelopmentANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSES RESERVE DEVELOPMENT

The following table sets forth the development of our GAAP reserves (net of reinsurance recoverables) for unpaid losses and LAE from 19951996 through 2005.2006.

Reinsurance