10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)

Delaware	04-3263626
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

440 Lincoln Street, Worcester, Massachusetts 01653

(Address of principal executive offices) (Zip Code)

(508) 855-1000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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.    Yes  x    No  ¨

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):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 51,396,389 shares of common stock outstanding, as of May 1, 2008.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Shareholders’ Equity	5
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Cash Flows	7
	Notes to Interim Consolidated Financial Statements	8-21
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22-49
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	51-52
Item 1A.	Risk Factors	52-55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6.	Exhibits	56
SIGNATURES		57

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

	(Unaudited) Three Months Ended March 31,
(In millions, except per share data)	2008			2007
REVENUES
Premiums	$	630.6		$	602.2
Net investment income		80.7			80.2
Net realized investment (losses) gains		(5.0	)		2.3
Fees and other income		11.1			13.4
Total revenues		717.4			698.1
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment expenses		406.4			385.5
Policy acquisition expenses		137.6			127.2
Other operating expenses		92.9			93.5
Total benefits, losses and expenses		636.9			606.2
Income before federal income taxes		80.5			91.9
Federal income tax expense:
Current		10.8			22.0
Deferred		16.2			6.1
Total federal income tax expense		27.0			28.1
Income from continuing operations		53.5			63.8
Discontinued operations (See Note 3):
Gain (loss) on disposal of variable life insurance and annuity business (net of income tax benefit of $0.2 in 2007)		6.2			(0.2	)
Other		(1.2	)		—
Net income	$	58.5		$	63.6
PER SHARE DATA
Basic
Income from continuing operations	$	1.03		$	1.25
Discontinued operations:
Gain (loss) on disposal of variable life insurance and annuity business		0.12			(0.01	)
Other		(0.02	)		—
Net income per share	$	1.13		$	1.24
Weighted average shares outstanding		51.7			51.2
Diluted
Income from continuing operations	$	1.02		$	1.23
Discontinued operations:
Gain (loss) on disposal of variable life insurance and annuity business		0.12			(0.01	)
Other		(0.02	)		—
Net income per share	$	1.12		$	1.22
Weighted average shares outstanding		52.3			51.9

The accompanying notes are an integral part of these consolidated financial statements.

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THE HANOVER INSURANCE GROUP, INC .

CONSOLIDATED BALANCE SHEETS

(In millions, except per share data)	(Unaudited) March 31, 2008			December 31, 2007
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost of $5,654.8 and $5,723.1)	$	5,646.6		$	5,722.0
Equity securities, at fair value (cost of $45.2 and $37.6)		49.1			44.9
Mortgage loans		38.3			41.2
Policy loans		111.9			116.0
Other long-term investments		30.1			30.7
Total investments		5,876.0			5,954.8
Cash and cash equivalents		233.3			262.8
Accrued investment income		73.5			70.9
Premiums, accounts and notes receivable, net		557.5			540.8
Reinsurance receivable on paid and unpaid losses, benefits and unearned premiums		1,353.2			1,378.9
Deferred policy acquisition costs		254.5			250.5
Deferred federal income taxes		316.5			330.5
Goodwill		131.9			126.0
Other assets		479.8			419.1
Separate account assets		424.4			481.3
Total assets	$	9,700.6		$	9,815.6
LIABILITIES
Policy liabilities and accruals:
Future policy benefits	$	1,157.3		$	1,164.9
Outstanding claims, losses and loss adjustment expenses		3,194.5			3,239.5
Unearned premiums		1,163.2			1,157.1
Contractholder deposit funds and other policy liabilities		163.3			179.2
Total policy liabilities and accruals		5,678.3			5,740.7
Expenses and taxes payable		677.0			696.4
Reinsurance premiums payable		48.5			47.2
Trust instruments supported by funding obligations		39.8			39.1
Long-term debt		511.9			511.9
Separate account liabilities		424.4			481.3
Total liabilities		7,379.9			7,516.6
Commitments and contingencies (Note 13)
SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value, 20.0 million shares authorized, none issued		—			—
Common stock, $0.01 par value, 300.0 million shares authorized, 60.5 million shares issued		0.6			0.6
Additional paid-in capital		1,798.4			1,822.6
Accumulated other comprehensive loss		(23.7	)		(20.4	)
Retained earnings		1,012.6			946.9
Treasury stock at cost (9.2 million and 8.7 million shares)		(467.2	)		(450.7	)
Total shareholders’ equity		2,320.7			2,299.0
Total liabilities and shareholders’ equity	$	9,700.6		$	9,815.6

The accompanying notes are an integral part of these consolidated financial statements.

4

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	(Unaudited) Three Months Ended March 31,
(In millions)	2008			2007
PREFERRED STOCK
Balance at beginning and end of period	$	—		$	—
COMMON STOCK
Balance at beginning and end of period		0.6			0.6
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period		1,822.6			1,814.3
Tax benefit from stock options and other		0.2			0.8
Employee and director stock-based awards		(24.4	)		(0.4	)
Balance at end of period		1,798.4			1,814.7
ACCUMULATED OTHER COMPREHENSIVE LOSS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS AND DERIVATIVE INSTRUMENTS:
Balance at beginning of period		5.5			(9.0	)
Net (depreciation) appreciation during the period:
Net (depreciation) appreciation on available-for-sale securities and derivative instruments		(3.6	)		24.1
Benefit (provision) for deferred federal income taxes		1.2			(4.7	)
		(2.4	)		19.4
Balance at end of period		3.1			10.4
DEFINED BENEFIT PENSION AND POSTRETIREMENT PLANS:
Balance at beginning of period		(25.9	)		(30.9	)
Amounts arising in the period		(0.1	)		—
Amortization during the period:
Amount recognized as net periodic benefit cost		(1.2	)		(0.9	)
Benefit for deferred federal income taxes		0.4			0.3
		(0.9	)		(0.6	)
Balance at end of period		(26.8	)		(31.5	)
Total accumulated other comprehensive loss		(23.7	)		(21.1	)
RETAINED EARNINGS
Balance at beginning of period, before cumulative effect of accounting change		946.9			712.0
Cumulative effect of accounting change		—			11.5
Balance at beginning of period, as adjusted		946.9			723.5
Net income		58.5			63.6
Treasury stock issued for less than cost		(5.6	)		(4.7	)
Recognition of share-based compensation		12.8			0.4
Balance at end of period		1,012.6			782.8
TREASURY STOCK
Balance at beginning of period		(450.7	)		(487.8	)
Shares purchased at cost		(32.9	)		—
Net shares reissued at cost under employee stock-based compensation plans		16.4			11.5
Balance at end of period		(467.2	)		(476.3	)
Total shareholders’ equity	$	2,320.7		$	2,100.7

The accompanying notes are an integral part of these consolidated financial statements.

5

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	(Unaudited) Three Months Ended March 31,
(In millions)	2008			2007
Net income	$	58.5		$	63.6
Other comprehensive (loss) income :
Available-for-sale securities:
Net (depreciation) appreciation during the period		(3.3	)		24.3
Benefit (provision) for deferred federal income taxes		1.1			(4.8	)
Total available-for-sale securities		(2.2	)		19.5
Derivative instruments:
Net depreciation during the period		(0.3	)		(0.2	)
Benefit for deferred federal income taxes		0.1			0.1
Total derivative instruments		(0.2	)		(0.1	)
		(2.4	)		19.4
Pension and postretirement benefits:
Amounts arising in the period		(0.1	)		—
Amortization recognized as net periodic benefit costs:
Net actuarial loss		0.3			0.1
Prior service cost		(1.1	)		(0.6	)
Transition asset		(0.4	)		(0.4	)
Total amortization recognized as net periodic benefit costs		(1.2	)		(0.9	)
Benefit for deferred federal income taxes		0.4			0.3
Total pension and postretirement benefits		(0.9	)		(0.6	)
Other comprehensive (loss) income		(3.3	)		18.8
Comprehensive income	$	55.2		$	82.4

The accompanying notes are an integral part of these consolidated financial statements.

6

THE HANOVER INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited) Three Months Ended March 31,
(In millions)	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	58.5		$	63.6
Adjustments to reconcile net income to net cash used in operating activities:
(Gain) loss on disposal of variable life insurance and annuity business		(6.2	)		0.2
Loss from other discontinued operations		1.2			—
Net realized investment losses (gains)		5.0			(2.3	)
Net amortization and depreciation		4.1			4.9
Stock-based compensation expense		3.4			4.4
Deferred federal income taxes		16.2			6.1
Change in deferred acquisition costs		(3.0	)		(6.0	)
Change in premiums and notes receivable, net of reinsurance premiums payable		(60.4	)		(14.7	)
Change in accrued investment income		(2.6	)		(2.6	)
Change in policy liabilities and accruals, net		(67.6	)		(3.9	)
Change in reinsurance receivable		31.2			8.6
Change in expenses and taxes payable		(56.8	)		(99.6	)
Other, net		(4.3	)		0.7
Net cash used in operating activities		(81.3	)		(40.6	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of available-for-sale fixed maturities		276.6			292.3
Proceeds from disposals of equity securities and other investments		4.8			5.9
Proceeds from mortgages sold, matured or collected		2.9			0.8
Proceeds from collections of installment finance and notes receivable		118.7			104.2
Net cash used to acquire Verlan Holdings, Inc (1)		(2.2	)		—
Purchase of available-for-sale fixed maturities		(214.8	)		(309.5	)
Purchase of equity securities and other investments		(8.1	)		—
Capital expenditures		(3.9	)		(2.4	)
Disbursements to fund installment finance and notes receivable		(106.9	)		(122.3	)
Net cash provided by (used in) investing activities		67.1			(31.0	)
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of options		2.5			5.7
Proceeds from excess tax benefits related to share-based payments		0.1			0.6
Change in short term debt		37.2			—
Change in collateral related to securities lending program		(16.5	)		(88.9	)
Treasury stock purchased at cost		(32.9	)		—
Net cash used in financing activities		(9.6	)		(82.6	)
Net change in cash and cash equivalents		(23.8	)		(154.2	)
Net change in cash and cash equivalents held by AMGRO, Inc. (See Note - 12)		(5.7	)		3.7
Cash and cash equivalents, beginning of period		262.4			364.4
Cash and cash equivalents, end of period	$	233.3		$	213.9

(1) The net cash used to acquire Verlan Holdings, Inc. excludes $24.5 million of funds being held by Hanover Insurance, who is acting as the facilitator of the transaction payments to shareholders. As of May 1, 2008, approximately $22 million of these funds has been paid to shareholders of Verlan. See Note 12 - Significant Transactions.

The accompanying notes are an integral part of these consolidated financial statements.

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THE HANOVER INSURANCE GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of The Hanover Insurance Group, Inc. (“THG” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the requirements of Form 10-Q.

The interim consolidated financial statements of THG include the accounts of The Hanover Insurance Company (“Hanover Insurance”), and Citizens Insurance Company of America (“Citizens”), THG’s principal property and casualty companies; First Allmerica Financial Life Insurance Company (“FAFLIC”), THG’s life insurance and annuity subsidiary; and certain other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 9. All significant intercompany accounts and transactions have been eliminated.

The accompanying interim consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments necessary for a fair presentation of the financial position and results of operations. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. New Accounting Pronouncements

Recently Issued Standards

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“Statement No. 141(R)”). Statement No. 141(R) requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with certain exceptions. Additionally, the statement requires changes to the accounting treatment of acquisition related items, including, among other items, transaction costs, contingent consideration, restructuring costs, indemnification assets and tax benefits. Statement No. 141(R) also provides for a substantial number of new disclosure requirements. This statement is effective for business combinations initiated on or after the first annual reporting period beginning after December 15, 2008. The Company expects that Statement No. 141(R) will have an impact on its accounting for future business combinations once the statement is adopted, but the effect is dependent upon acquisitions, if any, that are made in the future.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“Statement No. 160”), which establishes new standards governing the accounting for and reporting of noncontrolling interests (previously referred to as minority interests). This statement establishes reporting requirements which include, among other things, that noncontrolling interests be reflected as a separate component of equity, not as a liability. It also requires that the interests of the parent and the noncontrolling interest be clearly identifiable. Additionally, increases and decreases in a parent’s ownership interest that leave control intact shall be reflected as equity transactions, rather than step acquisitions or dilution gains or losses. This statement also requires changes to the presentation of information in the financial statements and provides for additional disclosure requirements. Statement No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the effect, if any, of adopting Statement No. 160 will be material to its financial position or results of operations.

Recently Adopted Standards

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (“Statement No. 159”). Statement No. 159 permits a company to choose, at specified election dates, to measure at fair value certain eligible financial assets and liabilities that are not currently required to be measured at fair value. The specified election dates include, but are not limited to, the date when an entity first recognizes the item, when an entity enters into a firm commitment or when changes in the financial instrument causes it to no longer qualify for fair value accounting under a different accounting standard. An entity may elect the fair value

8

option for eligible items that exist at the effective date. At that date, the difference between the carrying amounts and the fair values of eligible items for which the fair value option is elected should be recognized as a cumulative effect adjustment to the opening balance of retained earnings. The fair value option may be elected for each entire financial instrument, but need not be applied to all similar instruments. Once the fair value option has been elected, it is irrevocable. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. Statement No. 159 was effective as of the beginning of fiscal years that begin after November 15, 2007. The Company did not elect to implement the fair value option for eligible financial assets and liabilities as of January 1, 2008.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“Statement No. 157”). This statement creates a common definition of fair value to be used throughout generally accepted accounting principles. Statement No. 157 will apply whenever another standard requires or permits assets or liabilities to be measured at fair value, with certain exceptions. The standard establishes a hierarchy for determining fair value which emphasizes the use of observable market data whenever available. The statement also requires expanded disclosures which include the extent to which assets and liabilities are measured at fair value, the methods and assumptions used to measure fair value and the effect of fair value measures on earnings. Statement No. 157 was effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The difference between the carrying amounts and fair values of those financial instruments held at the date this statement is initially applied should be recognized as a cumulative effect adjustment to the opening balance of retained earnings for the fiscal year in which this statement is initially applied. Additionally, in February 2008, the FASB issued Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of Statement No. 157 for all non-recurring fair value measurements of nonfinancial assets and nonfinancial liabilities until the fiscal year beginning after November 15, 2008. As a result, the Company has partially applied the provisions of Statement No. 157 upon adoption at January 1, 2008 and has deferred the adoption for certain nonfinancial assets and liabilities as allowed by this staff position. The effect of adopting Statement No. 157 was not material to the Company’s financial position or results of operations. See further disclosure in Note 7—“Fair Value”.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). The interpretation requires companies to recognize the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained upon examination by tax authorities. The amount recognized would be the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability would be recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty on the excess. FIN 48 will require, among other items, a tabular reconciliation of the change during the reporting period, in the aggregate unrecognized tax benefits claimed or expected to be claimed in tax returns and disclosure relating to accrued interest and penalties for unrecognized tax benefits. Additional disclosure will also be required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next twelve months. FIN 48 was effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of January 1, 2007 which resulted in an increase to shareholders’ equity of $11.5 million (See also Note 4-Federal Income Taxes).

3. Sale of Variable Life Insurance and Annuity Business

On December 30, 2005, the Company sold all of the outstanding shares of capital stock of Allmerica Financial Life Insurance and Annuity Company (“AFLIAC”), a life insurance subsidiary representing approximately 95% of the Company’s run-off variable life insurance and annuity business, to The Goldman Sachs Group, Inc. (“Goldman Sachs”). The transaction also included the reinsurance of 100% of the variable business of FAFLIC. In connection with these transactions, Allmerica Investment Trust agreed to transfer certain assets and liabilities of its funds to certain Goldman Sachs Variable Insurance Trust managed funds through a fund reorganization transaction. Finally, the Company agreed to sell to Goldman Sachs all of the outstanding shares of capital stock of Allmerica Financial Investment Management Services, Inc. (“AFIMS”), its investment advisory subsidiary, concurrently with the consummation of a fund reorganization transaction. The fund reorganization transaction was consummated on January 9, 2006. Total proceeds from this transaction were $318.8 million, of which the Company has received $307.1 million as of March 31, 2008. The remaining $11.7 million will be received in December 2008.

The Company and Goldman Sachs have made various representations, warranties and covenants in connection with the transaction. The Company has agreed to indemnify Goldman Sachs for the breaches of the Company’s representations, warranties and covenants. THG has also agreed to indemnify Goldman Sachs for certain litigation, regulatory matters and other liabilities relating to the pre-closing activities of the business that was sold.

The Company accounted for the disposal of AFLIAC as a discontinued operation in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. The Company recognized a net gain of $6.2 million and a net loss of $0.2 million during the first quarter of 2008 and 2007, respectively, which are presented in

9

the Consolidated Statements of Income as Gain (Loss) on Disposal of Variable Life Insurance and Annuity Business, a component of discontinued operations.

Included in the $6.2 million gain in 2008 was a release of $5.8 million related to the Company’s estimated potential liability for certain contractual indemnities to Goldman Sachs relating to the pre-sale activities of the business sold recorded under FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others (“FIN 45”). The Company regularly reviews and updates its FIN 45 liability for legal and regulatory matter indemnities. Although the Company believes its current estimate for its FIN 45 liability is appropriate, there can be no assurance that these estimates will not materially increase in the future. Adjustments to this reserve are recorded in the results of the Company in the period in which they are determined. The loss in 2007 primarily consists of operations conversion costs associated with this variable business.

4. Federal Income Taxes

Federal income tax expense for the three months ended March 31, 2008 and 2007 has been computed using estimated effective tax rates. These rates are revised, if necessary, at the end of each successive interim period to reflect the current estimates of the annual effective tax rates.

In the first quarter of 2008, the Company increased its valuation allowance related to its deferred tax asset by $3.3 million, from $166.1 million to $169.4 million. The increase in this valuation allowance resulted primarily from our realized capital loss and unrealized depreciation of the Company’s investment portfolio. Accordingly, the Company recorded a valuation allowance of $1.8 million as an adjustment to Federal Income Tax Expense in its Consolidated Statements of Income, as well as a $1.5 million valuation allowance as an adjustment to Contractholder Deposit Funds and Other Policy Liabilities for the deferred tax associated with unrealized losses of the Closed Block.

The Company or its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 1995. The years 1995 through 2001 are currently being reviewed with the Internal Revenue Service (“IRS”) Appeals Division. The IRS audit of the years 2005 through 2006 commenced in December 2007.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). As a result of the implementation of FIN 48, the Company recognized an $11.5 million decrease in the liability for unrecognized tax benefits, which was reflected as an increase in the January 1, 2007 balance of retained earnings.

5. Pension and Other Postretirement Benefit Plans

The Company’s defined benefit pension plans, which provided retirement benefits based on a cash balance formula, were frozen as of January 1, 2005; therefore, no further cash balance allocations have been credited for plan years beginning on or after January 1, 2005. In addition, certain transition group employees were eligible for a grandfathered benefit based upon service and compensation; such benefits were also frozen at January 1, 2005 levels with an annual transition pension adjustment. The Company has additional unfunded pension plans and postretirement plans to provide benefits to certain full-time employees, former agents, retirees and their dependents.

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The components of net periodic benefit cost for pension and other postretirement benefit plans are as follows:

	(Unaudited) Three Months Ended March 31,
(In millions)	2008			2007			2008			2007
	Pension Benefits						Postretirement Benefits
Service cost—benefits earned during the period	$	—		$	—		$	0.2		$	0.2
Interest cost		8.2			7.3			0.9			1.2
Expected return on plan assets		(8.5	)		(8.0	)		—			—
Recognized net actuarial loss		0.3			—			0.1			0.2
Amortization of transition asset		(0.4	)		(0.4	)		—			—
Amortization of prior service cost		—			—			(1.1	)		(0.6	)
Net periodic (benefit) cost	$	(0.4	)	$	(1.1	)	$	0.1		$	1.0

6. Closed Block

Summarized financial information of the Closed Block is as follows for the periods indicated:

(In millions)	(Unaudited) March 31, 2008		December 31, 2007
ASSETS
Fixed maturities, at fair value (amortized cost of $512.4 and $512.0)	$	507.5	$	514.7
Mortgage loans		21.1		21.4
Policy loans		111.9		116.0
Cash and cash equivalents		3.4		3.8
Accrued investment income		10.2		11.0
Other assets		6.3		6.1
Total assets	$	660.4	$	673.0
LIABILITIES
Policy liabilities and accruals	$	670.1	$	670.8
Policyholder dividends		5.3		22.1
Other liabilities		1.3		1.3
Total liabilities	$	676.7	$	694.2
Excess of Closed Block liabilities over assets designated to the Closed Block and maximum future earnings to be recognized from Closed Block assets and liabilities	$	16.3	$	21.2

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	(Unaudited) Three Months Ended March 31,
(In millions)	2008			2007
REVENUES
Premiums	$	12.8		$	17.6
Net investment income		9.8			9.6
Net realized investment (losses) gains		(1.3	)		0.3
Total revenues		21.3			27.5
BENEFITS AND EXPENSES
Policy benefits		18.2			26.4
Policy acquisition and other operating expenses		0.1			—
Total benefits and expenses		18.3			26.4
Contribution from the Closed Block	$	3.0		$	1.1

Many expenses related to Closed Block operations are charged to operations outside the Closed Block; accordingly, the contribution from the Closed Block does not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside the Closed Block.

7. Fair Value

Effective January 1, 2008, the Company adopted the provisions of Statement No. 157 as it relates to its financial assets and liabilities, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants. Statement No. 157 also establishes a hierarchy for determining fair value which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority level given to Level 1 as these are the most reliable, and the lowest priority given to Level 3:

Level 1 –	Quoted prices in active markets for identical assets.
Level 2 –	Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.
Level 3 –	Unobservable inputs that are supported by little or no market activity.

When more than one level of input is used to determine fair value, the financial instrument is classified as Level 1, 2 or 3 according to the lowest priority level that has a significant impact on the fair value measurement.

The Company performs a review of the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in the reclassification of certain financial assets or liabilities within the fair value hierarchy. Reclassifications related to Level 3 of the fair value hierarchy are reported as transfers in or out of Level 3 as of the beginning of the quarter in which the reclassification occurs.

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The Company holds fixed maturity securities, equity securities, derivative instruments and separate account assets for which fair value is determined on a recurring basis. The following table presents for each hierarchy level, the Company’s assets and liabilities that are measured at fair value at March 31, 2008.

	Fair Value
(in millions)	Total			Level 1		Level 2		Level 3
U.S. Treasury securities and U.S. Government and agency securities	$	370.9		$	99.2	$	271.7	$	—
States and political subdivisions		824.7			—		824.7		—
Foreign governments		5.1			2.0		3.1		—
Corporate fixed maturities		2,858.3			23.7		2,817.2		17.4
Mortgage-backed securities		1,587.6			—		1,566.8		20.8
Total fixed maturities		5,646.6			124.9		5,483.5		38.2
Equity securities (1)		38.1			36.8		—		1.3
Separate account assets		424.4			424.4		—		—
Derivative assets (2)		7.8			—		—		7.8
Total assets at fair value	$	6,116.9		$	586.1	$	5,483.5	$	47.3
Derivative liabilities (3)	$	(3.3	)	$	—	$	—	$	(3.3	)

(1) Excludes certain investments in equities of unconsolidated affiliates totaling $11.0 million that are carried at cost.

(2) Included on the Consolidated Balance Sheets in other assets.

(3) Included on the Consolidated Balance Sheets in expenses and taxes payable.

The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2008.

	Level 3 Assets											Level 3 Liabilities
(in millions)	Fixed Maturities			Equity Securities		Derivatives			Total Assets			Derivatives
Balance January 1, 2008	$	30.5		$	1.3	$	5.8		$	37.6		$	(1.1	)
Total gains (losses):
Included in earnings		—			—		2.3			2.3			(2.2	)
Included in other comprehensive income		(0.1	)				(0.3	)		(0.4	)		—
Net purchases (redemptions/sales)		7.8			—		—			7.8			—
Balance March 31, 2008	$	38.2		$	1.3	$	7.8		$	47.3		$	(3.3	)

The Company had no transfers in or out of Level 3 during the three months ended March 31, 2008. The amount included in earnings attributable to the change in unrealized gains relating to derivative assets still held as of March 31, 2008 was $2.3 million, which is reflected in the Consolidated Statements of Income in fees and other income. The amount included in earnings attributable to the change in unrealized losses related to derivative liabilities still held as of March 31, 2008 was $2.2 million, which is reflected in the Consolidated Statements of Income in other operating expenses.

The valuation methodologies used to measure financial instruments at fair value, and the level in the fair value hierarchy in which these instruments are generally classified are as follows:

Fixed Maturities: Level 1 securities generally include U.S. Treasury issues and other securities that are highly liquid and for which quoted market prices are available. Level 2 securities are valued using pricing for similar securities and pricing models that incorporate observable inputs including, but not limited to yield curves, broker/dealer quotes and issuer spreads. Level 3 securities include issues for which little observable data can be obtained, primarily due to the illiquid nature of the securities, and the majority of the inputs used to determine fair value are based on the Company’s own assumptions.

Equity Securities: Level 1 includes publicly traded securities valued at quoted market prices. Level 3 consists of common stock of private companies for which observable inputs are not available.

Derivative instruments: These Level 3 valuations are derived from the counterparties’ internally developed models which do not necessarily represent observable market data.

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Separate account assets: The Company’s separate accounts are invested in variable insurance trust funds which have a daily net asset value obtainable from an active market.

8. Other Comprehensive Income

The following table provides a reconciliation of gross unrealized investment gains (losses) to the net balance shown in the Consolidated Statements of Comprehensive Income:

	(Unaudited) Three Months Ended March 31,
(In millions)	2008			2007
Unrealized (depreciation) appreciation on available-for-sale securities:
Unrealized holding (losses) gains arising during period, net of income tax benefit of $2.9 in 2008 and expense of $5.6 in 2007	$	(5.4	)	$	21.0
Less: reclassification adjustment for (losses) gains included in net income, net of income tax benefit of $1.8 in 2008 and expense of $0.8 in 2007		(3.2	)		1.5
Total available-for-sale securities		(2.2	)		19.5
Unrealized depreciation on derivative instruments:
Unrealized holding losses arising during period, net of income tax benefit of $0.1		(0.2	)		—
Less: reclassification adjustment for gains included in net income, net of income tax expense of $0.1		—			0.1
Total derivative instruments		(0.2	)		(0.1	)
Other comprehensive (loss) income	$	(2.4	)	$	19.4

9. Segment Information

The Company’s 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. The fourth operating segment, Life Companies, is in run-off. In accordance with Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information (“Statement No. 131”), the separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. A summary of the Company’s reportable segments is included below.

The Property and Casualty group manages its operations principally through three segments: 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 and inland marine. 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; AMGRO, Inc. (“AMGRO”), the Company’s premium financing business; as well as voluntary pools in which the Company has not actively participated since 1995.

The Life Companies segment consists primarily of a block of traditional life insurance products (principally the Closed Block), the group retirement annuity contract business and the guaranteed investment contract business. Assets and liabilities related to the reinsured variable life insurance and annuity business, as well as the discontinued group life and health business, including group life and health voluntary pools, are also reflected in this segment. (See Note 3—Sale of Variable Life Insurance and Annuity Business)

The Company reports interest expense related to its corporate debt separately from the earnings of its operating segments. Corporate debt consists of the Company’s junior subordinated debentures and its senior debentures.

Management evaluates the results of the aforementioned segments on a pre-tax basis. Segment income excludes certain items which are included in net income, such as federal income taxes and net realized investment gains and losses, including certain gains or losses on derivative instruments, 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. While

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these items may be significant components in understanding and assessing the Company’s financial performance, management believes that the presentation of segment income enhances understanding of the Company’s 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.

Summarized below is financial information with respect to business segments:

	(Unaudited) Three Months Ended March 31,
(In millions)	2008			2007
Segment revenues:
Property and Casualty:
Personal Lines	$	403.2		$	393.6
Commercial Lines		283.6			255.5
Other Property and Casualty Commercial Lines		10.7			11.0
Total Property and Casualty		697.5			660.1
Life Companies		29.1			37.5
Intersegment revenues		(2.1	)		(2.0	)
Total segment revenues		724.5			695.6
Adjustments to segment revenues:
Net realized investment (losses) gains		(5.0	)		2.3
Other (loss) income		(2.1	)		0.2
Total revenues	$	717.4		$	698.1
Segment income before federal income taxes:
Property and Casualty:
Personal Lines:
GAAP underwriting (loss) income	$	(4.6	)	$	14.9
Net investment income		29.7			29.5
Other		2.5			3.0
Personal Lines segment income		27.6			47.4
Commercial Lines:
GAAP underwriting income		36.4			20.9
Net investment income		30.9			27.3
Other		1.0			0.8
Commercial Lines segment income		68.3			49.0
Other Property and Casualty:
GAAP underwriting (loss) income		(1.0	)		0.3
Net investment income		3.7			3.9
Other		(0.6	)		0.3
Other Property and Casualty segment income		2.1			4.5
Total Property and Casualty		98.0			100.9
Life Companies		(2.5	)		(0.9	)
Interest on corporate debt		(10.0	)		(10.0	)
Segment income before federal income taxes		85.5			90.0
Adjustments to segment income:
Net realized investment (losses) gains, net of amortization		(5.1	)		1.9
Gain on derivative instruments		0.1			—
Income from continuing operations before federal income taxes	$	80.5		$	91.9

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	Identifiable Assets
(In millions)	(Unaudited) March 31, 2008		December 31, 2007
Property and Casualty (1)	$	7,490.3	$	7,313.2
Life Companies (2)		2,209.9		2,502.0
Intersegment eliminations		0.4		0.4
Total	$	9,700.6	$	9,815.6

(1) The Company reviews assets based on the total Property and Casualty Group and does not allocate between the Personal Lines, Commercial Lines and Other Property and Casualty segments. Includes $146.6 million and $110.7 million at March 31, 2008 and December 31, 2007, respectively related to AMGRO.

(2) Includes assets related to the Company’s discontinued group life and health operations.

Discontinued Operations—Group Life and Health

During 1999, the Company exited its group life and health insurance business, consisting of its Employee Benefit Services (“EBS”) business, its Affinity Group Underwriters business and its accident and health assumed reinsurance pool business. Prior to 1999, these businesses comprised substantially all of the former Corporate Risk Management Services segment. Accordingly, the operating results of the discontinued segment have been reported in accordance with Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB Opinion No. 30”). In 1999, the Company recorded a $30.5 million loss, net of taxes, on the disposal of this segment, consisting of after-tax losses from the run-off of the group life and health business of approximately $46.9 million, partially offset by net proceeds from the sale of the EBS business of approximately $16.4 million. Subsequent to the measurement date of June 30, 1999, approximately $29.4 million of the aforementioned $46.9 million loss has been generated from the operations of the discontinued business and net proceeds of $12.5 million were received from the sale of the EBS business.

As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not been segregated between continuing and discontinued operations. At March 31, 2008 and December 31, 2007, the discontinued segment had assets of approximately $304.2 million and $311.1 million, respectively, consisting primarily of invested assets and reinsurance recoverables, and liabilities of approximately $374.8 million and $381.6 million, respectively, consisting primarily of policy liabilities.

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10. Stock-based Compensation

Compensation cost recorded pursuant to Statement No. 123(R) and the related tax benefits were as follows:

	(Unaudited) Quarter Ended March 31,
(In millions)	2008		2007
Stock-based compensation expense	$	3.4	$	4.4
Tax benefit		1.2		1.5

Stock Options

Information on the Company’s stock option plan activity is summarized below.

	(Unaudited) Three Months Ended March 31, 2008			(Unaudited) Three Months Ended March 31, 2007
(In whole shares and dollars)	Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding, beginning of period	3,268,912	$	41.15	3,855,892	$	40.14
Granted	92,909		44.79	375,117		48.46
Exercised	69,350		35.98	164,368		34.87
Forfeited, cancelled or expired	123,650		52.70	18,575		39.61
Outstanding, end of period	3,168,821	$	40.91	4,048,066	$	41.13

Restricted Stock and Restricted Stock Units

The following table summarizes activity information about employee nonvested stock and performance based restricted share units:

	(Unaudited) Three Months Ended March 31, 2008			(Unaudited) Three Months Ended March 31, 2007
(In whole shares and dollars)	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Restricted stock and restricted stock units:
Outstanding, beginning of period	179,416	$	46.79	53,835	$	38.82
Granted	284,202		45.09	144,522		48.35
Vested and exercised	6,000		35.87	—		—
Forfeited	2,561		45.16	3,053		43.13
Outstanding, end of period	455,057	$	45.87	195,304	$	45.80
Performance-based restricted stock units:
Outstanding, beginning of period (1)	402,929	$	44.16	515,710	$	42.22
Granted (1) (2)	127,624		42.40	75,286		48.46
Vested and exercised	342,757		44.27	112,616		36.88
Forfeited	882		50.60	8,952		44.93
Outstanding, end of period (1)	186,914	$	45.64	469,428	$	43.68

(1) Performance based restricted stock units are based upon the achievement of the performance metric at 100%. These units have the potential to range from 0% to 150% of the shares disclosed, which varies based on grant year and individual participation level.

(2) In 2008, 69,644 performance based stock units were included as granted due to completion levels related to both the 2005 and 2006 grants, in excess of 100%. The weighted average grant date fair value for these awards was $40.06. In 2007, 30,716 performance based stock units were included as granted due to completion levels related to 2004 grant, in excess of 100%. The weighted average grant date fair value for these awards was $36.88.

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11. Earnings Per Share

The following table provides share information used in the calculation of the Company’s basic and diluted earnings per share:

	(Unaudited) Three Months Ended March 31,
(In millions, except per share data)	2008			2007
Basic shares used in the calculation of earnings per share		51.7			51.2
Dilutive effect of securities:
Employee stock options		0.3			0.5
Non-vested stock grants		0.3			0.2
Diluted shares used in the calculation of earnings per share		52.3			51.9
Per share effect of dilutive securities on income from continuing operations and net income	$	(0.01	)	$	(0.02	)

Diluted earnings per share for the three months ended March 31, 2008 and 2007 excludes 2.0 million and 1.5 million, respectively, of common shares issuable under the Company’s stock compensation plans, because their effect would be antidilutive.

12. Significant Transactions

On March 14, 2008, the Company acquired all of the outstanding shares of Verlan Holdings, Inc. for $29.0 million. Verlan Holdings, Inc. is a specialty company providing property insurance to small and medium-sized manufacturing and distribution companies, and which historically has generated annual written premium of approximately $18 million.

On March 10, 2008, the Company reached an agreement to sell its premium financing subsidiary, AMGRO to Premium Financing Specialists, Inc. The transaction is subject to regulatory review and approval, as well as the satisfaction of certain closing conditions, and is expected to close in the second quarter of 2008.

In accordance with Statement of Financial Accounting Standard No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the Balance Sheet for AMGRO has been reclassified as assets held for sale. The following table details the significant assets and liabilities reflected in AMGRO’s Balance Sheet under the captions “Other Assets” and “Expenses and taxes payable”, respectively.

(In millions)	(Unaudited) March 31, 2008		December 31, 2007
Assets:
Cash and equivalents	$	18.3	$	12.6
Premiums, accounts and notes receivable		121.2		88.7
Other assets		7.1		9.4
Total assets	$	146.6	$	110.7
Liabilities:
Expenses and taxes payable	$	12.2	$	19.8
Short-term debt (1)		128.3		85.0
Total liabilities	$	140.5	$	104.8

(1) In 2007, this balance reflects intercompany borrowings from Hanover Insurance. In 2008, $91.1 million of the borrowings were from Hanover Insurance and $37.2 million were borrowing from an unaffiliated party. All intercompany amounts are eliminated in the Consolidated Balance Sheets.

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13. Commitments and Contingencies

LITIGATION

Durand Litigation

On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named plaintiff, a former employee who received a lump sum distribution from the Company’s Cash Balance Plan at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, the plan understated the accrued benefit in the calculation. The Company filed a motion to dismiss on the basis that the plaintiff failed to exhaust administrative remedies, which motion was granted without prejudice in a decision dated November 7, 2007. On December 3, 2007, plaintiff filed a Notice of Appeal of this dismissal to the United States Court of Appeals for the Sixth Circuit. In the Company’s judgment, the outcome is not expected to be material to the Company’s financial position, although it could have a material effect on the results of operations for a particular quarter or annual period.

Emerald Litigation

On July 24, 2002, an action captioned American National Bank and Trust Company of Chicago, as Trustee f/b/o Emerald Investments Limited Partnership, and Emerald Investments Limited Partnership v. Allmerica Financial Life Insurance and Annuity Company (“Emerald”) was commenced in the United States District Court for the Northern District of Illinois, Eastern Division. Although AFLIAC was sold to Goldman Sachs on December 30, 2005, the Company has agreed to indemnify AFLIAC and Goldman Sachs with respect to this litigation.

In 1999, plaintiffs purchased two variable annuity contracts with initial premiums aggregating $5 million. Plaintiffs, who AFLIAC subsequently identified as engaging in frequent transfers of significant sums between sub-accounts that in the Company’s opinion constituted “market timing”, were subject to restrictions upon such trading that AFLIAC imposed in December 2001. Plaintiffs allege that such restrictions constituted a breach of the terms of the annuity contracts. In December 2003, the court granted partial summary judgment to the plaintiffs, holding that at least certain restrictions imposed on their trading activities violated the terms of the annuity contracts.

On May 19, 2004, plaintiffs filed a Brief Statement of Damages in which, without quantifying their damage claim, they outlined a claim for (i) amounts totaling $150,000 for surrender charges imposed on the partial surrender by plaintiffs of the annuity contracts, (ii) loss of trading profits they expected over the remaining term of each annuity contract, and (iii) lost trading profits resulting from AFLIAC’s alleged refusal to process five specific transfers in 2002 because of trading restrictions imposed on market timers. With respect to the lost profits, plaintiffs claim that pursuant to their trading strategy of transferring money from money market accounts to international equity accounts and back again to money market accounts, they have been able to consistently obtain relatively risk free returns of between 35% and 40% annually. Plaintiffs claim that they would have been able to continue to maintain such returns on the account values of their annuity contracts over the remaining terms of the annuity contracts (which are based in part on the lives of the named annuitants). The aggregate account value of plaintiffs’ annuities was approximately $12.8 million in December 2001. On February 1, 2006, the Court issued a ruling which precluded plaintiffs from claiming any damages accruing beyond July 31, 2004.

A jury trial on plaintiffs’ damage claim was held in December 2006, which resulted in an aggregate award to plaintiffs of $1.3 million for lost profits and reimbursement of surrender charges. Plaintiffs’ motion for a new trial was subsequently denied. On March 5, 2007, plaintiffs filed a Notice of Appeal to the United States Court of Appeals, Seventh Circuit which, in a decision rendered on February 20, 2008, reversed the lower court with respect to damages and ordered the district court to enter a judgment that plaintiffs are entitled to no damages other than the return of the $150,000 surrender charge. On March 5, 2008, plaintiffs filed a Petition for Rehearing with the Seventh Circuit, which was denied on March 13, 2008, which decision is final and conclusive.

Hurricane Katrina Litigation

The Company has been named as a defendant in various litigations, including putative class actions, relating to disputes arising from damages which occurred as a result of Hurricane Katrina in 2005. As of March 31, 2008, there were approximately 270 such cases, at least two of which were styled as putative class actions. These cases have been filed in both Louisiana state courts and federal district courts. These cases involve, among other claims, disputes as to the amount of reimbursable claims in particular cases, as well as the scope of insurance coverage under homeowners and commercial property policies due to flooding, civil authority actions, loss of landscaping, business interruption and other matters. Certain of these cases claim a breach of duty of good faith or violations of Louisiana insurance claims handling laws or regulations and involve claims for punitive or exemplary damages. Certain of the cases claim that under Louisiana’s so-called “Valued Policy Law,” the insurers must pay the total insured

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value of a home which is totally destroyed if any portion of such damage was caused by a covered peril, even if the principal cause of the loss was an excluded peril. Other cases challenge the scope or enforceability of the water damage exclusion in the policies. On April 8, 2008, the Louisiana Supreme Court issued a decision in the case of Sher v. Lafayette Insurance Company, et al, No. 2007-C-2441, holding that flood exclusions used in the Company’s policies are unambiguous and enforceable.

Plaintiffs in several consolidated cases (including Sampia v. Massachusetts Bay Insurance Company, E.D. La. Civil Action No. 06-0559) appealed an Order of the Federal District Court dated August 6, 2006 rejecting plaintiffs’ contention that the Louisiana Valued Policy Law has the effect of requiring coverage for a total loss proximately caused by a non-covered peril so long as there was any covered loss. This consolidated appeal was heard by the United States Court of Appeals, Fifth Circuit, in a case captioned Chauvin, et al., v. State Farm Fire & Casualty Co., No. 06-30946. On August 6, 2007, the Fifth Circuit Court issued an opinion upholding the District Court decision dismissing plaintiffs’ claims. Plaintiffs thereafter filed a petition for a writ of certiorari with the United States Supreme Court, which was denied on January 14, 2008. Currently pending before the Louisiana Supreme Court is the case of Landry v. Louisiana Citizens Property Insurance Corporation, No. 2007-C-1907, in which plaintiffs have asserted a construction of the Valued Policy Law similar to that rejected by the Fifth Circuit in Chauvin. Landry was argued on February 26, 2008; the Court subsequently requested additional briefing from the parties to be filed no later than April 18, 2008.

On August 23, 2007, the State of Louisiana (individually and on behalf of the State of Louisiana, Division of Administration, Office of Community Development) filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including THG. Plaintiff seeks to represent a class of current and former Louisiana citizens who have applied for and received or will receive funds through Louisiana’s “Road Home” program. On August 29, 2007, Plaintiff filed an Amended Petition in this case, asserting myriad claims, including claims under Louisiana’s Valued Policy Law, as well as claims for breach of: contract, the implied covenant of good faith and fair dealing, fiduciary duty and Louisiana’s bad faith statutes. Plaintiff seeks relief in the form of, among other things, declarations that (a) the efficient proximate cause of losses suffered by putative class members was windstorm, a covered peril under their policies; (b) the second efficient proximate cause of their losses was storm surge, which Plaintiff contends is not excluded under class members’ policies; (c) the damage caused by water entering affected parishes of Louisiana does not fall within the definition of “flood”; (d) the damages caused by water entering Orleans Parish and the surrounding area was a result of man-made occurrence and are properly covered under class members’ policies; (e) many class members suffered total losses to their residences; and (f) many class members are entitled to recover the full value for their residences stated on their policies pursuant to the Louisiana Valued Policy Law. In accordance with these requested declarations, Plaintiff seeks to recover amounts that it alleges should have been paid to policyholders under their insurance agreements, as well as penalties, attorneys’ fees, and costs. The case has been removed to the Federal District Court for the Eastern District of Louisiana.

A final, non-appealable order that under the Louisiana Valued Policy Law the Company’s flood exclusion is inapplicable where any portion of a loss is attributable to a covered peril, could have a material adverse effect on the Company’s financial position, and would likely have such effect on the Company’s results of operations. The Company has established its loss and LAE reserves on the assumption that the application of the Valued Policy Law will not result in the Company having to pay damages for perils not otherwise covered and that the Company will not have any liability under the “Road Home” or similar litigation.

Other Matters

The Company has been named a defendant in various other legal proceedings arising in the normal course of business, including two other suits which, like the Emerald case described above, challenge the Company’s imposition of certain restrictions on trading funds invested in separate accounts. The potential outcome of any such proceedings in which the Company has been named a defendant, and the Company’s ultimate liability, if any, from such legal proceedings, is difficult to predict at this time. In the Company’s opinion, based on the advice of legal counsel, the ultimate resolutions of such proceedings will not have a material effect on the Company’s financial position, although they could have a material effect on the results of operations for a particular quarter or annual period.

REGULATORY AND INDUSTRY DEVELOPMENTS

Unfavorable economic conditions may contribute to an increase in the number of insurance companies that are under regulatory supervision. This may result in an increase in mandatory assessments by state guaranty funds, or voluntary payments by solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are

20

subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. The Company is not able to reasonably estimate the potential impact of any such future assessments or voluntary payments.

On July 16, 2007, Massachusetts Commissioner of Insurance issued two decisions pertaining to personal automobile insurance. The first decision calls for the end of the “fix-and-establish” system of setting automobile rates and replaces it with a system of “managed competition”. The second decision orders the implementation of an Assigned Risk Plan beginning with new business as of April 1, 2008.

The Commissioner of Insurance has issued a regulation providing the framework for the transition from a market in which the rates are set by the Commissioner to one in which companies propose their own rates. The Company’s rate filing was approved by the Massachusetts Division of Insurance on January 18, 2008 and implemented effective April 1, 2008. It is anticipated that on average, the Company’s overall Massachusetts personal automobile rate levels will decline approximately 8% in 2008.

The Assigned Risk Plan will distribute the Massachusetts residual automobile market based on individual policyholder assignments rather than assigning carriers Exclusive Representative Producers. The Company believes the Assigned Risk Plan will provide for a more equitable distribution of residual market risks across all carriers in the market, and therefore, such plan, is not likely to adversely affect THG’s results of operations or financial position.

Over the past year, other state-sponsored insurers, reinsurers or involuntary pools have increased significantly, particularly those in states which have Atlantic or Gulf Coast exposures. As a result, the potential assessment exposure of insurers doing business in such states and the attendant collection risks has increased, particularly, in the states of Massachusetts, Louisiana and Florida. Such actions and related regulatory restrictions may limit the Company’s ability to reduce its potential exposure to hurricane related losses. It is possible that other states may take action similar to those taken in the state of Florida. At this time the Company is unable to predict the likelihood or impact of any such potential assessments or other actions.

In addition, the Company is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant, and the Company’s ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. In the Company’s opinion, based on the advice of legal counsel, the ultimate resolutions of such proceedings will not have a material effect on the Company’s financial position, although they could have a material effect on the results of operations for a particular quarter or annual period.

RESIDUAL MARKETS

The Company is required to participate in residual markets in various states, which generally pertains to high risk insureds. The results of the residual markets are not subject to the predictability associated with the Company’s own managed business, and are significant to the workers’ compensation line of business, the homeowners line of business and both the personal and commercial automobile lines of business.

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PART I

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

Introduction	23
Executive Overview	23-24
Description of Operating Segments	24
Results of Operations	24-26
Segment Income	25
Other Items	26
Segment Results	27-37
Property and Casualty	27-36
Life Companies	36-37
Investment Portfolio	37-39
Income Taxes	40
Significant Transactions	40
Critical Accounting Estimates	40-43
Statutory Capital of Insurance Subsidiaries	43
Rating Agency Actions	43
Liquidity and Capital Resources	43-44
Off-Balance Sheet Arrangements	44
Contingencies and Regulatory Matters	44-46
Risks and Forward-Looking Statements	47
Glossary of Selected Insurance Terms	47-49

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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 2007 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; First Allmerica Financial Life Insurance Company (“FAFLIC”), our life insurance and annuity company; and certain other insurance and non-insurance subsidiaries.

Executive Overview

Our property and casualty business constitutes our primary ongoing operations and includes our Personal Lines segment, our Commercial Lines segment and our Other Property and Casualty segment.

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, however, continue to be challenging as pricing pressures and economic conditions are becoming more difficult, especially in Michigan, impacting our ability to grow and retain business in the state. We are working closely with our partner agents in Michigan to remain a significant writer with strong margins. We believe that market conditions will remain challenging and competitive in Personal Lines throughout 2008 and beyond. As a result of the implementation of “managed competition” in Massachusetts, 2008 is a transition year for the industry and while we expect to grow in this state over the long-term, we do not expect Massachusetts to contribute to premium growth during 2008 due to the current rate environment. We have also initiated catastrophe management actions in coastal states, including Florida and Louisiana that, while reducing premium in our homeowners line, has improved our risk profile. Despite these challenges and transitions, we expect our growth levels to be relatively flat in Personal Lines in 2008.

As of April 1, 2008, our Connections^® Auto product is available in seventeen states, including Massachusetts. We believe that this product will help us to profitably grow our market share over time. Connections Auto is designed to be competitive 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, which is available in sixteen states, is intended to improve our competitiveness and attract more total account business. Additionally, we continue to make investments in and focus on growing our umbrella product and other personal lines coverages. Having implemented a broader portfolio of products, we continue to work closely with high potential agents to increase the percentage of business they place with us and to ensure this business 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

In the Commercial Lines business, the market continues to be increasingly competitive, a trend that we expect to continue and intensify for the foreseeable future. More significant price competition requires us to continue to be highly disciplined in our underwriting process to ensure that we grow the business only at acceptable margins. We continue to target, through mid-sized agents, small and first-tier middle markets, which encompass clients whose premiums are generally below $200,000. We also continue to develop our specialty businesses, particularly bond and inland marine, 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. During the first quarter of 2008, we experienced new business growth in our specialty lines, which now accounts for approximately one third of our Commercial Lines business. Additional growth in these lines continues to be a significant part of our strategy in the future. We continue to focus on expanding our product offerings in specialty businesses as evidenced by our acquisition on March 14, 2008, of Verlan Holdings, Inc. (“Verlan”), a specialty company providing property insurance to small and medium-sized manufacturing and distribution companies. Last year we acquired Professionals Direct, Inc. (“PDI”), which provides professional liability coverage for small legal practices. We believe these acquisitions provide us with better breadth and diversification of products and improve our competitive position with our agents.

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The 2007 enhancements of our small commercial business platform provide for additional growth opportunities in our more traditional lines of business. We have expanded the breadth of our underwriting for small account, low hazard workers’ compensation and business owners’ policies, and have introduced Avenues^® Auto, a price segmented product for small, commercial automobile policies. We have also provided additional coverage features in our business owners’ policies. Our technology investments are intended to provide our agents with the ability to view a customer’s full account and provide eligibility guidance, as well as other important ease of business improvements. Our focus continues to be on improving and expanding our partnerships with agents. We believe our specialty capabilities and small commercial opportunities, coupled with distinctiveness in the middle market, enables us to deliver significant value to our agents and policyholders in our target markets.

2008 Results

During the first quarter of 2008, our property and casualty group’s segment income decreased $2.9 million, or 2.9%, compared to the prior year. This decrease was attributable to a $5.0 million increase in catastrophe related activity, as well as approximately $6 million of higher underwriting and loss adjustment expenses. These decreases were partially offset by a $3.6 million increase in favorable development of prior year loss and loss adjustment expense (“LAE”) reserves and $3.6 million of higher net investment income. Net premiums written for our property and casualty group increased $16.5 million, or 2.7%, as compared to the first quarter of 2007.

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. Our fourth operating segment, Life Companies, is in run-off. 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.

The Property and Casualty group manages its operations principally through three segments: 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 and inland marine business. 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 1999; and Amgro, Inc. (“AMGRO”), our premium financing business. We have entered into an agreement to sell AMGRO and its subsidiaries; such transaction is expected to close in the second quarter of 2008.

Our Life Companies segment, which is in runoff, consists primarily of a block of traditional life insurance products (principally the Closed Block), a block of group retirement annuity contracts and two remaining guaranteed investment contracts (“GICs”). Assets and liabilities related to our reinsured variable life insurance and annuity business, as well as our discontinued group life and health business, including group life and health voluntary pools, are reflected in this segment.

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.

Results of Operations

Our consolidated net income includes the results of our four 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, including net gains or losses on certain derivative instruments, 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 property and casualty insurance business. However, catastrophic events, such as Hurricane Katrina in 2005, 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.

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Our consolidated net income for the first quarter of 2008 was $58.5 million, compared to $63.6 million for the same period in 2007. The $5.1 million decrease in earnings primarily reflects a net realized investment loss of $5.1 million in 2008 compared to a $1.9 million gain in 2007, decreased pre-tax segment results of $2.9 million related to our property and casualty business, and the absence of a $2.4 million benefit received in 2007 related to federal income tax settlements of prior years. These decreases were partially offset by a gain on the disposal of the variable life insurance and annuity business.

The following table reflects segment income as determined in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, and a reconciliation of total segment income to consolidated net income.

	Three Months Ended March 31,
(In millions)	2008			2007
Segment income before federal income taxes:
Property and Casualty
Personal Lines	$	27.6		$	47.4
Commercial Lines		68.3			49.0
Other Property and Casualty		2.1			4.5
Total Property and Casualty		98.0			100.9
Life Companies		(2.5	)		(0.9	)
Interest expense on corporate debt		(10.0	)		(10.0	)
Total segment income before federal income taxes		85.5			90.0
Federal income tax expense on segment income		(28.2	)		(29.8	)
Federal income tax settlement		—			2.4
Net realized investment (losses) gains, net of amortization		(5.1	)		1.9
Gains on derivative instruments		0.1			—
Federal income tax benefit (expense) on non-segment items		1.2			(0.7	)
Income from continuing operations, net of taxes		53.5			63.8
Discontinued operations:
Gain (loss) on disposal of variable life insurance and annuity business, net of taxes		6.2			(0.2	)
Other		(1.2	)		—
Net income	$	58.5		$	63.6

Segment Income

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

The Property and Casualty group’s segment income decreased $2.9 million, or 2.9%, to $98.0 million, in the first quarter of 2008, compared to $100.9 million in the first quarter of 2007. Excluding higher catastrophe related activity of $5.0 million in the quarter, earnings would have increased by $2.1 million. This increase is primarily due to lower losses and higher net investment income, partially offset by higher underwriting and loss adjustment expenses. Losses were lower in the current year due to $3.6 million of increased favorable development on prior years’ loss and LAE reserves and approximately $2 million of improvement in current accident year results. Net investment income increased $3.6 million, primarily due to earnings on invested assets transferred from our Life Companies segment to our Property and Casualty group related to a change in common employer from FAFLIC to Hanover Insurance, and from favorable operational cash flows. Underwriting and loss adjustment expenses increased approximately $6 million, primarily due to expenses related to recently acquired subsidiaries, salaries and employee benefit costs, expenses related to the introduction of our Connections Auto product in Massachusetts, technology costs related to a new claims system, and higher expenses related to independent adjustors.

Life Companies’ segment loss was $2.5 million for the first quarter of 2007 compared to a loss of $0.9 million during the same period in 2007. This increase was primarily due to lower net investment income primarily from the intercompany asset transfer.

Our federal income tax expense on segment income was $28.2 million for the first quarter of 2008 compared to $29.8 million for the same period in 2007, primarily due to lower underwriting income in our property and casualty business.

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Other Items

Net realized losses on investments were $5.1 million in the first quarter of 2008 compared to a gain of $1.9 million in the same period of 2007. Net realized losses in 2008 are due to $7.5 million of impairments, primarily from fixed maturities and other invested assets, partially offset by $2.3 million of gains recognized principally from the sale of approximately $280 million of fixed maturities.

In 2005, we sold our variable life insurance and annuity business to The Goldman Sachs Group, Inc. (“Goldman Sachs”). In the first quarter of 2008, we recorded a gain of $6.2 million primarily due to the release of liabilities related to certain contractual indemnities to Goldman Sachs relating to the pre-sale activities of the business sold, which were recorded under FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others (“FIN 45”). (See also Note 3—Sale of Variable Life Insurance and Annuity Business) In the first quarter of 2007, we recorded a loss of $0.2 million related to operations conversion expenses. Additionally, in 2008, we recognized $1.2 million of losses associated with the sale of a subsidiary, related to pre-sale activities.

Net income includes the following items by segment:

	Three Months Ended March 31, 2008
	Property and Casualty
(In millions)	Personal Lines			Commercial Lines			Other Property and Casualty (2)		Life Companies			Total
Net realized investment (losses) gains (1)	$	(2.0	)	$	(1.4	)	$	3.1	$	(4.8	)	$	(5.1	)
Gains on derivative instruments		—			—			—		0.1			0.1
Gain on disposal of variable life insurance and annuity business, net of taxes		—			—			—		6.2			6.2
Other		—			—			—		(1.2	)		(1.2	)
	Three Months Ended March 31, 2007
	Property and Casualty
	Personal Lines			Commercial Lines			Other Property and Casualty (2)		Life Companies			Total
Net realized investment (losses) gains (1)	$	(0.4	)	$	(0.3	)	$	1.0	$	1.6		$	1.9
Federal income tax settlement		—			—			—		2.4			2.4
Loss on disposal of variable life insurance and annuity business, net of taxes		—			—			—		(0.2	)		(0.2	)

(1) We manage investment assets for our property and casualty business based on the requirements of the entire property and casualty group. We allocate the investment income, expenses and realized gains (losses) to our Personal Lines, Commercial Lines and Other Property and Casualty segments based on actuarial information related to the underlying businesses.

(2) Includes corporate eliminations.

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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, such as realized gains and losses, which we believe are not indicative of core operations.

Property and Casualty

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

	Three Months Ended March 31,
(In millions)	2008		2007
Segment revenues
Net premiums written	$	628.5	$	612.0
Net premiums earned	$	617.7	$	584.4
Net investment income		64.3		60.7
Other income		15.5		15.0
Total segment revenues		697.5		660.1
Losses and operating expenses
Losses and loss adjustment expenses		379.7		353.1
Policy acquisition expenses		137.4		127.0
Other operating expenses		82.4		79.1
Total losses and operating expenses		599.5		559.2
Segment income	$	98.0	$	100.9

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

The Property and Casualty group’s segment income decreased $2.9 million, or 2.9%, to $98.0 million, in the first quarter of 2008, compared to $100.9 million in the first quarter of 2007. Catastrophe related activity increased by $5.0 million in the quarter, to $19.3 million, from $14.3 million in the same period of 2007. Excluding the impact of catastrophe related activity, earnings would have increased by $2.1 million. This increase is primarily due to favorable development of prior years’ loss and LAE reserves, higher net investment income and more favorable current accident year results, partially offset by higher expenses. Favorable development on prior years’ reserves increased $3.6 million, to $55.6 million in the first quarter of 2008, from $52.0 million in the same period of 2007. Net investment income increased $3.6 million, primarily due to earnings on invested assets transferred from our Life Companies segment to the Property and Casualty group related to a change in common employer from FAFLIC to Hanover Insurance, and from favorable operational cash flows. Current accident year results improved approximately $2 million, with improvements in Commercial Lines being partially offset by declines in Personal Lines. Underwriting and loss adjustment expenses increased approximately $6 million primarily due to expenses related to recently acquired subsidiaries, salaries and employee benefit costs, expenses related to the introduction of our Connections Auto product in Massachusetts, technology costs related to a new claims system, and higher expenses related to independent adjusters for increased weather related claims.

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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 for our Other Property and Casualty segment.

	Three Months Ended March 31,
	2008				2007
(In millions, except ratios)	GAAP Net Premiums Written		GAAP Loss Ratios (1)(2)	Catastrophe loss ratios (3)	GAAP Net Premiums Written		GAAP Loss Ratios (1)(2)	Catastrophe loss ratios (3)
Personal Lines:
Personal automobile	$	259.3	59.8	0.2	$	273.5	56.6	0.1
Homeowners		83.3	65.7	9.1		84.5	51.5	5.3
Other personal		9.1	32.6	7.1		8.3	39.8	4.1
Total Personal Lines		351.7	60.8	3.0		366.3	54.7	1.7
Commercial Lines:
Workers’ compensation		38.2	38.9	—		34.5	33.6	—
Commercial automobile		53.5	41.9	—		51.6	43.8	—
Commercial multiple peril		94.3	36.9	7.6		91.8	47.2	5.6
Other commercial		90.8	29.6	2.1		67.8	30.4	1.0
Total Commercial Lines		276.8	35.9	3.3		245.7	40.3	2.5
Total	$	628.5	51.0	3.1	$	612.0	49.1	2.0
	2008				2007
	GAAP LAE Ratio		GAAP Expense Ratio	GAAP Combined Ratio (4)	GAAP LAE Ratio		GAAP Expense Ratio	GAAP Combined Ratio (4)
Personal Lines		11.1	29.3	101.2		11.6	29.6	95.9
Commercial Lines		9.5	39.9	85.3		10.8	39.7	90.8
Total		10.5	33.5	95.0		11.3	33.4	93.8

(1) GAAP loss ratio is a common industry measurement of the results of property and casualty insurance underwriting. This ratio reflects incurred claims compared to premiums earned. Our GAAP loss ratios include catastrophe losses.

(2) Includes policyholders’ dividends.

(3) Catastrophe loss ratio reflects incurred catastrophe claims compared to premiums earned.

(4) GAAP combined ratio is a common industry measurement of the results of property and casualty insurance underwriting. This ratio is the sum of incurred claims, claim expenses and underwriting expenses incurred to premiums earned. Our GAAP combined ratios also include the impact of catastrophes. Federal income taxes, net investment income and other non-underwriting expenses are not reflected in the GAAP combined ratio.

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The following table summarizes GAAP underwriting results for the Personal Lines, Commercial Lines and Other Property and Casualty segments and reconciles it to GAAP segment income.

	Three Months Ended March 31, 2008												Three Months Ended March 31, 2007
	Personal Lines			Commercial Lines			Other Property and Casualty			Total			Personal Lines			Commercial Lines			Other Property and Casualty			Total
GAAP underwriting (loss) profit, excluding prior year reserve development and catastrophes	$	(5.6	)	$	0.1		$	—		$	(5.5	)	$	0.6		$	(2.5	)	$	0.3		$	(1.6	)
Prior year reserve development favorable (unfavorable)		12.0			44.6			(1.0	)		55.6			21.5			30.5			—			52.0
Pretax catastrophe effect		(11.0	)		(8.3	)		—			(19.3	)		(7.2	)		(7.1	)		—			(14.3	)
GAAP underwriting (loss) profit		(4.6	)		36.4			(1.0	)		30.8			14.9			20.9			0.3			36.1
Net investment income		29.7			30.9			3.7			64.3			29.5			27.3			3.9			60.7
Fees and other income		4.2			4.3			7.0			15.5			3.8			4.1			7.1			15.0
Other operating expenses		(1.7	)		(3.3	)		(7.6	)		(12.6	)		(0.8	)		(3.3	)		(6.8	)		(10.9	)
Segment income	$	27.6		$	68.3		$	2.1		$	98.0		$	47.4		$	49.0		$	4.5		$	100.9

Personal Lines

Personal Lines’ net premiums written decreased $14.6 million, or 4.0%, to $351.7 million for the first quarter of 2008. The most significant factor contributing to this decrease was a decline in net premiums written in Michigan, which we attribute to the declining economy in the state. We also experienced a decrease in Massachusetts, which resulted from the state mandated rate decrease of 12% effective April 1, 2007 and a decrease in premium from the Massachusetts Commonwealth Automobile Reinsurers (“CAR”) facility. Our exposure management actions, primarily in Florida and Louisiana, also contributed to the decrease in net premiums written. Additionally, premium decreases in our targeted growth states resulted from our Connections Auto profitability management actions implemented over the past several quarters, partially offset by growth in personal automobile renewal premium and an increase in new homeowners premium in these targeted growth states. These decreases in net written premium were partially offset by a favorable impact from changes in our reinsurance structure as discussed on page 14 of our 2007 Annual Report on Form 10-K, which increased net written premium by $5.7 million in the first quarter of 2008.

Policies in force in the personal automobile line of business increased 0.2% at the end of the first quarter of 2008 compared to the first quarter of 2007. The increase was primarily the result of net growth in policies in force outside of Michigan, partially offset by a decrease in Michigan.

Policies in force in the homeowners line of business decreased 2.5% at the end of the first quarter of 2008, compared to the first quarter of 2007, primarily as a result of declines in Michigan. Policies in force also decreased due to exposure management actions taken in coastal states, particularly in Florida, where we have begun non-renewing all homeowners policies, and in Louisiana, where policies in force declined 17% compared to the first quarter of 2007. Partially offsetting these reductions is an increase in policies in force in newer, growth-targeted states.

Our underwriting profit, excluding prior year reserve development and catastrophes, declined $6.2 million, from a profit of $0.6 million in the first quarter of 2007 to a loss of $5.6 million in 2008. This decline was due to a reduction in current accident year profit of approximately $4 million, primarily due to higher non-catastrophe weather related claims, principally in the homeowners line, resulting from a more severe winter in the Midwest and Northeast, partially offset by the benefit of changes in our 2008 reinsurance programs. Additionally, underwriting and loss adjustment expenses were approximately $3 million higher, primarily due to expenses related to the introduction of our Connections Auto product in Massachusetts, higher independent adjuster costs for increased weather related claims, and salaries and employee benefits.

Favorable development on prior years’ loss and LAE reserves decreased $9.5 million, from $21.5 million in the first quarter of 2007 to $12.0 million in 2008. This decrease was driven by adverse personal automobile personal injury and property development in the 2007 accident year, partially offset by favorable development in the 2003 through 2006 accident years.

The pre-tax effect of catastrophes increased $3.8 million, from $7.2 million in the first quarter of 2007 to $11.0 million in 2008.

Our ability to maintain and increase Personal Lines net written premium and to maintain and improve underwriting results is expected to be affected by increasing price competition, our ability to achieve acceptable margins, our ability to generate new business and to retain our existing business, regulatory actions, the difficult economic conditions in Michigan, and our plans to

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continue to reduce coastal exposures. In conjunction with the introduction of “managed competition” effective April 1, 2008, our overall personal automobile rate levels in Massachusetts are expected to decrease approximately 8%. Such rates may be subject to further revision throughout the year, depending on the competitive and regulatory environment.

In addition, as discussed under “Contingencies and Regulatory Matters—Other Regulatory Matters”, certain coastal states may take actions which significantly affect the property and casualty insurance market, including ordering rate reductions for homeowners insurance products and subjecting insurance companies that do business in that state to potentially significant assessments in the event of catastrophic losses that are insured or reinsured by state-sponsored insurance or reinsurance entities. Such state actions or our responses thereto could have a significant impact on our underwriting margins and growth prospects, as well as our ability to manage exposures to hurricane losses.

Commercial Lines

Commercial Lines’ net premiums written increased $31.1 million, or 12.7%, to $276.8 million for the first quarter of 2008. This increase included the benefit of changes in our 2008 reinsurance programs, premiums written related to recently acquired subsidiaries, and modest growth in our Commercial Lines of business. Effective January 1, 2008, we renewed our property and casualty reinsurance program with changes to the reinsurance structure as discussed on page 14 of our 2007 Annual Report on Form 10-K. These changes resulted in an increase in net written premium of $19.6 million in the first quarter of 2008, of which $9.4 million is a non-recurring amount related to the termination of our 2007 umbrella excess of loss reinsurance treaty. Net written premium from our recent acquisitions, Verlan and PDI, was $7.9 million, of which $1.5 million was non-recurring due to the termination of existing reinsurance coverage. The remaining premium increase was due to growth in our underlying Commercial Lines business, most notably in our bond business.

Our underwriting profit, excluding prior year reserve development and catastrophes, increased $2.6 million in 2008, from a loss of $2.5 million in 2007 to a profit of $0.1 million in 2008. This increase was primarily due to higher current accident year profit of approximately $5 million, primarily due to the benefit of changes in our reinsurance programs, the results of our recently acquired subsidiaries and growth in our inland marine and bond lines of business. These were partially offset by higher underwriting and loss adjustment expenses of approximately $2 million, primarily attributable to our recently acquired subsidiaries. The overall impact of our recent acquisitions on our underwriting profit and underwriting profit excluding prior year loss development, was a loss of $0.8 million and a profit of $0.1 million, respectively.

Favorable development on prior years’ loss and LAE reserves increased $14.1 million, from $30.5 million for the first quarter of 2007 to $44.6 million in 2008. This increase primarily relates to the commercial multiple peril line of business.

The pre-tax effect of catastrophes increased $1.2 million, to $8.3 million in the first quarter of 2008 from $7.1 million in the first quarter of 2007.

We are experiencing increasing competition in our Commercial Lines segment and modest premium decreases on renewal policies, most notably in our middle market and commercial automobile business and relatively flat pricing in our small commercial business. The industry is also generally experiencing overall rate decreases. Our ability to increase Commercial Lines’ net premiums written while maintaining or improving underwriting results is expected to be affected by increased price competition and the difficult economic conditions in Michigan.

Other Property and Casualty

Segment income of the Other Property and Casualty segment decreased $2.4 million, to $2.1 million for the quarter ended March 31, 2008, from $4.5 million in the same period of 2007. The decrease is primarily due to adverse development in our run-off voluntary pools business and increased expenses related to our premium financing business.

Investment Results

Net investment income increased $3.6 million, or 5.9%, to $64.3 million for the quarter ended March 31, 2008, primarily due to earnings on invested assets transferred from our Life Companies segment to the Property and Casualty group. Effective January 1, 2008, Hanover Insurance became the common employer of all employees of the holding company and its subsidiaries and sponsorship of all employee benefit and pension plans was transferred from FAFLIC to Hanover Insurance. Accordingly, we transferred liabilities associated with these benefit plans and other employee related items, and an equal amount of assets to Hanover Insurance. Excluding earnings on these intersegment transfers, net investment income would have increased $0.7 million, or 1.1%, in 2008, which is primarily due to higher average invested assets resulting from increased operational cash flows in the latter half of 2007. Net investment income also includes $0.5 million related to our recently acquired subsidiaries.

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Reserve for Losses and Loss Adjustment Expenses

Overview of Loss Reserve Estimation Process

We maintain reserves for our property and casualty products to provide for our ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves are estimates, taking into account actuarial projections at a given point in time, of what we expect the ultimate settlement and administration of claims will cost based on facts and circumstances then known, estimates of future trends in claim severity and frequency, judicial theories of liability and policy coverage, and other factors.

We determine the amount of loss and loss adjustment expense reserves (the “loss reserves”) based on an estimation process that is very complex and uses information obtained from both company specific and industry data, as well as general economic information. The estimation process is judgmental, and requires us to continuously monitor and evaluate the life cycle of claims on type-of-business and nature-of-claim bases. Using data obtained from this monitoring and assumptions about emerging trends, our actuaries develop information about the size of ultimate claims based on historical experience and other available market information. The most significant assumptions used in the actuarial estimation process, which vary by line of business, include determining the expected consistency in the frequency and severity of claims incurred but not yet reported to prior years’ claims, the trend in loss costs, changes in the timing of the reporting of losses from the loss date to the notification date and expected costs to settle unpaid claims. This process assumes that past experience, adjusted for the estimated effects of current developments and anticipated trends, is an appropriate basis for predicting future events. On a quarterly basis, our actuaries provide to management a point estimate for each significant line of our direct business to summarize their analysis.

In establishing the appropriate loss reserve balances for any period, management carefully considers these actuarial point estimates, which are the principal bases for establishing our reserve balances, along with a qualitative evaluation of business trends, environmental changes, and numerous other factors. In general, such additional factors may include, but are not limited to, improvement or deterioration of the actuarial indications in the period, the maturity of the accident year, trends observed over the recent past such as changes in the mix of business or the impact of regulatory or litigation developments, the anticipated impact of new product introductions or expansion into new geographic areas, the level of volatility within a particular line of business, and the magnitude of the difference between the actuarial indication and the recorded reserves. Regarding our indirect business from voluntary and involuntary pools, we are provided loss estimates by managers of each pool. We adopt reserve estimates for the pools that consider this information and other facts.

Management’s Review of Judgments and Key Assumptions

There is greater inherent uncertainty in estimating insurance reserves for certain types of property and casualty insurance lines, particularly workers’ compensation and other liability lines, where a longer period of time may elapse before a definitive determination of ultimate liability and losses may be made. In addition, the technological, judicial, regulatory and political climates involving these types of claims change regularly. There is also greater uncertainty in establishing reserves with respect to new business, particularly new business which is generated with respect to newly introduced product lines, by newly appointed agents or in geographies in which we have less experience in conducting business. In such cases, there is less historical experience or knowledge and less data upon which the actuaries can rely. Historically, we have limited the issuance of long-tailed other liability policies, including directors and officers (“D&O”) liability, errors and omissions (“E&O”) liability and medical malpractice liability. The industry has experienced adverse loss trends in these lines of business.

We regularly update our reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in the results of operations as adjustments to losses and LAE. Often, these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and the loss event occurred. These types of subsequent adjustments are described separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results and may vary by line of business.

Inflation generally increases the cost of losses covered by insurance contracts. The effect of inflation varies by product. Our property and casualty insurance premiums are established before the amount of losses and LAE and the extent to which inflation may affect such expenses are known. Consequently, we attempt, in establishing rates and reserves, to anticipate the potential impact of inflation and increasing medical costs in the projection of ultimate costs. We have experienced increasing medical costs, including those associated with personal automobile personal injury protection claims, particularly in Michigan, as well as in our workers’ compensation line in most states. This increase is reflected in our reserve estimates, but continued increases could contribute to increased losses and LAE in the future.

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 and policy coverage,

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political attitudes and trends in general economic conditions, (ii) our review of per claim information, (iii) our historical loss experience and that 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 impact on our results of operations and 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 $24 million impact on property and casualty segment income, based on 2007 full year premiums.

As discussed below, estimated loss and LAE reserves for claims occurring in prior years developed favorably by $55.6 million and $52.0 million for the quarters ended March 31, 2008 and 2007, respectively, which represents 2.5% and 2.3% of net loss reserves held, respectively.

The major causes of material uncertainty relating to ultimate losses and loss adjustment expenses (“risk factors”) generally vary for each line of business, as well as for each separately analyzed component of the line of business. In some cases, such risk factors are explicit assumptions of the estimation method and in others, they are implicit. For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal interpretation of existing contract language will remain unchanged. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently.

Some risk factors will affect more than one line of business. Examples include changes in claim department practices, changes in settlement patterns, regulatory and legislative actions, court actions, timeliness of claim reporting, state mix of claimants, and degree of claimant fraud. The extent of the impact of a risk factor will also vary by components within a line of business. Individual risk factors are also subject to interactions with other risk factors within line of business components. Thus, risk factors can have offsetting or compounding effects on required reserves.

We are also defendants in various litigation, including putative class actions, which claim punitive damages or claim a broader scope of policy coverage than our interpretation, particularly in connection with losses incurred from Hurricane Katrina. The reserves established with respect to Hurricane Katrina assume that we will prevail with respect to these matters (See also Contingencies and Regulatory Matters). Although we believe our current Hurricane Katrina reserves are adequate, there can be no assurance that our ultimate costs associated with this event will not substantially exceed these estimates.

Loss Reserves by Line of Business

We perform actuarial reviews on certain detailed line of business coverages. These individual estimates are summarized into nine broader lines of business including personal automobile, homeowners, workers’ compensation, commercial automobile, commercial multiple peril, and other personal and other commercial lines. Asbestos and environmental reserves and pools business are separately analyzed.

The process of estimating reserves involves considerable judgment by management and is inherently uncertain. Actuarial point estimates by lines of business are the primary bases for determining ultimate expected losses and LAE and the level of net reserves required; however, other factors are considered as well. In general, such additional factors may include, but are not limited to, improvement or deterioration of the actuarial indications in the period, the maturity of the accident year, trends observed over the recent past such as changes in the mix of business or the impact of regulatory or litigation developments, the amount of data or experience we have with respect to a particular product or geographic area, the level of volatility within a particular line of business, and the magnitude of the difference between the actuarial indication and the recorded reserves.

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The table below shows our recorded reserves, net of reinsurance, and the related actuarial reserve point estimates by line of business at March 31, 2008 and December 31, 2007.

	March 31, 2008				December 31, 2007
(In millions)	Recorded Net Reserves		Actuarial Point Estimate		Recorded Net Reserves		Actuarial Point Estimate
Personal Automobile	$	682.2	$	649.8	$	696.7	$	672.8
Homeowners		116.3		114.6		99.4		97.4
Other Personal Lines		18.3		14.9		24.9		22.1
Workers’ Compensation		367.3		354.3		371.1		353.9
Commercial Automobile		164.6		152.9		169.9		159.8
Commercial Multiple Peril		449.5		410.4		463.3		424.2
Other Commercial Lines		184.8		171.7		179.9		165.4
Asbestos and Environmental		19.9		19.5		19.4		20.0
Pools and Other		197.5		197.5		200.7		200.7
Total	$	2,200.4	$	2,085.6	$	2,225.3	$	2,116.3

The principal factors considered by management in addition to the actuarial point estimates in determining the reserves at March 31, 2008 and December 31, 2007 vary by line of business. In our Commercial Lines segment, management considered the growth and product mix changes and recent adverse property related frequency trends in certain coverages. In addition, management also considered the significant growth in our inland marine and bond businesses for which we have limited actuarial data to estimate losses and the product mix change in our bond business towards a greater proportion of contract surety bonds where losses tend to emerge over a longer period of time and are cyclical related to general economic conditions. Moreover, in our Commercial Lines segment, management considered the potential for adverse development in the workers’ compensation line where losses tend to emerge over long periods of time and rising medical costs, while moderating, have continued to be a concern. In our Personal Lines segment, management considered the adverse personal automobile personal injury development and related potential for adverse trends due to costs shifting from health insurers to property and casualty insurers resulting from economic concerns and health insurance coverage trends, developments in personal automobile property costs in the 2007 accident year and an increase in physical damage frequency, all of which have added additional uncertainty to future development in our personal automobile line. Additionally, management considered the significant growth in our new business with our Connections Auto product and related growth in a number of states where there is additional uncertainty in the ultimate profitability and development of reserves due to the unseasoned nature of our new business and new agency relationships in these markets, as well as emerging loss trends which are higher than expected. Our lack of credible actuarial data to estimate losses in these new geographical areas and agency relationships and with this new product causes uncertainty in estimating ultimate reserves and requires considerable judgment by management. Also in Personal Lines, management considered the significant improvement in frequency trends the industry experienced during 2001 through 2006 in these lines of business which were unanticipated and remain to some extent unexplained. Management also considered the likelihood of future adverse development related to significant catastrophe losses experienced in 2005. Regarding our indirect business from voluntary and involuntary pools, we are provided loss estimates by managers of each pool. We adopt reserve estimates for the pools that consider this information and other factors. At March 31, 2008 and December 31, 2007, total recorded net reserves were 5.5% and 5.2% greater than actuarially indicated reserves, respectively.

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The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and LAE as follows:

	Three Months Ended March 31,
(In millions)	2008			2007
Reserve for losses and LAE, beginning of period	$	3,165.8		$	3,163.9
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of current year		435.9			405.0
Decrease in provision for insured events of prior years; favorable development		(55.6	)		(52.0	)
Total incurred losses and LAE		380.3			353.0
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year		131.7			115.1
Losses and LAE attributable to insured events of prior years		266.3			233.6
Hurricane Katrina		9.7			15.7
Total payments		407.7			364.4
Change in reinsurance recoverable on unpaid losses		(18.6	)		4.6
Purchase of Verlan Fire Insurance Company		4.2			—
Reserve for losses and LAE, end of period	$	3,124.0		$	3,157.1

The table below summarizes the gross reserve for losses and LAE by line of business.

(In millions)	March 31, 2008		December 31, 2007
Personal Automobile	$	1,263.3	$	1,277.4
Homeowners and Other		172.2		162.5
Total Personal		1,435.5		1,439.9
Workers’ Compensation		583.1		593.8
Commercial Automobile		242.7		250.8
Commercial Multiple Peril		522.4		541.8
Other Commercial		340.3		339.5
Total Commercial		1,688.5		1,725.9
Total reserve for losses and LAE	$	3,124.0	$	3,165.8

The total reserve for losses and LAE as disclosed in the above table decreased by $41.8 million for the quarter ended March 31, 2008.

Prior Year Development by Line of Business

When trends emerge that we believe affect the future settlement of claims, we adjust our reserves accordingly. Reserve adjustments are reflected in the Consolidated Statements of Income as adjustments to losses and LAE. Often, we recognize these adjustments in periods subsequent to the period in which the underlying loss event occurred. These types of subsequent adjustments are disclosed and discussed separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results.

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The following table summarizes the change in provision for insured events of prior years by line of business.

	Three Months Ended March 31,
(In millions)	2008			2007
(Decrease) increase in loss provision for insured events of prior years:
Personal Automobile	$	(16.2	)	$	(25.6	)
Homeowners and Other		3.6			2.7
Total Personal		(12.6	)		(22.9	)
Workers’ Compensation		(9.6	)		(10.0	)
Commercial Automobile		(5.9	)		(4.5	)
Commercial Multiple Peril		(16.7	)		(6.4	)
Other Commercial		(9.5	)		(7.0	)
Total Commercial		(41.7	)		(27.9	)
Voluntary Pools		1.0			—
Decrease in loss provision for insured events of prior years		(53.3	)		(50.8	)
Decrease in LAE provision for insured events of prior years		(2.3	)		(1.2	)
Decrease in total loss and LAE provision for insured events of prior years	$	(55.6	)	$	(52.0	)

Estimated loss reserves for claims occurring in prior years developed favorably by $53.3 million and $50.8 million during the first quarters of 2008 and 2007, respectively. The favorable loss reserve development during the first quarter of 2008 is primarily the result of lower than expected frequency of bodily injury in the personal automobile line, primarily in the 2003 through 2006 accident years, and lower than expected severity of liability claims in the commercial multiple peril line for the 2002 through 2007 accident years. In addition, lower than expected severity in the workers’ compensation line, primarily in the 2003 through 2007 accident years, contributed to the favorable development.

The favorable loss reserve development during the first quarter of 2007 was primarily the result of lower than expected bodily injury claim frequency in the personal automobile line, primarily in the three most recent accident years, and lower than expected severity in the workers’ compensation line, also primarily in the three most recent accident years. In addition, lower than expected frequency of liability claims in the commercial multiple peril line for the 2005 and prior accident years contributed to the favorable development.

During the first quarters of 2008 and 2007, estimated LAE reserves for claims occurring in prior years developed favorably by $2.3 million and $1.2 million, respectively. The favorable development in first quarter of 2008 and 2007 is primarily attributable to improvements in ultimate loss activity on prior accident years, primarily in the commercial multiple peril line, partially offset by an adverse litigation settlement in the first quarter of 2007, primarily impacting the personal automobile line.

Although we have experienced significant favorable development in both losses and LAE in recent years, there can be no assurance that this level of favorable development will occur in the future. We believe that we will experience less favorable prior year development in future years than we experienced recently. The factors that resulted in the favorable development of prior year reserves are considered in our ongoing process for establishing current accident year reserves. In light of our recent years of favorable development, the factors driving this development were considered to varying degrees in setting the more recent years’ accident year reserve. As a result, we expect the current and most recent accident year reserves not to develop as favorably as they have in the past. In light of the significance, in recent periods, of favorable development to our Property and Casualty segment income, declines in favorable development could be material to our results of operations.

Asbestos and Environmental Reserves

Although we attempt to limit our exposures to asbestos, environmental damage and toxic tort liability through specific policy exclusions, we have been and may continue to be subject to claims related to these exposures. Ending loss and LAE reserves for all direct business written by our property and casualty companies related to asbestos, environmental damage and toxic tort liability, included in the reserve for losses and LAE, were $19.9 million and $19.4 million at March 31, 2008 and December 31, 2007, respectively, net of reinsurance of $8.4 million and $11.1 million at March 31, 2008 and December 31, 2007, respectively. In recent years average asbestos and environmental payments have declined modestly. As a result of our historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos, environmental damage and toxic tort liability loss experience has remained minimal in relation to our total loss and LAE incurred experience.

In addition, and not included in the numbers above, we have established loss and LAE reserves for assumed reinsurance pool business with asbestos, environmental damage and toxic tort liability of $57.1 million and $56.9 million at March 31, 2008 and

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December 31, 2007, respectively. These reserves relate to pools in which we have terminated our participation; however, we continue to be subject to claims related to years in which we were a participant. A significant part of our pool reserves relates to our participation in the Excess and Casualty Reinsurance Association (“ECRA”) voluntary pool from 1950 to 1982. In 1982, the pool was dissolved and since that time, the business has been in runoff. Our percentage of the total pool liabilities varied from 1% to 6% during these years. 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 these pools, we cannot provide assurance that our reserves will be sufficient.

We estimate our ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, assumed reinsurance or pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. We believe that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. Nevertheless, the asbestos, environmental and toxic tort liability reserves could be revised, and any such revisions could have a material adverse effect on our results of operations for a particular quarterly or annual period or on our financial position.

Life Companies

On December 30, 2005, we sold all of the outstanding shares of capital stock of Allmerica Financial Life Insurance and Annuity Company (“AFLIAC”), a life insurance subsidiary representing approximately 95% of our run-off variable life insurance and annuity business, to Goldman Sachs. The transaction also included the reinsurance of 100% of the variable business of FAFLIC. Additionally, we continue to evaluate strategic alternatives related to our remaining life insurance subsidiary.

Our Life Companies segment is discussed in two major components: Continuing Operations and Discontinued Operations.

Continuing Operations

The following table summarizes the results of operations for the Continuing Operations segment for the periods indicated.

	Three Months Ended March 31,
(In millions)	2008			2007
Segment revenues
Premiums	$	12.9		$	17.8
Fees and other income		—			0.4
Net investment income		16.2			19.3
Total segment revenue		29.1			37.5
Policy benefits, claims and operating expenses
Policy benefits, claims and losses		26.6			32.0
Policy acquisition and other operating expenses		5.0			6.4
Total policy benefits, claims and operating expenses		31.6			38.4
Segment loss	$	(2.5	)	$	(0.9	)

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Life Companies’ Continuing Operations segment loss was $2.5 million in the first quarter of 2008, compared to a loss of $0.9 million during the same period in 2007. The increase in segment loss was primarily due to lower net investment income resulting from an intercompany transfer of assets to our Property and Casualty segment. Effective January 1, 2008, Hanover Insurance became the common employer for all employees of THG and its subsidiaries and sponsorship of all employee benefit and pension plans was transferred from FAFLIC to Hanover Insurance. Accordingly, we transferred liabilities with corresponding assets associated with these benefit plans and other employee related items to Hanover Insurance. In addition, we experienced slight unfavorable mortality in the business, with unfavorable mortality in our traditional line of business partially offset by favorable mortality in our group retirement line. These unfavorable items were partially offset by lower operating expenses.

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Discontinued Operations

Gain/(Loss) on Sale of AFLIAC Variable Life Insurance and Annuity Business

	Three Months Ended March 31,
(In millions)	2008		2007
Gain/(loss) on sale of AFLIAC variable life insurance and annuity business	$	6.2	$	(0.2	)

For the quarter ended March 31, 2008, we recorded a gain of $6.2 million, net of tax, primarily due to the release of liabilities related to certain contractual indemnities to Goldman Sachs relating to the pre-sale activities of the business sold, which were recorded under FIN 45. For the quarter ended March 31, 2007, we recorded a net loss of $0.2 million, primarily due to conversion costs associated with this variable business.

As of March 31, 2008, our total gross FIN 45 liability was $19.2 million. Although we believe our current estimate for our FIN 45 liability is appropriate, there can be no assurance that this estimate will not materially increase in the future.

Investment Portfolio

We held general account investment assets diversified across several asset classes, as follows:

	March 31, 2008				December 31, 2007
(In millions, except percentage data)	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
Fixed maturities (1)	$	5,646.6	92.4	%	$	5,722.0	92.0	%
Equity securities (1)		49.1	0.8			44.9	0.7
Mortgages		38.3	0.6			41.2	0.7
Policy loans (1)		111.9	1.9			116.0	1.9
Cash and cash equivalents (1)		233.3	3.8			262.8	4.2
Other long-term investments		30.1	0.5			30.7	0.5
Total	$	6,109.3	100.0	%	$	6,217.6	100.0	%

(1) We carry these investments at fair value.

Total investment assets decreased $108.3 million, or 1.7%, to $6.1 billion during the first quarter of 2008, of which fixed maturities decreased $75.4 million and cash and cash equivalents decreased $29.5 million. Fixed maturities declined primarily due to operational cash flow requirements in the Property and Casualty group as well as the Company’s stock repurchase program. Cash and cash equivalents decreased primarily due to a decline in the balance of collateral held related to our securities lending program and the run-off of our life operations.

Our fixed maturity portfolio is comprised primarily of investment grade corporate securities, mortgage-backed securities, taxable and tax-exempt issues of state and local governments, U.S. government and agency securities and other issues. Based on ratings by the National Association of Insurance Commissioners (“NAIC”), our fixed maturity portfolio consisted of 95.0% investment grade securities at March 31, 2008 and 94.5% at December 31, 2007.

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The following table provides information about the credit quality of our fixed maturities.

(In millions, except percentage data)		March 31, 2008						December 31, 2007
NAIC Designation	Rating Agency Equivalent Designation	Amortized Cost		Carrying Value		% of Total Carrying Value		Amortized Cost		Carrying Value		% of Total Carrying Value
1	Aaa/Aa/A	$	4,070.8	$	4,084.3	72.3	%	$	4,149.5	$	4,164.1	72.8	%
2	Baa		1,290.1		1,282.0	22.7			1,257.6		1,244.2	21.7
3	Ba		112.3		107.0	1.9			130.7		129.6	2.3
4	B		146.8		140.4	2.5			151.9		151.1	2.6
5	Caa and lower		33.8		31.2	0.5			32.4		30.6	0.5
6	In or near default		1.0		1.7	0.1			1.0		2.4	0.1
Total fixed maturities		$	5,654.8	$	5,646.6	100.0	%	$	5,723.1	$	5,722.0	100.0	%

We do not hold subprime mortgages either directly or through our mortgage backed securities, nor do we currently own any collateralized debt and loan obligations or invest in credit derivatives. Our residential mortgage-backed securities constitute $1.1 billion of our invested assets, with less than 15% held in non-agency securities. Commercial mortgage-backed securities (“CMBS”) constitute $468.3 million of our invested assets. Approximately 95% of our CMBS holdings were from pre-2005 vintages, with 5% from the 2006 vintage and no 2005 vintage. The entire CMBS portfolio had a weighted average loan to value ratio of 67.2%. Also, we have limited exposure to the secondary credit risk presented by financial guarantors of municipal obligations. Financial guarantor insurance enhanced municipal bonds were $365.8 million, or approximately 44%, of our municipal bond portfolio at March 31, 2008, with a weighted average credit rating of AA. The overall weighted average credit rating of our insured municipal bond portfolio, giving no effect to the insurance enhancement, was A-. In addition, we believe we have limited indirect exposure to subprime mortgages through our investments in debt securities of banking, brokerage and insurance companies. Based on the issuing companies’ public disclosure, we identified approximately $137 million of corporate bonds which we believe have significant subprime exposure. At March 31, 2008, these securities have a weighted average rating of A and net unrealized losses of $20.4 million.

Our fixed maturity and equity securities are classified as available-for-sale and are carried at fair value. As of January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“Statement No. 157”) with respect to our investment assets and liabilities which was not material to our financial position or results of operations. Statement No. 157 creates a common definition of fair value, establishes a hierarchy for determining fair value that emphasizes the use of observable market data whenever available and requires expanded disclosures. Financial instruments whose value is determined using significant management judgment or estimation are less than 1% of the total assets and liabilities we measured at fair value. See Note 7 of the Notes to Interim Consolidated Financial Statements included under Item 1 of this filing.

Although we expect to invest new funds primarily in cash, cash equivalents and investment grade fixed maturities, we have invested and expect to continue investing a small portion of funds in equity securities, and we may invest a portion in below investment grade fixed maturities and other assets. The average yield on fixed maturities was 5.6% for March 31, 2008 and December 31, 2007.

At March 31, 2008, $112.4 million of our fixed maturities were invested in traditional private placement securities, as compared to $111.3 million at December 31, 2007. Fair values of traditional private placement securities are determined by pricing models, including the use of discounted cash flow analyses.

We recognized $7.5 million of realized losses on other-than-temporary impairments of fixed maturities for the first quarter of 2008, as compared to $0.5 million for the first quarter of 2007, principally resulting from our exposure to below investment grade securities. In our determination of other-than-temporary impairments, we consider several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends, dividend payments, and asset quality; a weakening of the general market conditions in the industry or geographic region in which the issuer operates; the length of time in which the fair value of an issuer’s securities remains below our cost; and with respect to fixed maturity investments, any factors that might raise doubt about the issuer’s ability to pay all amounts due according to the contractual terms. We apply these factors to all securities. Other-than-temporary impairments are recorded as a realized loss, which reduces net income and earnings per share. Temporary declines in market value are recorded as unrealized losses, which do not affect net income and earnings per share but reduce other comprehensive income. We cannot provide assurance that the other-than-temporary impairments will, in fact, be adequate to cover future losses or that we will not have substantial additional impairments in the future.

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The following table provides information about our fixed maturities that have been continuously in an unrealized loss position.

	March 31, 2008				December 31, 2007
(In millions)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Investment grade fixed maturities:
12 months or less	$	42.1	$	995.1	$	27.1	$	740.0
Greater than 12 months		45.7		646.3		34.3		1,214.7
Total investment grade fixed maturities		87.8		1,641.4		61.4		1,954.7
Below investment grade fixed maturities:
12 months or less		16.6		183.3		8.3		171.0
Greater than 12 months		—		—		—		—
Total below investment grade fixed maturities		16.6		183.3		8.3		171.0
Equity securities		2.4		31.3		0.5		17.8
Total fixed maturities and equity securities	$	106.8	$	1,856.0	$	70.2	$	2,143.5

We had $106.8 million of gross unrealized losses on fixed maturities and equity securities at March 31, 2008, as compared to $70.2 million at December 31, 2007. Unrealized losses on investment grade and below investment grade securities increased during the first quarter of 2008 due to widening credit spreads. In our investment grade bonds, spreads widened most notably in the financial sector for companies that have exposure to the residential mortgage market, and to a lesser extent, in our prime mortgage-backed securities holdings. In our below investment grade portfolio, corporate bonds with lower ratings declined in value as investors evaluated the length and severity of the economic slowdown in the U.S. and its impact on the global economy. Obligations of the U.S. Treasury, U.S. government and agency securities, states and political subdivisions had associated gross unrealized losses of $2.7 million at March 31, 2008 and $2.4 million at December 31, 2007. At March 31, 2008 and December 31, 2007, substantially all below investment grade securities with an unrealized loss had been rated by the NAIC, Standard & Poor’s or Moody’s.

We view the gross unrealized losses on fixed maturities and equity securities as being temporary since it is our assessment that these securities will recover in the near term. Furthermore, as of March 31, 2008, we had the intent and ability to retain such investments for the period of time anticipated to allow for this expected recovery in fair value. The risks inherent in our assessment methodology include the risk that, subsequent to the balance sheet date, market factors may differ from our expectations; we may decide to subsequently sell a security for unforeseen business needs; or changes in the credit assessment or equity characteristics from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, the unrealized loss would then be realized and we would record a charge to earnings. Although unrealized losses are not reflected in the results of financial operations until they are realized or deemed “other-than-temporary”, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets.

The following table sets forth gross unrealized losses for fixed maturities by maturity period and for equity securities at March 31, 2008 and December 31, 2007. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers. Mortgage-backed securities are included in the category representing their ultimate maturity.

(In millions)	March 31, 2008		December 31, 2007
Due in one year or less	$	0.1	$	0.2
Due after one year through five years		21.0		11.2
Due after five years through ten years		45.9		38.5
Due after ten years		37.4		19.8
Total fixed maturities		104.4		69.7
Equity securities		2.4		0.5
Total fixed maturities and equity securities	$	106.8	$	70.2

The carrying value of fixed maturity securities on non-accrual status at March 31, 2008 and December 31, 2007, as well as the effect that non-accruals had on net investment income were not material. Although we did not experience defaults in the first quarter of 2008, any defaults in the fixed maturities portfolio in future periods may negatively affect investment income.

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Income Taxes

We file a consolidated United States federal income tax return that includes the holding company and its domestic subsidiaries (including non-insurance operations). We segregate the entities included within the consolidated group into either a life insurance or a non-life insurance company subgroup. The consolidation of these subgroups is subject to certain statutory restrictions on the percentage of eligible non-life tax losses that can be applied to offset life company taxable income.

The provision for federal income taxes from continuing operations was an expense of $27.0 million during the first quarter of 2008, compared to an expense of $28.1 million during the same period in 2007. These provisions resulted in consolidated effective federal tax rates of 33.5% and 30.6% for the quarters ended March 31, 2008 and 2007, respectively. This increase in the tax rate is primary due to a $2.4 million benefit realized in 2007 for a settlement with the Internal Revenue Service (“IRS”) of interest claims for 1977 through 1994.

In the first quarter of 2008, we increased our valuation allowance related to our deferred tax asset by $3.3 million, from $166.1 million to $169.4 million. The increase in this valuation allowance resulted primarily from realized investment losses in the quarter and from unrealized depreciation primarily associated with our Closed Block investment portfolio. Accordingly, we recorded a valuation allowance of $1.8 million as an adjustment to Federal Income Tax Expense in our Consolidated Statements of Income as well as a $1.5 million valuation allowance as an adjustment to Contractholder Deposit Funds and Other Policy Liabilities for the deferred tax associated with the unrealized losses of the Closed Block.

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). As a result of the implementation of FIN 48, we recognized an $11.5 million decrease in the liability for unrecognized tax benefits, which was reflected as an increase in the January 1, 2007 balance of retained earnings.

A corporation is entitled to a tax deduction from gross income for a portion of any dividend which was received from a domestic corporation that is subject to income tax. This is referred to as a “dividends received deduction.” In this and in prior years, we have taken this dividends received deduction when filing our federal income tax return. Many separate accounts held by life insurance companies receive dividends from such domestic corporations, and therefore, were regarded as entitled to this dividends received deduction. In its Revenue Ruling 2007-61, issued on September 25, 2007, the IRS announced its intention to issue regulations with respect to certain computational aspects of the dividends received deduction on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are not yet known, but they could result in the elimination of some or all of the separate account dividends received deduction tax benefit that we receive. We believe that it is more likely than not that any such regulation would apply prospectively only, and application of this regulation is not expected to be material to our results of operations in any future annual period. However, there can be no assurance that the outcome of the revenue ruling will be as anticipated and should retroactive application be required, our results of operations may be adversely affected in a quarterly or annual period. We believe that retroactive application would not materially affect our financial position.

Significant Transactions

On March 14, 2008, we acquired all of the outstanding shares of Verlan Holdings, Inc. for $29.0 million. Verlan Holdings, Inc. is a specialty company providing property insurance to small and medium-sized manufacturing and distribution companies, and which historically has generated annual written premium of approximately $18 million.

On March 10, 2008, we entered into a definitive agreement to sell our premium financing subsidiary, AMGRO, Inc. and its subsidiaries to Premium Financing Specialists, Inc. The transaction is subject to regulatory review and approval, as well as the satisfaction of certain closing conditions, and is expected to close in the second quarter of 2008.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements. These statements have been prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting estimates are those which we believe affect the more significant judgments and estimates used in the preparation of our financial statements. Additional information about our other significant accounting

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policies and estimates may be found in Note 1—“Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Property & Casualty Insurance Loss Reserves

We determine the amount of loss and loss adjustment expense reserves (the “loss reserves”), as discussed in “Segment Results—Property and Casualty, Overview of Loss Reserve Estimation Process” based on an estimation process that is very complex and uses information obtained from both company specific and industry data, as well as general economic information. The estimation process is judgmental, and requires us to continuously monitor and evaluate the life cycle of claims on type-of-business and nature-of-claim bases. Using data obtained from this monitoring and assumptions about emerging trends, our actuaries develop information about the size of ultimate claims based on historical experience and other available market information. The most significant assumptions used in the actuarial estimation process, which vary by line of business, include determining the expected consistency in the frequency and severity of claims incurred but not yet reported to prior years claims, the trend in loss costs, changes in the timing of the reporting of losses from the loss date to the notification date and expected costs to settle unpaid claims. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. On a quarterly basis, our actuaries provide to management a point estimate for each significant line of our direct business to summarize their analysis.

In establishing the appropriate loss reserve balances for any period, management carefully considers these actuarial point estimates, which are the principal bases for establishing our reserve balances, along with a qualitative evaluation of business trends, environmental changes, and numerous other factors. In general, such additional factors may include, but are not limited to, improvement or deterioration of the actuarial indications in the period, the maturity of the accident year, trends observed over the recent past such as changes in the mix of business or the impact of regulatory or litigation developments, the level of volatility within a particular line of business, and the magnitude of the difference between the actuarial indication and the recorded reserves. Specific factors considered by management in determining the reserves at March 31, 2008 and December 31, 2007 included the current extent to which growth and product mix changes in our Commercial Lines segment have affected our ultimate loss trends, the significant growth in our Personal Lines new business in 2006 and related growth in a number of states, the significant improvement in personal lines frequency and severity trends the industry has experienced during 2001 through 2006 in these lines of business which were unanticipated and remain to some extent unexplained, significant growth and product mix changes in our surety bond and inland marine businesses for which we have limited actuarial data to estimate ultimate losses, and the potential for adverse development in the workers’ compensation line, where losses tend to emerge over long periods of time and rising medical costs, while moderating, continue to be a concern. Management also considered the likelihood of future adverse development related to significant catastrophe losses experienced in 2005. Regarding our indirect business from voluntary and involuntary pools, we are provided loss estimates by managers of each pool. We adopt reserve estimates for the pools that consider this information and other facts. At March 31, 2008 and December 31, 2007, total recorded net reserves were 5.5% and 5.2% greater than actuarially indicated point estimates, respectively. We exercise judgment in estimating all loss reserves based upon our knowledge of the property and casualty business, review of the outcome of actuarial studies, historical experience and other facts to record an estimate which reflects our expected ultimate loss and loss adjustment expenses. 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 impact on our results of operations and 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 loss and LAE ratio resulting from a change in reserve estimation is currently projected to have an approximate $24 million impact on property and casualty segment income, based on 2007 full year premiums.

When trends emerge that we believe affect the future settlement of claims, we adjust our reserves accordingly (see Segment Results—Property and Casualty, Management’s Review of Judgments and Key Assumptions for further explanation of factors affecting our reserve estimates, our review process and our process for determining changes to our reserve estimates). Reserve adjustments are reflected in the Consolidated Statements of Income as adjustments to losses and loss adjustment expenses. Often, we recognize these adjustments in periods subsequent to the period in which the underlying loss event occurred. These types of subsequent adjustments are disclosed and discussed separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results. As discussed in “Segment Results—Property and Casualty, Management’s Review of Judgments and Key Assumptions”, estimated loss and LAE reserves for claims occurring in prior years, excluding those related to Hurricane Katrina, developed favorably by $55.6 million and $52.0 million for the quarters ended March 31, 2008 and 2007, respectively, which represents 2.5% and 2.3% of net loss reserves held, respectively. There were no changes to our estimate of Hurricane Katrina net loss and loss adjustment reserves in the first quarter of 2008 and 2007, respectively. See also “Analysis of Losses and Loss Adjustment Expenses Reserve Development” in Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2007 for guidance related to the annual development of our loss and LAE reserves.

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The major causes of material uncertainty relating to ultimate losses and loss adjustment expenses (“risk factors”) generally vary for each line of business, as well as for each separately analyzed component of the line of business. In some cases, such risk factors are explicit assumptions of the estimation method and in others, they are implicit. For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal interpretation of existing contract language will remain unchanged. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently. Some risk factors will affect more than one line of business. Examples include changes in claim department practices, changes in settlement patterns, regulatory and legislative actions, court actions, timeliness of claim reporting, state mix of claimants, and degree of claimant fraud. The extent of the impact of a risk factor will also vary by components within a line of business. Individual risk factors are also subject to interactions with other risk factors within line of business components. Thus, risk factors can have offsetting or compounding effects on required reserves.

We are also defendants in various litigation, including putative class actions, which claim punitive damages or claim a broader scope of policy coverage than our interpretation, all in connection with losses incurred from Hurricane Katrina. The reserves established with respect to Hurricane Katrina assume that we will prevail with respect to these matters (see Contingencies and Regulatory Matters). Although we believe our current Hurricane Katrina reserves are adequate, there can be no assurance that our ultimate costs associated with this event will not substantially exceed these estimates.

Property & Casualty Reinsurance Recoverables

We share a significant amount of insurance risk of the primary underlying contracts with various insurance entities through the use of reinsurance contracts. As a result, when we experience loss events that are subject to the reinsurance contract, reinsurance recoveries are recorded. The amount of the reinsurance recoverable can vary based on the size of the individual loss or the aggregate amount of all losses in a particular line, book of business or an aggregate amount associated with a particular accident year. The valuation of losses recoverable depends on whether the underlying loss is a reported loss, or an incurred but not reported loss. For reported losses, we value reinsurance recoverables at the time the underlying loss is recognized, in accordance with contract terms. For incurred but not reported losses, we estimate the amount of reinsurance recoverable based on the terms of the reinsurance contracts and historical reinsurance recovery information and apply that information to the gross loss reserve estimates. The most significant assumption we use is the average size of the individual losses for those claims that have occurred but have not yet been recorded by us. The reinsurance recoverable is based on what we believe are reasonable estimates and is disclosed separately on the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses are settled.

Pension Benefit Obligations

Prior to 2005, we provided pension retirement benefits to substantially all of our employees based on a defined benefit cash balance formula. In addition to the cash balance allocation, certain transition group employees, who had met specified age and service requirements as of December 31, 1994, were eligible for a grandfathered benefit based primarily on the employees’ years of service and compensation during their highest five consecutive plan years of employment. As of January 1, 2005, the defined benefit pension plans were frozen.

We account for our pension plans in accordance with Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements 87, 88, 106, and 132(R) and Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions (“Statement No. 87”). In order to measure the liabilities and expense associated with these plans, we must make various estimates and key assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates. These estimates and assumptions are reviewed at least annually and are based on our historical experience, as well as current facts and circumstances. In addition, we use outside actuaries to assist in measuring the expenses and liabilities associated with this plan.

The discount rate enables us to state expected future cash flows as a present value on the measurement date. We also use this discount rate in the determination of our pre-tax pension expense or benefit. A lower discount rate increases the present value of benefit obligations and increases pension expense. We determined our discount rate utilizing the Citigroup Pension Discount Curve as of December 31, 2007. At December 31, 2007, based upon our qualified plan assets in relation to this discount curve, we increased our discount rate to 6.38%, from 5.88% at December 31, 2006.

To determine the expected long-term return on plan assets, we consider the historical mean returns by asset class for passive indexed strategies, as well as current and expected asset allocations and adjust for certain factors that we believe will have an impact on future returns. For the years ended December 31, 2007 and 2006, the expected rate of return on plan assets was 8.0% and 8.25%, respectively. Increases in actual returns on plan assets will generally reduce our net actuarial losses that are reflected in our accumulated other comprehensive income balance in shareholders’ equity.

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We expect our pre-tax pension expense to decrease by approximately $7.1 million in 2008 from an expense of $5.4 million in 2007, excluding a $6.0 million correction related to historical participant census data, to a benefit of $1.7 million in 2008. This decrease in expense is primarily due to the aforementioned increase in the discount rate.

Holding all other assumptions constant, sensitivity to changes in our key assumptions are as follows:

Discount Rate—A 25 basis point increase in discount rate would decrease our pension expense in 2008 by $0.3 million and decrease our projected benefit obligation by approximately $13 million. A 25 basis point reduction in the discount rate would increase our pension expense by $2.1 million and increase our projected benefit obligation by approximately $14 million.

Expected Return on Plan Assets—A 25 basis point increase or decrease in the expected return on plan assets would decrease or increase our pension expense in 2008 by $1.1 million.

Statutory Capital of Insurance Subsidiaries

The NAIC prescribes an annual calculation regarding risk based capital (“RBC”). RBC ratios for regulatory purposes, as described in the glossary, are expressed as a percentage of the capital required to be above the Authorized Control Level (the “Regulatory Scale”); however, in the insurance industry RBC ratios are widely expressed as a percentage of the Company Action Level. Set forth below are Total Adjusted Capital, the Company Action Level, the Authorized Control Level and RBC ratios for FAFLIC and Hanover Insurance, as of March 31, 2008, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):

(In millions, except ratios)	Total Adjusted Capital		Company Action Level		Authorized Control Level		RBC Ratio Industry Scale		RBC Ratio Regulatory Scale
Hanover Insurance (1)	$	1,742.4	$	503.5	$	251.8	346	%	692	%
FAFLIC		174.0		35.7		17.9	487	%	972	%

(1) Hanover Insurance’s Total Adjusted Capital includes $755.3 million related to its subsidiary, Citizens.

The total adjusted statutory capital position of Hanover Insurance improved $76.0 million during the first quarter of 2008, primarily due to results generated by our property and casualty business. The total adjusted statutory capital position of FAFLIC declined during 2008, from $188.9 million at December 31, 2007 to $174.0 million at March 31, 2008.

Rating Agency Actions

Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers information on specific insurance companies. Higher ratings generally indicate the rating agencies’ opinion regarding financial stability and a stronger ability to pay claims.

We believe that strong ratings are important factors in marketing our products to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry. Insurance company financial strength ratings are assigned to an insurer based upon factors deemed by the rating agencies to be relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security.

In January of 2008, Moody’s upgraded the financial strength rating of our property and casualty subsidiaries to A3 (good) from Baa1 (adequate). Additionally, Moody’s upgraded our debt ratings for senior debt to Baa3 (adequate) from Ba1 (questionable), upgraded our capital securities to Ba1 (questionable) from Ba2 (questionable) and upgraded our short-term debt to Prime-3 (acceptable) from NP (not prime).

Liquidity and Capital Resources

Net cash used by operating activities was $81.3 million during the first quarter of 2008, as compared to $40.6 million in 2007. The $48.7 million increase in cash used for operating activities primarily resulted from increased loss and loss adjustment expense payments.

Net cash provided by investing activities was $67.1 million during the first quarter of 2008, compared to cash used of $31.0 million for the same period of 2007. During 2008, cash was provided by net sales of fixed maturity securities primarily to fund operational cash flow requirements of our property and casualty business, as well as the stock repurchase program. In 2007, we had net purchases of fixed maturity securities primarily from the improved underwriting results in our property and casualty business.

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Net cash used in financing activities was $9.6 million during the first quarter of 2008, compared to $82.6 million for the same period of 2007. During 2008, cash used in financing activities primarily resulted from $32.9 million of share repurchases, a net repayment of $16.5 million related to our securities lending program, partially offset by $37.2 million of proceeds from short-term borrowings in our premium financing business, the sale of which is expected to close in the second quarter of 2008. In 2007, cash used by financing activities primarily resulted from a net repayment of $88.9 million related to our securities lending program.

At March 31, 2008, THG, as a holding company, held $282.3 million of fixed maturities and cash. We believe our holding company assets are sufficient to meet our obligations through the remainder of 2008, which currently consist primarily of interest on the senior debentures and junior subordinated debentures, and certain intercompany tax liabilities of approximately $40 million that are expected to become due in 2008. We also expect that the holding company will be required to make payments in 2008 related to indemnification of liabilities associated with the sale of various subsidiaries. However, we currently do not expect that it will be necessary to dividend funds from our insurance subsidiaries in order to fund 2008 holding company obligations.

We expect to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements, including the funding of our qualified defined benefit pension plan. Based on current law, we are required to contribute an estimated $22.1 million in 2008, of which $9.7 million has been paid through April 2008. We may be required to make significant cash contributions to our qualified defined benefit pension plan in future years. Effective January 1, 2008, Hanover Insurance assumed FAFLIC’s responsibilities as the common employer of all employees of the holding company and its subsidiaries and as such, the funding of these plans is now the legal responsibility of Hanover Insurance.

Our insurance subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term investments.

On October 16, 2007, our Board of Directors authorized a share repurchase program of up to $100 million. Under this repurchase authorization, we may repurchase our common stock from time to time, in amounts and prices and at such times as we deem appropriate, subject to market conditions and other considerations. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. As of May 1, 2008, we had repurchased approximately 920,000 shares for a cost of approximately $39.5 million. From time to time we may also repurchase senior debt or capital securities on an opportunistic basis.

In June 2007, we entered into a $150.0 million committed syndicated credit agreement which expires in June 2010. Borrowings, if any, under this agreement are unsecured and incur interest at a rate per annum equal to, at our option, a designated base rate or the Eurodollar rate plus applicable margin. The agreement provides covenants, including, but not limited to, maintaining a certain level of equity and an RBC ratio in our primary property and casualty companies of at least 175% (based on the Industry Scale). We had no borrowings under this line of credit during 2008. Additionally, we had no commercial paper borrowings as of March 31, 2008 and we do not anticipate utilizing commercial paper in 2008. Our premium financing business had short-term borrowings of $37.2 million through a credit facility as a result of its pending sale and a change in accounting treatment associated with that transaction.

Off-Balance Sheet Arrangements

We currently do not have any material off-balance sheet arrangements that are reasonably likely to have an effect on our financial position, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contingencies and Regulatory Matters

LITIGATION AND CERTAIN REGULATORY MATTERS

Durand Litigation

On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named plaintiff, a former employee who received a lump sum distribution from our Cash Balance Plan at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, we understated the accrued benefit in the calculation. We filed a motion to dismiss on the basis that the plaintiff failed to exhaust administrative remedies, which motion was granted without prejudice in a decision dated November 7, 2007. On December 3, 2007, plaintiff filed a Notice of Appeal of this dismissal to the United States Court of Appeals for the Sixth Circuit. In our judgment, the outcome is not expected to be material to our financial position, although it could have a material effect on the results of operations for a particular quarter or annual period.

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Emerald Litigation

On July 24, 2002, an action captioned American National Bank and Trust Company of Chicago, as Trustee f/b/o Emerald Investments Limited Partnership, and Emerald Investments Limited Partnership v. Allmerica Financial Life Insurance and Annuity Company (“Emerald”) was commenced in the United States District Court for the Northern District of Illinois, Eastern Division. Although AFLIAC was sold to Goldman Sachs on December 30, 2005, we have agreed to indemnify AFLIAC and Goldman Sachs with respect to this litigation.

In 1999, plaintiffs purchased two variable annuity contracts with initial premiums aggregating $5 million. Plaintiffs, who AFLIAC subsequently identified as engaging in frequent transfers of significant sums between sub-accounts that in our opinion constituted “market timing”, were subject to restrictions upon such trading that AFLIAC imposed in December 2001. Plaintiffs allege that such restrictions constituted a breach of the terms of the annuity contracts. In December 2003, the court granted partial summary judgment to the plaintiffs, holding that at least certain restrictions imposed on their trading activities violated the terms of the annuity contracts.

On May 19, 2004, plaintiffs filed a Brief Statement of Damages in which, without quantifying their damage claim, they outlined a claim for (i) amounts totaling $150,000 for surrender charges imposed on the partial surrender by plaintiffs of the annuity contracts, (ii) loss of trading profits they expected over the remaining term of each annuity contract, and (iii) lost trading profits resulting from AFLIAC’s alleged refusal to process five specific transfers in 2002 because of trading restrictions imposed on market timers. With respect to the lost profits, plaintiffs claim that pursuant to their trading strategy of transferring money from money market accounts to international equity accounts and back again to money market accounts, they have been able to consistently obtain relatively risk free returns of between 35% and 40% annually. Plaintiffs claim that they would have been able to continue to maintain such returns on the account values of their annuity contracts over the remaining terms of the annuity contracts (which are based in part on the lives of the named annuitants). The aggregate account value of plaintiffs’ annuities was approximately $12.8 million in December 2001. On February 1, 2006, the Court issued a ruling which precluded plaintiffs from claiming any damages accruing beyond July 31, 2004.

A jury trial on plaintiffs’ damage claim was held in December 2006, which resulted in an aggregate award to plaintiffs of $1.3 million for lost profits and reimbursement of surrender charges. Plaintiffs’ motion for a new trial was subsequently denied. On March 5, 2007, plaintiffs filed a Notice of Appeal to the United States Court of Appeals, Seventh Circuit, which, in a decision rendered on February 20, 2008, reversed the lower court with respect to damages and ordered the district court to enter a judgment that the plaintiffs are entitled to no damages other than the return of the $150,000 surrender charge. On March 5, 2008, plaintiffs filed a Petition for Rehearing with the Seventh Circuit, which was denied on March 13, 2008, which decision is final and conclusive.

Hurricane Katrina Litigation

We have been named as a defendant in various litigations, including putative class actions, relating to disputes arising from damages which occurred as a result of Hurricane Katrina in 2005. As of March 31, 2008, there were approximately 270 such cases, at least two of which were styled as class actions. These cases have been filed in both Louisiana state courts and federal district courts. These cases involve, among other claims, disputes as to the amount of reimbursable claims in particular cases, as well as the scope of insurance coverage under homeowners and commercial property policies due to flooding, civil authority actions, loss of landscaping, business interruption and other matters. Certain of these cases claim a breach of duty of good faith or violations of Louisiana insurance claims handling laws or regulations and involve claims for punitive or exemplary damages. Certain of the cases claim that under Louisiana’s so-called “Valued Policy Law”, the insurers must pay the total insured value of a home which is totally destroyed if any portion of such damage was caused by a covered peril, even if the principal cause of the loss was an excluded peril. Other cases challenge the scope or enforceability of the water damage exclusion in the policies. On April 8, 2008, the Louisiana Supreme Court issued a decision in the case of Sher v. Lafayette Insurance Company, et al, No. 2007-C-2441, holding that flood exclusions such as those used in our policies are unambiguous and enforceable.

Plaintiffs in several consolidated cases (including Sampia v. Massachusetts Bay Insurance Company, E.D. La. Civil Action Number 06-0559) appealed an Order of the Federal District Court dated August 6, 2006 rejecting plaintiffs’ contention that the Louisiana Valued Policy Law has the effect of requiring coverage for a total loss proximately caused by a non-covered peril so long as there was any covered loss. This consolidated appeal was heard by the United States Court of Appeals, Fifth Circuit, in a case captioned Chauvin, et al., v. State Farm Fire & Casualty Co., No. 06-30946. On August 6, 2007, the Fifth Circuit Court issued an opinion upholding the District Court decision dismissing plaintiffs’ claims. Plaintiffs thereafter filed a petition for a writ of certiorari with the United States Supreme Court, which was denied on January 14, 2008. Currently pending before the Louisiana Supreme Court is the case of Landry v. Louisiana Citizens Property Insurance Corporation, No. 2007-C-1907, in which plaintiffs have asserted a construction of the Valued Policy Law similar to that rejected by the Fifth Circuit in Chauvin. Landry was argued on February 26,2008; the Court subsequently requested additional briefing from the parties to be filed no later than April 18, 2008.

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On August 23, 2007, the State of Louisiana (individually and on behalf of the State of Louisiana, Division of Administration, Office of Community Development) filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including us. Plaintiff seeks to represent a class of current and former Louisiana citizens who have applied for and received or will receive funds through Louisiana’s “Road Home” program. On August 29, 2007, Plaintiff filed an Amended Petition in this case, asserting myriad claims, including claims under Louisiana’s Valued Policy Law, as well as claims for breach of: contract, the implied covenant of good faith and fair dealing, fiduciary duty and Louisiana’s bad faith statutes. Plaintiff seeks relief in the form of, among other things, declarations that (a) the efficient proximate cause of losses suffered by putative class members was windstorm, a covered peril under their policies; (b) the second efficient proximate cause of their losses was storm surge, which Plaintiff contends is not excluded under class members’ policies; (c) the damage caused by water entering affected parishes of Louisiana does not fall within the definition of “flood”; (d) the damages caused by water entering Orleans Parish and the surrounding area was a result of man-made occurrence and are properly covered under class members’ policies; (e) many class members suffered total losses to their residences; and (f) many class members are entitled to recover the full value for their residences stated on their policies pursuant to the Louisiana Valued Policy Law. In accordance with these requested declarations, Plaintiff seeks to recover amounts that it alleges should have been paid to policyholders under their insurance agreements, as well as penalties, attorneys’ fees, and costs. The case has been removed to the Federal District Court for the Eastern District of Louisiana.

A final, non-appealable order that under the Louisiana Valued Policy Law our flood exclusion is inapplicable where any portion of a loss is attributable to a covered peril, could have a material adverse effect on our financial position, and would likely have such effect on our results of operations. We have established our loss and LAE reserves on the assumption that the application of the Valued Policy Law will not result in our having to pay damages for perils not otherwise covered and that we will not have any liability under the “Road Home” or similar litigation.

Other Matters

We have been named a defendant in various other legal proceedings arising in the normal course of business, including two other suits which, like the Emerald case described above, challenge our imposition of certain restrictions on trading funds invested in separate accounts. In addition, we are involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action, or regulatory proceedings or other legal proceedings in which we have been named a defendant, and our ultimate liability, if any, from such action or legal proceedings, is difficult to predict at this time. In our opinion, based on the advice of legal counsel, the ultimate resolutions of such proceedings will not have a material effect on our financial position, although they could have a material effect on the results of operations for a particular quarter or annual period.

OTHER REGULATORY MATTERS

During 2007, the Massachusetts Commissioner of Insurance issued two decisions pertaining to personal automobile insurance. The first decision calls for the end of the “fix-and-establish” system of setting automobile rates and replaces it with a system of “managed competition”. The second decision orders the implementation of an Assigned Risk Plan beginning with new business as of April 1, 2008.

The Commissioner of Insurance has issued a regulation providing the framework for the transition from a market in which the rates are set by the Commissioner to one in which companies propose their own rates. Our rate filing was approved by the Massachusetts Division of Insurance on January 18, 2008 and implemented effective April 1, 2008. Over the course of the year, we currently anticipate overall rate level decreases of approximately 8%.

The Assigned Risk Plan will distribute the Massachusetts residual automobile market based on individual policyholder assignments rather than assigning carriers Exclusive Representative Producers. We believe the Assigned Risk Plan will provide for a more equitable distribution of residual market risks across all carriers in the market, and therefore, such plan, is not likely to adversely affect our results of operations or financial position.

Over the past year, other state-sponsored insurers, reinsurers or involuntary pools have increased significantly, particularly those states which have Atlantic or Gulf Coast exposures. As a result, the potential assessment exposure of insurers doing business in such states and the attendant collection risks have increased, particularly, in our case, in the states of Massachusetts, Louisiana and Florida. Such actions and related regulatory restrictions may limit our ability to reduce our potential exposure to hurricane related losses. It is possible that other states may take action similar to those taken in the state of Florida. At this time we are unable to predict the likelihood or impact of any such potential assessments or other actions.

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Risks and Forward-Looking Statements

Information regarding risk factors and forward-looking information appears in Part II—Item 1A of this Quarterly Report on Form 10-Q and in Part I—Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. This Management’s Discussion and Analysis should be read and interpreted in light of such factors.

Glossary of Selected Insurance Terms

Annuity contracts—An annuity contract is an arrangement whereby an annuitant is guaranteed to receive a series of stipulated amounts commencing either immediately or at some future date. Annuity contracts can be issued to individuals or to groups.

Benefit payments—Payments made to an insured or their beneficiary in accordance with the terms of an insurance policy.

Casualty insurance—Insurance that is primarily concerned with the losses caused by injuries to third persons and their property (other than the policyholder) and the related legal liability of the insured for such losses.

Catastrophe—A severe loss, resulting from natural and manmade events, including risks such as hurricane, fire, earthquake, windstorm, tornado, hailstorm, severe winter weather, explosion, terrorism and other similar events.

Catastrophe loss—Loss and directly identified loss adjustment expenses from catastrophes. The Insurance Services Office (“ISO”) Property Claim Services (“PCS”) defines a catastrophe loss as an event that causes $25 million or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers.

Cede; cedent; ceding company—When a party reinsures its liability with another, it “cedes” business and is referred to as the “cedent” or “ceding company”.

Closed Block—Consists of certain individual life insurance participating policies, individual deferred annuity contracts and supplementary contracts not involving life contingencies which were in force as of FAFLIC’s demutualization in 1995. The purpose of this block of business is to protect the policy dividend expectations of such FAFLIC dividend paying policies and contracts. The Closed Block will be in effect until none of the Closed Block policies are in force, unless an earlier date is agreed to by the Massachusetts Commissioner of Insurance.

Combined ratio, GAAP—This ratio is the GAAP equivalent of the statutory ratio that is widely used as a benchmark for determining an insurer’s underwriting performance. A ratio below 100% generally indicates profitable underwriting prior to the consideration of investment income. A combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income. The combined ratio is the sum of the loss ratio, the loss adjustment expense ratio and the underwriting expense ratio.

Current year accident results—A measure of the estimated earnings impact of current premiums offset by estimated loss experience and expenses for the current accident year. This measure includes the estimated increase in revenue associated with higher prices (premiums), including those caused by price inflation and changes in exposure, partially offset by higher volume driven expenses and inflation of loss costs. Volume driven expenses include policy acquisition costs such as commissions paid to property and casualty agents which are typically based on a percentage of premium dollars.

Dividends received deduction—A corporation is entitled to a special tax deduction from gross income for dividends received from a domestic corporation that is subject to income tax.

Earned premium—The portion of a premium that is recognized as income, or earned, based on the expired portion of the policy period, that is, the period for which loss coverage has actually been provided. For example, after six months, $50 of a $100 annual premium is considered earned premium. The remaining $50 of annual premium is unearned premium. Net earned premium is earned premium net of reinsurance.

Excess of loss reinsurance—Reinsurance that indemnifies the insured against all or a specific portion of losses under reinsured policies in excess of a specified dollar amount or “retention”.

Expense Ratio, GAAP—The ratio of underwriting expenses to premiums earned for a given period.

Exposure—A measure of the rating units or premium basis of a risk; for example, an exposure of a number of automobiles.

Frequency—The number of claims occurring during a given coverage period.

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Inland Marine Insurance—In Commercial Lines, this is a type of coverage developed for shipments that do not involve ocean transport. It covers articles in transit by all forms of land and air transportation as well as bridges, tunnels and other means of transportation and communication. In the context of Personal Lines , this term relates to floater policies that cover expensive personal items such as fine art and jewelry.

Loss adjustment expenses (“LAE”)—Expenses incurred in the adjusting, recording, and settlement of claims. These expenses include both internal company expenses and outside services. Examples of LAE include claims adjustment services, adjuster salaries and fringe benefits, legal fees and court costs, investigation fees and claims processing fees.

Loss adjustment expense (“LAE”) ratio, GAAP—The ratio of loss adjustment expenses to earned premiums for a given period.

Loss costs—An amount of money paid for a property and casualty claim.

Loss ratio, GAAP—The ratio of losses to premiums earned for a given period.

Loss reserves—Liabilities established by insurers to reflect the estimated cost of claims payments and the related expenses that the insurer will ultimately be required to pay in respect of insurance it has written. Reserves are established for losses and for LAE.

Multivariate product—An insurance product, the pricing for which is based upon the magnitude of, and correlation between, multiple rating factors. In practical application, the term refers to the foundational analytics and methods applied to the product construct. Our Connections Auto product is a multivariate product.

Peril—A cause of loss.

Property insurance—Insurance that provides coverage for tangible property in the event of loss, damage or loss of use.

Rate—The pricing factor upon which the policyholder’s premium is based.

Rate increase (commercial lines)—Represents the average change in premium on renewal policies caused by the estimated net effect of base rate changes, discretionary pricing, inflation or changes in policy level exposure.

Rate increase (personal lines)—The estimated cumulative premium effect of approved rate actions during the prior policy period applied to a policy’s renewal premium.

Reinstatement premium—A pro-rata reinsurance premium that may be charged for reinstating the amount of reinsurance coverage reduced as the result of a reinsurance loss payment under a catastrophe cover. For example, in 2005 this premium was required to ensure that our property catastrophe occurrence treaty, which was exhausted by Hurricane Katrina, was available again in the event of another large catastrophe loss in 2005.

Reinsurance—An arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance or reinsurance company, the ceding company, against all or a portion of the insurance or reinsurance risks underwritten by the ceding company under one or more policies. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on risks and catastrophe protection from large or multiple losses. Reinsurance does not legally discharge the primary insurer from its liability with respect to its obligations to the insured.

Risk based capital (“RBC”)—A method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The RBC ratio for regulatory purposes is calculated as total adjusted capital divided by required risk based capital. Total adjusted capital for property and casualty companies is capital and surplus. Total adjusted capital for life insurance companies is defined as capital and surplus, plus asset valuation reserve, plus 50% of policyholder dividends apportioned for payment. The Company Action Level is the first level at which regulatory involvement is specified based upon the level of capital. Regulators may take action for reasons other than triggering various RBC action levels. The various action levels are summarized as follows:

• The Company Action Level, which equals 200% of the Authorized Control Level, requires a company to prepare and submit a RBC plan to the commissioner of the state of domicile. A RBC plan proposes actions which a company may take in order to bring statutory capital above the Company Action Level. After review, the commissioner will notify the company if the plan is satisfactory.

• The Regulatory Action Level, which equals 150% of the Authorized Control Level, requires the insurer to submit to the commissioner of the state of domicile an RBC plan, or if applicable, a revised RBC plan. After examination or analysis, the commissioner will issue an order specifying corrective actions to be taken.

• The Authorized Control Level authorizes the commissioner of the state of domicile to take whatever regulatory actions considered necessary to protect the best interest of the policyholders and creditors of the insurer.

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• The Mandatory Control Level, which equals 70% of the Authorized Control Level, authorizes the commissioner of the state of domicile to take actions necessary to place the company under regulatory control (i.e., rehabilitation or liquidation).

• Life and health companies whose Total Adjusted Capital is between 200% and 250% of the Authorized Control Level are subject to a trend test. The trend test calculates the greater of the decrease in the margin between the current year and the prior year and the average of the past three years.

Security Lending—We engage our banking provider to lend securities from our investment portfolio to third parties. These lent securities are fully collateralized by cash. We monitor the fair value of the securities on a daily basis to assure that the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. We record securities lending collateral as a cash equivalent, with an offsetting liability in expenses and taxes payable.

Separate accounts—An investment account that is maintained separately from an insurer’s general investment portfolio and that allows the insurer to manage the funds placed in variable life insurance policies and variable annuity policies. Policyholders direct the investment of policy funds among the different types of separate accounts available from the insurer.

Severity—A monetary increase in the loss costs associated with the same or similar type of event or coverage.

Specialty Lines—A major component of our Other Commercial Lines, includes products such as inland and ocean marine, bond and various small commercial niche products.

Statutory accounting principles—Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by insurance regulatory authorities including the NAIC, which in general reflect a liquidating, rather than going concern, concept of accounting.

Surrender or withdrawal—Surrenders of life insurance policies and annuity contracts for their entire net cash surrender values and withdrawals of a portion of such values.

Underwriting—The process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept risks.

Underwriting expenses—Expenses incurred in connection with the acquisition, pricing and administration of a policy.

Underwriting expense ratio, GAAP—The ratio of underwriting expenses to earned premiums in a given period.

Unearned premiums—The portion of a premium representing the unexpired amount of the contract term as of a certain date.

Variable annuity—An annuity which includes a provision for benefit payments to vary according to the investment experience of the separate account in which the amounts paid to provide for this annuity are allocated.

Written premium—The premium assessed for the entire coverage period of a property and casualty policy without regard to how much of the premium has been earned. See also earned premium. Net written premium is written premium net of reinsurance.

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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Our market risks, and the ways we manage them, are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2007, included in our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no material changes in the first three months of 2008 to these risks or our management of them.

ITEM 4

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures Evaluation

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Based on our controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the internal control over financial reporting, as required by Rule 13a-15(d) of the Exchange Act, to determine whether any changes occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer noted that during the fourth quarter of 2007 the Claims department piloted a new HCS claims system and commenced the transition of all new claims within our personal and commercial automobile lines of business to the newly developed system. This transition to HCS was completed during the first quarter of 2008 and; therefore, became a significant system to our business. There were no other changes that occurred during our fiscal quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

Durand Litigation

On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named plaintiff, a former employee who received a lump sum distribution from our Cash Balance Plan at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, we understated the accrued benefit in the calculation. We filed a motion to dismiss on the basis that the plaintiff failed to exhaust administrative remedies, which motion was granted without prejudice in a decision dated November 7, 2007. On December 3, 2007, plaintiff filed a Notice of Appeal of this dismissal to the United States Court of Appeals for the Sixth Circuit. In our judgment, the outcome is not expected to be material to our financial position, although it could have a material effect on the results of operations for a particular quarter or annual period.

Emerald Litigation

On July 24, 2002, an action captioned American National Bank and Trust Company of Chicago, as Trustee f/b/o Emerald Investments Limited Partnership, and Emerald Investments Limited Partnership v. Allmerica Financial Life Insurance and Annuity Company (“Emerald”) was commenced in the United States District Court for the Northern District of Illinois, Eastern Division. Although AFLIAC was sold to Goldman Sachs on December 30, 2005, we have agreed to indemnify AFLIAC and Goldman Sachs with respect to this litigation.

In 1999, plaintiffs purchased two variable annuity contracts with initial premiums aggregating $5 million. Plaintiffs, who AFLIAC subsequently identified as engaging in frequent transfers of significant sums between sub-accounts that in our opinion constituted “market timing”, were subject to restrictions upon such trading that AFLIAC imposed in December 2001. Plaintiffs allege that such restrictions constituted a breach of the terms of the annuity contracts. In December 2003, the court granted partial summary judgment to the plaintiffs, holding that at least certain restrictions imposed on their trading activities violated the terms of the annuity contracts.

On May 19, 2004, plaintiffs filed a Brief Statement of Damages in which, without quantifying their damage claim, they outlined a claim for (i) amounts totaling $150,000 for surrender charges imposed on the partial surrender by plaintiffs of the annuity contracts, (ii) loss of trading profits they expected over the remaining term of each annuity contract, and (iii) lost trading profits resulting from AFLIAC’s alleged refusal to process five specific transfers in 2002 because of trading restrictions imposed on market timers. With respect to the lost profits, plaintiffs claim that pursuant to their trading strategy of transferring money from money market accounts to international equity accounts and back again to money market accounts, they have been able to consistently obtain relatively risk free returns of between 35% and 40% annually. Plaintiffs claim that they would have been able to continue to maintain such returns on the account values of their annuity contracts over the remaining terms of the annuity contracts (which are based in part on the lives of the named annuitants). The aggregate account value of plaintiffs’ annuities was approximately $12.8 million in December 2001. On February 1, 2006, the Court issued a ruling which precluded plaintiffs from claiming any damages accruing beyond July 31, 2004.

A jury trial on plaintiffs’ damage claim was held in December 2006, which resulted in an aggregate award to plaintiffs of $1.3 million for lost profits and reimbursement of surrender charges. Plaintiffs’ motion for a new trial was subsequently denied. On March 5, 2007, plaintiffs filed a Notice of Appeal to the United States Court of Appeals, Seventh Circuit which, in a decision rendered on February 20, 2008, reversed the lower court with respect to damages and ordered the district court to enter a judgment that the plaintiffs are entitled to no damages other than the return of the $150,000 surrender charge. On March 5, 2008, plaintiffs filed a Petition for Rehearing with the Seventh Circuit, which was denied on March 13, 2008, which decision is final and conclusive.

Hurricane Katrina Litigation

We have been named as a defendant in various litigations, including putative class actions, relating to disputes arising from damages which occurred as a result of Hurricane Katrina in 2005. As of March 31, 2008, there were approximately 270 such cases, at least two of which were styled as class actions. These cases have been filed in both Louisiana state courts and federal district courts. These cases involve, among other claims, disputes as to the amount of reimbursable claims in particular cases, as well as the scope of insurance coverage under homeowners and commercial property policies due to flooding, civil authority actions, loss of landscaping, business interruption and other matters. Certain of these cases claim a breach of duty of good faith or violations of Louisiana insurance claims handling laws or regulations and involve claims for punitive or exemplary damages. Certain of the cases claim that under Louisiana’s so-called “Valued Policy Law”, the insurers must pay the total insured value of a home which is totally destroyed if any portion of such damage was caused by a covered peril, even if the principal cause of the loss was an excluded peril. Other cases challenge the scope or enforceability of the water damage exclusion in the policies. On

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April 8, 2008, the Louisiana Supreme Court issued a decision in the case of Sher v. Lafayette Insurance Company, et al, No. 2007-C-2441, holding that flood exclusions such as those used in our policies are unambiguous and enforceable.

Plaintiffs in several consolidated cases (including Sampia v. Massachusetts Bay Insurance Company, E.D. La. Civil Action Number 06-0559) appealed an Order of the Federal District Court dated August 6, 2006 rejecting plaintiffs’ contention that the Louisiana Valued Policy Law has the effect of requiring coverage for a total loss proximately caused by a non-covered peril so long as there was any covered loss. This consolidated appeal was heard by the United States Court of Appeals, Fifth Circuit, in a case captioned Chauvin, et al., v. State Farm Fire & Casualty Co., No. 06-30946. On August 6, 2007, the Fifth Circuit Court issued an opinion upholding the District Court decision dismissing plaintiffs’ claims. Plaintiffs thereafter filed a petition for writ of certiorari with the United States Supreme Court, which was denied on January 14, 2008. Currently pending before the Louisiana Supreme Court is the case of Landry v. Louisiana Citizens Property Insurance Corporation, No. 2007-C-1907, in which plaintiffs have asserted a construction of the Valued Policy Law similar to that rejected by the Fifth Circuit in Chauvin. Landry was argued on February 26, 2008; the Court subsequently requested additional briefing from the parties to be filed no later than April 18, 2008.

On August 23, 2007, the State of Louisiana (individually and on behalf of the State of Louisiana, Division of Administration, Office of Community Development) filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including THG. Plaintiff seeks to represent a class of current and former Louisiana citizens who have applied for and received or will receive funds through Louisiana’s “Road Home” program. On August 29, 2007, Plaintiff filed an Amended Petition in this case, asserting myriad claims, including claims under Louisiana’s Valued Policy Law, as well as claims for breach of: contract, the implied covenant of good faith and fair dealing, fiduciary duty and Louisiana’s bad faith statutes. Plaintiff seeks relief in the form of, among other things, declarations that (a) the efficient proximate cause of losses suffered by putative class members was windstorm, a covered peril under their policies; (b) the second efficient proximate cause of their losses was storm surge, which Plaintiff contends is not excluded under class members’ policies; (c) the damage caused by water entering affected parishes of Louisiana does not fall within the definition of “flood”; (d) the damages caused by water entering Orleans Parish and the surrounding area was a result of man-made occurrence and are properly covered under class members’ policies; (e) many class members suffered total losses to their residences; and (f) many class members are entitled to recover the full value for their residences stated on their policies pursuant to the Louisiana Valued Policy Law. In accordance with these requested declarations, Plaintiff seeks to recover amounts that it alleges should have been paid to policyholders under their insurance agreements, as well as penalties, attorneys’ fees, and costs. The case has been removed to Federal District Court for the Eastern District of Louisiana.

A final, non-appealable order that under the Louisiana Valued Policy Law our flood exclusion is inapplicable where any portion of a loss is attributable to a covered peril, could have a material adverse effect on our financial position, and would likely have such effect on our results of operations. We have established our loss and loss adjustment reserves on the assumption that the application of the Valued Policy Law will not result in our having to pay damages for perils not otherwise covered and that we will not have any liability under the “Road Home” or similar litigation.

ITEM 1A—RISK FACTORS

Risks and Forward-Looking Statements

We wish to caution readers that the following important factors, among others, in some cases have affected and in the future could affect our actual results and could cause our actual results for the remainder of 2008 and beyond to differ materially from historical results and from those expressed in any of our forward-looking statements. When used in our Management’s Discussion and Analysis, the words “believes”, “anticipates”, “expects”, “projections”, “outlook”, “should”, “could”, “plan”, “guidance” and similar expressions are intended to identify forward-looking statements. See “Important Factors Regarding Forward-Looking Statements” filed as Exhibit 99.2 to our Annual Report on Form 10-K for the period ended December 31, 2007. While any of these factors could affect our business as a whole, we have grouped certain factors by the business segment to which we believe they are most likely to apply.

Risk factors which have changed from those previously disclosed in our Annual Report on Form 10-K have been marked in bold. The risks identified below reflect additional risks, or provide additional examples of risks, described in “Important Factors Regarding Forward-Looking Statements” filed as Exhibit 99.2 to our Annual Report on Form 10-K for the period ended December 31, 2008. In order to better understand the risks we face, the following description and updates should be read in conjunction with the disclosure in such Exhibit 99.2.

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Risks Relating To Our Property And Casualty Insurance Business

We generate most of our total revenues and earnings through our property and casualty insurance subsidiaries. The results of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability could be affected significantly by (i) adverse loss development or loss adjustment expense for events we (including our recently acquired subsidiaries) have insured in either the current or in prior years, including risks indirectly insured through various mandatory market mechanisms or through discontinued pools which are included in the Other Property and Casualty segment (our retained Life Companies business also includes discontinued pools which present similar risks) or the expected decline in the amount of favorable development which has been realized in recent periods, which could be material, particularly in light of the significance of favorable development as a contributor to Property and Casualty segment income; (ii) an inability to retain profitable policies in force and attract profitable policies in our Personal Lines and Commercial Lines segments, whether as the result of an increasingly competitive product pricing environment, the adoption by competitors of strategies to increase agency appointments and commissions, as well as marketing and advertising expenditures or otherwise; (iii) heightened competition, including the recent intensification of price competition and increased marketing efforts by our competitors, the entry of new competitors and the introduction of new products by new and existing competitors, or as the result of consolidation within the financial services industry and the entry of additional financial institutions into the insurance industry; (iv) failure to obtain new customers, retain existing customers or reductions of policies in force by existing customers, whether as a result of recent competition or otherwise; (v) increases in costs, particularly those occurring after the time our products are priced and including construction, automobile, and medical and rehabilitation costs, and including as the result of “cost shifting” from health insurers to casualty and liability insurers (whether as a result of an increasing number of injured parties without health insurance or coverage changes in health policies to make such coverage, in certain circumstances, secondary to other policies); (vi) restrictions on insurance underwriting; (vii) adverse state and federal legislation or regulation, including mandated decreases in rates, the inability to obtain further rate increases, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates, limitations on the ability to manage care and utilization, requirements to write certain classes of business, recently enacted changes to the “fix-and-establish” rate setting mechanism for personal automobile rates in Massachusetts, limitations on the use of credit scoring, such as proposals to ban the use of credit scores with respect to personal lines in Michigan and Florida or arising out of the recent report on credit scores issued by the U.S Fair Trade Commission, restrictions on the use of certain compensation arrangements with agents and brokers, as well as continued compliance with state and federal regulations; (viii) adverse changes in the ratings obtained from independent rating agencies, such as Moody’s, Standard and Poor’s and A.M. Best, whether due to additional capital requirements or our underwriting performance or other factors; (ix) industry-wide change resulting from investigations and inquiries relating to compensation arrangements with insurance brokers and agents; (x) disruptions caused by the introduction of new Personal Lines products, such as our multivariate auto and our new homeowners products, and related technology changes and new Personal and Commercial Lines operating models or in connection with the integration of newly acquired businesses; (xi) disruptions caused by the implementation of a new claims system for both the personal and commercial automobile lines; and (xii) the impact of our acquisition of Professionals Direct, Inc. and Verlan Holdings, Inc. or other future acquisitions. Additionally, our profitability could be affected by adverse catastrophe experience, severe weather or other unanticipated significant losses. Further, certain new catastrophe models assume an increased frequency and severity of certain weather events, and financial strength rating agencies are placing increased emphasis on capital and reinsurance adequacy for insurers with certain geographic concentrations of risk. This factor, along with the increased cost of reinsurance, may result in insurers seeking to diversify their geographic exposure which could result in increased regulatory restrictions in those markets where insurers seek to exit or reduce coverage, as well as an increase in competitive pressures in non-coastal markets such as the Midwest. We have significant concentration of exposures in certain areas, including portions of the Northeast and Southeast and derive a material amount of profits from operations in the Midwest.

Specifically, underwriting results and segment income could be adversely affected by further changes in our net loss and LAE estimates related to hurricanes Katrina and Rita. The risks and uncertainties in our business that may affect such estimates and future performance, including the difficulties in arriving at such estimates, should be considered. Estimating losses following any major catastrophe is an inherently uncertain process, which is made more difficult by the unprecedented nature of this event. Factors that add to the complexity in this event include the legal and regulatory uncertainty (including certain legal questions now pending before the Louisiana Supreme Court related to the interpretation of the Louisiana Valued Policy Law), the complexity of factors contributing to the losses, delays in claim reporting, the exacerbating circumstances of Hurricane Rita and a slower pace of recovery resulting from the extent of damage sustained in the affected areas due in part to the availability and cost of resources to effect repairs. As a result, there can be no assurance that our ultimate costs associated with this event will not be substantially different from current estimates. In addition, there can be no assurance that, in light of the devastation in the areas affected by Hurricane Katrina, our ability to obtain and retain policyholders will not be adversely affected. Hurricane Katrina has also contributed to uncertainty regarding the reinsurance marketplace, which also experienced significant losses related to this catastrophe.

Additionally, future operating results as compared to prior years and forward-looking information regarding Personal Lines and Commercial Lines segment information on written and earned premiums, policies in force, underwriting results and segment income currently are expected to be adversely affected by competitive and regulatory pressures affecting rates, particularly in

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Massachusetts, where the introduction of “managed competition” in the personal automobile line is expected to result in rate decreases. In addition, underwriting results and segment income could be adversely affected by changes in frequency and loss trends. Results in Personal Lines business may also be adversely affected by pricing decreases and market disruptions (including any caused by the current economic environment in Michigan, proposals in Michigan to reduce rates, expand coverage, or expand circumstances in which parties can recover non-economic damages for bodily injury claims (i.e., efforts to modify or overturn the so-called Kreiner decision), the Michigan Commissioner of Insurance’s proposed ban, and a bill passed by the Michigan House of Delegates to ban, the use of credit scores, or the Governor’s executive order creating a new position of the Automobile and Home Insurance Consumer Advocate, who is to act independent from the Michigan Commissioner of Insurance), by unfavorable loss trends that may result in New Jersey due to that state’s supreme court ruling relating to the no-fault tort threshold, and by disruptions caused by judicial and potential legislative and executive branch intervention related to rules proposed by the Massachusetts Commissioner of Insurance to reform the distribution of losses from the Massachusetts personal automobile residual market and introduce “managed competition” to the personal automobile market. The introduction of “managed competition” is expected to result in an overall rate level reduction of approximately 8%. Additionally, there is uncertainty regarding our ability to attract and retain customers in this market as new and larger carriers enter the state as a result of “managed competition”.

Also, our Personal Lines business production and earnings may be unfavorably affected by the introduction of our multivariate auto product should we experience adverse selection because of our pricing, operational difficulties or implementation impediments with independent agents, including with respect to its introduction in Massachusetts, or the inability to grow or sustain growth in new markets after the introduction of new products or the appointment of new agents. In addition, there are increased underwriting risks associated with premium growth and the introduction of new products or programs in both our Personal and Commercial Lines businesses, as well as the appointment of new agencies and the expansion into new geographical areas, and we have experienced increased loss ratios with respect to our new personal automobile business, which is written through our Connections Auto product, particularly in certain states where we have less experience and data.

Additionally, during the past few years we have made, and our current plans are to continue to make, significant investments in our Personal Lines and Commercial Lines businesses to, among other things, strengthen our product offerings and service capabilities, improve technology and our operating models, build expertise in our personnel, and expand our distribution capabilities, with the ultimate goal of achieving significant and sustained profitable growth and obtaining favorable returns on these investments. In order for these investment strategies to be profitable, we must achieve both profitable premium growth and the successful implementation of our operating models so that our expenses do not increase proportionately with growth. The ability to grow profitably throughout the property and casualty “cycle” is crucial to our current strategy. There can be no assurance that we will be successful in profitably growing our business, or that we will not alter our current strategy due to changes in our markets or an inability to successfully maintain acceptable margins on new business or for other reasons, in which case written and earned premium, property and casualty segment income and net book value could be adversely affected.

Recent significant increases and expected further increases in the number of participants or insureds in state-sponsored reinsurance pools or FAIR Plans, particularly in the states of Massachusetts, Louisiana and Florida, combined with regulatory restrictions on the ability to adequately price, underwrite, or non-renew business, could expose us to significant exposures and assessment risks.

Risks Relating To Our Life Companies

Our businesses may be affected by (i) adverse actions related to legal and regulatory actions described under “Contingencies and Regulatory Matters”, including those which are subject to the “FIN 45” reserve described under “Life Companies—Discontinued Operations”; (ii) adverse loss and expense development related to our discontinued assumed accident and health reinsurance pool business or failures of our reinsurers to timely pay their obligations (especially in light of the fact that historically these pools sometimes involved multiple layers of overlapping reinsurers, or so called “spirals”); (iii) possible claims relating to sales practices for insurance and investment products or our historical administration of such products, including with respect to activities of our former agents; (iv) adverse trends in mortality and morbidity; (v) lower appreciation or decline in value of our managed investments or the investment markets in general; (vi) issues relating to the administration of the Closed Block, including the implementation of dividend scales; and (vii) an adverse ruling by the Internal Revenue Service eliminating some or all of the separate accounts’ dividends received deduction tax benefits that we have received.

In particular, we have provided forward-looking information relating to the sale of our variable life insurance and annuity business and its effect on our results of operations and financial position. There are certain factors that could cause actual results to differ materially from those anticipated herein. These include (i) the impact of contingent liabilities, including litigation and regulatory matters, assumed or retained by THG in connection with the transaction and the impact of other indemnification obligations owed from THG to Goldman Sachs (including with respect to existing and potential litigation); and (ii) future statutory operating results of FAFLIC, which will affect its projected statutory adjusted capital and ability to obtain future regulatory approval for dividends.

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Risks Relating To Our Business Generally

Other market fluctuations and general economic, market and political conditions also may negatively affect our business and profitability. These conditions include (i) changes in interest rates causing a reduction of investment income or in the market value of interest rate sensitive investments; (ii) higher service, administrative or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (iii) the inability to attract, or the loss or retirement of key executives or other key employees, and increased costs associated with the replacement of key executives or employees; (iv) changes in our liquidity due to changes in asset and liability matching, including the effect of defaults of debt securities; (v) failure of a reinsurer of our policies to pay its liabilities under reinsurance or coinsurance contracts or adverse effects on the cost and availability of reinsurance; (vi) changes in the mix of assets comprising our investment portfolios and changes in general market conditions that may cause the market value of our investment portfolio to fluctuate, including the expansion of current concerns regarding sub-prime mortgages to prime mortgage and corresponding mortgage-backed or other debt securities and concerns relative to the ratings and capitalization of municipal bond and mortgage guarantees and the valuation of commercial mortgages and commercial mortgage backed securities; (vii) losses resulting from our participation in certain reinsurance pools, including pools in which we no longer participate but may have unquantified potential liabilities relating to asbestos and other matters, or from fronting arrangements where the reinsurer does not meet all of its reinsurance obligations; (viii) defaults or impairments of debt securities held by us; (ix) higher employee benefit costs due to changes in market values of plan assets, interest rates, regulatory requirements or judicial interpretations of benefits (including with respect to our Cash Balance Plan which is the subject of the Durand litigation); (x) the effects of our restructuring actions, including any resulting from our review of operational matters related to our business, including a review of our markets, products, organization, financial capabilities, agency management, regulatory environment, ancillary businesses and service processes; (xi) errors or omissions in connection with the administration of any of our products; (xii) breaches of our information technology security systems or other operational disruptions or breaches which result in the loss or compromise of confidential financial, personal, medical or other information about our policyholders, agents or others with whom we do business; and (xiii) interruptions in our ability to conduct business as a result of terrorist actions, catastrophes or other significant events affecting infrastructure, and delays in recovery of our operating capabilities.

In addition, except where required or permitted by applicable accounting principles, components of our Consolidated Balance Sheets are not marked to market or otherwise intended to reflect our estimates of the fair market or disposition value of such assets or liabilities or the related businesses. The recorded value of certain assets, such as deferred acquisition costs, deferred federal income taxes, real estate, and goodwill, and certain liabilities, such as reserves, reflect the application of our assumptions to generally accepted accounting principles. Accordingly, in the event of a disposition of all or a portion of any such assets, liabilities or related businesses, the value obtainable in such a transaction may differ materially from the value reflected in our consolidated financial statements, which would in turn have a material impact on Shareholders’ Equity and book value per share. Management is currently evaluating strategic options for the Life Companies, including the possible disposition of all or a portion of such business. There can be no assurance that we will be successful in any such efforts. In the event of such a disposition, it is management’s expectation that the realizable value would be lower than the value reflected in Shareholders’ Equity in our Consolidated Balance Sheets. Additionally, such transactions may also result in the reallocation of corporate overhead costs to other segments.

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ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On October 16, 2007, the Board of Directors authorized the repurchase of up to $100 million of our common stock. Under this repurchase authorization, we may repurchase our common stock from time to time, in amounts and prices and at such times as we deem appropriate, subject to market conditions and other considerations. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
January 1 - 31, 2008	197,120	$	43.18	197,120	$	89,800,000
February 1 - 29, 2008(1)	333,736		43.92	234,048		79,600,000
March 1 - 31, 2008(2)	336,204		42.21	333,594		65,500,000
Total	867,060	$	43.09	764,762	$	65,500,000

(1) Includes 99,688 shares withheld to satisfy tax withholding amounts due from employees upon their receipt of previously restricted or deferred shares.

(2) Includes 2,610 shares withheld to satisfy tax withholding amounts due from employees upon their receipt of previously restricted or deferred shares.

ITEM 6—EXHIBITS

EX - 10.1	The Hanover Insurance Group Retirement Savings Plan.
EX - 10.2	The Hanover Insurance Group Amended and Restated Non-Qualified Retirement Savings Plan.
EX - 31.1	Certification of the Chief Executive Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
EX - 31.2	Certification of the Chief Financial Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
EX - 32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
EX - 32.2	Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	The Hanover Insurance Group, Inc
	Registrant
May 7, 2007	/s/ Frederick H. Eppinger, Jr.
Date	Frederick H. Eppinger, Jr.
	President, Chief Executive Officer and Director
May 7, 2007	/s/ Eugene M. Bullis
Date	Eugene M. Bullis
	Executive Vice President,
	Chief Financial Officer and Principal Accounting Officer

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EX-10.1

EXHIBIT 10.1

Rev. eff. 12/01/05

TABLE OF CONTENTS

THE HANOVER INSURANCE GROUP

RETIREMENT SAVINGS PLAN

ARTICLE	TITLE	PAGE
I	NAME, PURPOSE AND EFFECTIVE DATE OF PLAN AND RESTATED PLAN	1
II	DEFINITIONS	1
III	ELIGIBILITY AND PARTICIPATION	18
IV	EMPLOYER CONTRIBUTIONS AND FORFEITURES	20
V	EMPLOYEE CONTRIBUTIONS AND ROLLOVER CONTRIBUTIONS	23
VI	PROVISIONS APPLICABLE TO TOP HEAVY PLANS	24
VII	LIMITATIONS ON ALLOCATIONS	27
VIII	PARTICIPANT ACCOUNTS AND VALUATION OF ASSETS	31
IX	401(k) ALLOCATION LIMITATIONS	32
X	401(m) ALLOCATION LIMITATIONS	36
XI	IN-SERVICE WITHDRAWALS	39
XII	PLAN LOANS	41
XIII	RETIREMENT, TERMINATION AND DEATH BENEFITS	43
XIV	PLAN FIDUCIARY RESPONSIBILITIES	54
XV	RETIREMENT PLAN COMMITTEE	57
XVI	INVESTMENT OF THE TRUST FUND	58
XVII	INDIVIDUAL LIFE INSURANCE AND ANNUITY POLICIES	59
XVIII	CLAIMS PROCEDURE	61
XIX	AMENDMENT AND TERMINATION	62
XX	MISCELLANEOUS	64

THE HANOVER INSURANCE GROUP

RETIREMENT SAVINGS PLAN

ARTICLE I

NAME, PURPOSE AND EFFECTIVE DATE OF PLAN AND RESTATED PLAN

1.01 Name of Plan. This Plan is an amendment and restatement of The Allmerica Financial Employees’ 401(k) Matched Savings Plan. Effective January 1, 2005, this Plan was known as The Allmerica Financial Retirement Savings Plan. Effective December 1, 2005, this Plan shall be known as The Hanover Insurance Group Retirement Savings Plan.

1.02 Purpose. This Plan has been established for the exclusive benefit of the Plan Participants and their Beneficiaries, and as far as possible shall be administered in a manner consistent with this intent and consistent with the requirements of Section 401 of the Code.

Subject to Section 19.05, under no circumstances shall any contributions made to the Plan be used for, or be diverted to, purposes other than for the exclusive benefit of Plan Participants or their Beneficiaries.

1.03 Plan and Plan Restatement Effective Date. The effective date of this Plan was November 22, 1961. The effective date of this amended and restated Plan is January 1, 2005 (except for these provisions of the Plan which have an alternative effective date). Except to the extent otherwise specifically provided herein, (i) the terms and conditions of this amended and restated Plan shall apply only to those employed by the Employer on or after January 1, 2005 and (ii) the rights and benefits accruing under the Plan to those who separated from service prior to January 1, 2005 shall be determined in accordance with the terms of the Plan in effect on the date of their separation from service.

ARTICLE II

DEFINITIONS

The terms defined in this Article shall have the meanings stated herein unless the context clearly indicates otherwise.

2.01 “Accrued Benefit” shall mean the sum of the balances in a Participant’s 401(k) Account, Match Contribution Account, Non-Elective Employer Contribution Account, Regular Account, Rollover Account, Tax Deductible Contribution Account and Voluntary Contribution Account.

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2.02 (a)     “Affiliate” shall mean any corporation affiliated with the Employer through the action of such corporation’s board

         of directors and the Employer’s Board of Directors.

(b) Affiliate shall also mean:

(i) Any corporation or corporations which together with the Employer constitute a controlled group of corporations or an “affiliated service group”, as described in Sections 414 (b) and 414 (m) of the Internal Revenue Code as now enacted or as later amended and in regulations promulgated thereunder; and

(ii) Any partnerships or proprietorships under the common control of the Employer.

2.03 “Age” shall mean the age of a person at his or her last birthday.

2.04 “Beneficiary” shall mean the person, trust, organization or estate designated to receive Plan benefits payable on or after the death of a Participant.

2.05 “Catch-up Contributions” shall mean Salary Reduction Contributions made to the Plan that are in excess of an otherwise applicable Plan limit and that are made by Participants who are Age 50 or over by the end of their taxable years. An “otherwise applicable Plan limit” is a limit in the Plan that applies to Salary Reduction Contributions without regard to Catch-up Contributions, such as the limits on Annual Additions, the dollar limitation on Salary Reduction Contributions under Code Section 402(g) (not counting Catch-up Contributions) and the limit imposed by the Actual Deferral Percentage (ADP) test under Code Section 401(k)(3). Catch-up Contributions for a Participant for a taxable year may not exceed the dollar limit on Catch-up Contributions under Code Section 414(v)(2)(B)(i) for the taxable year. The dollar limit on Catch-up Contributions under Code Section 414(v)(2)(B)(i) is $1,000 for taxable years beginning in 2002, increasing by $1,000 for each year thereafter up to $5,000 for taxable years beginning in 2006 and later years. After 2006, the $5,000 limit will be adjusted by the Secretary of the Treasury for cost-of-living increases under Code Section 414(v)(2)(C). Any such adjustments will be in multiples of $500.

Catch-up Contributions are not subject to the limits on Annual Additions, are not counted in the ADP test and are not counted in determining the minimum top-heavy allocation under Code Section 416 (but Catch-up Contributions made in prior years are counted in determining whether the Plan is top-heavy).

2.06 “Compensation” shall mean:

(a) For purposes of Articles IX and X, for purposes of determining a Participant’s 401(k) Salary Reduction Contributions pursuant to Section 3.01(b) and for

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purposes of determining an eligible Employee’s Non-Elective Employer Contribution pursuant to Section 4.03, Compensation shall mean the total wages or salary, overtime, bonuses, and any other taxable remuneration paid to an Employee by the Employer during the Plan Year, while the Employee is a Plan Participant, as reported on the Participant’s W-2 for the Plan Year. Provided, however, that Compensation for this purpose shall be determined without reduction for (i) any Code Section 401(k) Salary Reduction Contributions contributed to the Plan on the Participant’s behalf for the Plan Year and (ii) the amount of any salary reduction contributions contributed on the Participant’s behalf for the Plan Year to any Code Section 125 plan sponsored by the Employer.

Notwithstanding the above, for purposes of determining a Participant’s Salary Reduction Contributions pursuant to Section 3.01(b) and for purposes of determining an eligible Employee’s Non-Elective Employer Contribution pursuant to Section 4.03, Compensation shall not include:

(i) incentive compensation paid to Participants pursuant to the Employer’s Executive Long Term Performance Unit Plan or pursuant to any similar or successor executive incentive compensation plan;

(ii) Employer contributions to a deferred compensation plan or arrangement (other than Salary Reduction Contributions to a Section 401(k) or 125 plan, as described above) either for the year of deferral or for the year included in the Participant’s gross income;

(iii) any income which is received by or on behalf of a Participant in connection with the grant, receipt, settlement, exercise, lapse of risk of forfeiture or restriction on transferability, or disposition of any stock option, stock award, stock grant, stock appreciation right or similar right or award granted under any plan, now or hereafter in effect, of the Employer or any successor to the Employer, the Employer’s parent, any such successor’s parent, any subsidiaries or affiliates of the Employer, or any stock or securities underlying any such option, award, grant or right;

(iv) severance payments paid in a lump sum;

(v) Code Section 79 imputed income; long term disability and workers’ compensation benefit payments;

(vi) taxable moving expense allowances or taxable tuition or other educational reimbursements;

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(vii) for Plan Years commencing after December 31, 1998, compensation paid in the form of commissions;

(viii) non-cash taxable benefits provided to executives, including the taxable value of Employer-paid club memberships, chauffeur services and Employer-provided automobiles; and

(ix) other taxable amounts received other than cash compensation for services rendered, as determined by the Retirement Plan Committee.

(b) For purposes of Section 4.04 (Minimum Employer Contributions for Top Heavy Plans) and for purposes of Article VII (Limitations on Allocations) the term “Compensation” means a Participant’s wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c) of the Regulations)), and excluding the following:

(i) Employer contributions to a plan of deferred compensation which are not includible in the Employee’s gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation;

(ii) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee becomes freely transferable or is no longer subject to a substantial risk of forfeiture;

(iii) Amounts realized for the sale, exchange or other disposition of stock acquired under a qualified stock option; and

(iv) Other amounts which received special tax benefits.

Notwithstanding the foregoing, Compensation for purposes of the Plan shall also include Employee elective deferrals under Code Section 402(g)(3), and amounts contributed or deferred by the Employer at the election of the Employee and not includible in the gross income of the Employee, by reason of Code Sections 125, 132(f)(4), 402(e)(3) and 402(h)(1)(B).

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Additionally, amounts under Code Section 125 include any amounts not available to a Participant in cash in lieu of group health coverage because the Participant is unable to certify that he has other health coverage (deemed Code Section 125 compensation). Such an amount will be treated as an amount under Code Section 125 only if the Employer does not request or collect information regarding the Participant’s other health coverage as part of the enrollment process for the health plan.

For purposes of applying the limitations of Article VII, Compensation for a Limitation Year is the Compensation actually paid or includible in gross income during such Year.

(c) Notwithstanding (a) and (b) above, for any Plan Year beginning after December 31, 2001, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $200,000, as adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code.

Notwithstanding (a) and (b) above, for the Plan Years beginning on or after January 1, 1994 and before January 1, 2002, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $150,000. This limitation shall be adjusted for inflation by the Secretary under Code Section 401(a)(17)(B) in multiples of $10,000 by applying an inflation adjustment factor and rounding the result down to the next multiple of $10,000 (increases of less than $10,000 are disregarded).

The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined beginning in such calendar year.

If Compensation is being determined for a Plan Year that contains fewer than 12 calendar months, then the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12.

2.07 “Eligibility Computation Period” shall mean, for Plan Years commencing prior to January 1, 2005, a period of twelve consecutive months commencing on an Employee’s Employment Commencement Date or, if an Employee does not complete at least 1,000 Hours of Service during such initial period, such Employee’s Eligibility Computation Period shall mean the Plan Year commencing with the first Plan Year following the Employee’s Employment Commencement Date and, if necessary, each succeeding Plan Year.

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2.08 “Employee” shall mean any employee who is employed by the Employer.

2.09 “Employer” shall mean First Allmerica Financial Life Insurance Company (herein sometimes referred to as “First Allmerica”).

2.10 “Employment Commencement Date” shall mean the date on which an Employee first performs an Hour of Service or, in the case of an Employee who has a One Year Break in Service, the date on which he or she first performs an Hour of Service after such Break.

2.11 “Fiduciary” shall mean any person who (i) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets; (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so; or (iii) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee and the Plan Administrator.

2.12 “Five Percent Owner” shall mean, in the case of a corporation, any person who owns (or is considered as owning within the meaning of Code Section 416(i)) more than five percent of the outstanding stock of the Employer or stock possessing more than five percent of the total combined voting power of all stock of the Employer. In the case of an Employer that is not a corporation, “Five Percent Owner” shall mean any person who owns or under applicable regulations is considered as owning more than five percent of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), and (m) shall be treated as separate employers.

2.13 “Former Participant” shall mean a person who has been an active Participant, but who has ceased to actively participate in the Plan for any reason.

2.14 “401(k) Account” shall mean the account established and maintained for each Participant who has directed the Employer to make Salary Reduction Contributions to the Trust on his or her behalf or for whom the Employer has made 401(k) Employer Contributions to the Trust on his or her behalf, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto.

2.15 “401(k) Employer Contribution” shall mean a 401(k) contribution made by the Employer to the Trust for Plan Years prior to 1995 pursuant to Section 4.01 of the Plan as in effect prior to 1995.

2.16 “Highly Compensated Employee” shall mean any Employee who:

(a) was a Five Percent Owner at any time during the Plan Year or the preceding Plan Year; or

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(b) for the preceding Plan Year:

(i) had Compensation from the Employer in excess of $80,000 (as adjusted pursuant to Code Section 414(q)(1)); and

(ii) for such preceding Year was in the top-paid group of Employees for such preceding Year.

For purposes of this Section the “top-paid group” for a Plan Year are the top 20% of Employees ranked on the basis of Compensation paid during such Year.

In addition to the foregoing, the term “Highly Compensated Employee” shall also mean any former Employee who separated from service prior to the Plan Year, performs no service for the Employer during the Plan Year, and was an actively employed Highly Compensated Employee in the separation year or any Plan Year ending on or after the date the Employee attained Age 55.

For purposes of this Section Compensation means Compensation determined for purposes of Article VII (Limitations on Allocations), but, for Plan Years beginning before January 1, 1998, without regard to Code Sections 125, 402(e)(3), and 402(h)(1)(B).

The determination of who is a Highly Compensated Employee, including the determinations of the numbers and identity of employees in the top-paid group and the Compensation that is considered will be made in accordance with Section 414(q) of the Code and regulations thereunder.

2.17 “Hour of Service” shall mean:

(a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. For purposes of the Plan an Employee who is exempt from the requirements of the Fair Labor Standards Act of 1938, as amended, shall be credited with 45 Hours of Service for each complete or partial week he or she would be credited with at least one Hour of Service under this Section 2.17.

(b) Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence:

(i) No more than 1000 hours shall be credited to an Employee under this Subsection (b) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period);

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(ii) No hours shall be credited under this Subsection (b) for any payments made or due under a plan maintained solely for the purpose of complying with any applicable worker’s compensation, unemployment compensation or disability insurance laws; and

(iii) No hours shall be credited under this Subsection (b) for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee.

For purposes of this Subsection (b) a payment shall be deemed to be made by or due from an Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly, through, among others, a trust fund or insurer, to which the Employer contributes or pays premiums.

(c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be both credited under Subsections (a) or (b), as the case may be, and under this Subsection. No more than 501 Hours shall be credited under this Subsection for a period of time during which an Employee did not or would not have performed duties.

(d) Special rules for determining Hours of Service under Subsection (b) or (c) for reasons other than the performance of duties.

In the case of a payment which is made or due which results in the crediting of Hours of Service under Subsection (b) or in the case of an award or agreement for back pay, to the extent that such an award or agreement is made with respect to a period during which an Employee performs no duties, the number of Hours of Service to be credited shall be determined as follows:

(i) In the case of a payment made or due which is calculated on the basis of units of time (such as hours, days, weeks or months), the number of Hours of Service to be credited for “exempt” Employees described in Subsection (a) shall be determined as provided in such Subsection. For all other Employees, the Hours of Service to be credited shall be those regularly scheduled hours in such unit of time; provided, however, that when a non-exempt Employee does not have regularly scheduled hours, such Employee shall be credited with 8 Hours of Service for each workday for which he or she is entitled to be credited with Hours of Service under paragraph (b).

(ii) Except as provided in Paragraph (d)(iii), in the case of a payment made or due which is not calculated on the basis of units of time, the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employee’s most recent hourly rate of compensation (as determined below) before the period during which no duties are performed.

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A. The hourly rate of compensation of Employees paid on an hourly basis shall be the most recent hourly rate of such Employees.

B. In the case of Employees whose compensation is determined on the basis of a fixed rate for specified periods of time (other than hours) such as days, weeks or months, the hourly rate of compensation shall be the Employee’s most recent rate of compensation for a specified period of time (other than an hour), divided by the number of hours regularly scheduled for the performance of duties during such period of time. The rule described in Paragraph (d)(i) shall also be applied under this subparagraph to Employees without a regular work schedule.

C. In the case of Employees whose compensation is not determined on the basis of a fixed rate for specified periods of time, the Employee’s hourly rate of compensation shall be the lowest hourly rate of compensation paid to Employees in the same job classification as that of the Employee or, if no Employees in the same job classification have an hourly rate, the minimum wage as established from time to time under Section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended.

(iii) Rule against double credit. An Employee shall not be credited on account of a period during which no duties are performed with more hours than such Employee would have been credited but for such absence.

(e) Crediting of Hours of Service to computation periods.

(i) Hours of Service described in Subsection (a) shall be credited to the Employee for the computation period or periods in which the duties are performed.

(ii) Hours of Service described in Subsection (b) shall be credited as follows:

A. Hours of Service credited to an Employee on account of a payment which is calculated on the basis of units of time (such as hours, days, weeks or months) shall be credited to the

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computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates.

B. Hours of Service credited to an Employee by reason of a payment which is not calculated on the basis of units of time shall be credited to the computation period in which the period during which no duties are performed occurs, or if the period during which no duties are performed extends beyond one computation period, such Hours of Service shall be allocated between not more than the first two computation periods in accordance with reasonable rules established by the Employer, which rules shall be consistently applied with respect to all Employees within the same job classification, reasonably defined.

(iii) Hours of Service described in Subsection (c) shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement or payment is made.

(f) For purposes of the Plan, Hours of Service shall also include Hours of Service determined in accordance with the rules set forth in this Section 2.17:

(i) with the Employer in a position in which he or she was not eligible to participate in this Plan; or

(ii) as a Career Agent or General Agent of First Allmerica; or

(iii) for periods prior to January 1, 1998, with Citizens, Hanover, or as an employee of a General Agent of First Allmerica; or

(iv) with Financial Profiles, Inc., or Advantage Insurance Network, Affiliates of First Allmerica, including periods of service completed prior to the date each became an Affiliate; or

(v) with an Affiliate.

(g) Rules for Non-Paid Leaves of Absence. For purposes of the Plan, a Participant will also be credited with Hours of Service during any non-paid leave of absence granted by the Employer. Except as provided in Subsection (a) for exempt Employees, the number of Hours of Service to be credited under this Subsection (g) shall be the number of regularly scheduled working hours in each workday during the leave of absence; provided, however, that no more than the number of Hours in one regularly scheduled work year of

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the Employer will be credited for each non-paid leave of absence. In the case of a non-exempt Employee without a regular work schedule, the number of Hours to be credited shall be based on a 40 hour work week and an 8 hour workday. Hours of Service described in this Subsection (g) shall be credited to the Employee for the computation period or periods during which the leave of absence occurs.

Notwithstanding the foregoing, for Plan Years beginning after December 31, 1998, all Employees (exempt and non-exempt) shall be credited with 8 Hours of Service for each workday for which they are entitled to be credited with Hours of Service for a non-paid leave of absence pursuant to this Subsection (g).

(h) Rules for Maternity or Paternity Leaves of Absence. In addition to the foregoing rules, solely for purposes of determining whether a One Year Break in Service has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such Hours cannot be determined, 8 Hours of Service per day of such absence. Provided, however, that:

(i) Hours shall not be credited under both this Paragraph (h) and one of the other Paragraphs of this Section 2.17;

(ii) no more than 501 Hours shall be credited for each maternity or paternity absence; and

(iii) if a maternity or paternity leave extends beyond one Plan Year, the Hours shall be credited to the Plan Year in which the absence begins to the extent necessary to prevent a One Year Break in service, otherwise such Hours shall be credited to the following Plan Year.

For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the individual, (ii) by reason of a birth of a child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.

(i) Other Federal Law. Nothing in this Section 2.17 shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States or any rule or regulation issued under any such law.

2.18 “Insurer” shall mean First Allmerica or any of its life insurance company affiliates.

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2.19 “Internal Revenue Code” or “Code” shall mean the Internal Revenue Code of 1986, as amended and any future Internal Revenue Code or similar Internal Revenue laws.

2.20 “Key Employee”. In determining whether the Plan is top-heavy for Plans Years beginning after December 31, 2001, “Key Employee” shall mean any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date is an officer of the Employer having an annual Compensation greater than $130,000 (as adjusted under Section 416(i)(l) of the Code for Plan Years beginning after December 31, 2002), a Five Percent Owner, or a 1-percent owner of the Employer having an annual Compensation of more than $150,000. In determining whether a Plan is top heavy for Plan Years beginning before January 1, 2002, “Key Employee” shall mean any Employee or former Employee (including any deceased Employee) who at any time during the 5-year period ending on the determination date, is an officer of the employer having an annual Compensation that exceeds 50 percent of the dollar limitation under Code Section 415(b)(l)(A), an owner (or considered an owner under Code Section 318) of one of the ten largest interests in the Employer if such individual’s Compensation exceeds 100 percent of the dollar limitation under Code Section 415(c)(l)(A), a Five Percent Owner or a 1-percent owner of the Employer who has an annual Compensation of more than $150,000.

The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Internal Revenue Code and the regulations thereunder. For purposes of determining whether a Participant is a Key Employee, the Participant’s Compensation means Compensation as defined for purposes of Article VII, but for Plan Years beginning before January 1, 1998, without regard to Code Sections 125, 402(e)(3), and 402(h)(1)(B).

2.21 “Limitation Year” shall mean a calendar year.

2.22 “Match Contribution” shall mean a Salary Reduction Match Contribution made by the Employer to the Trust pursuant to Section 4.02 of the Plan. Match Contributions and earnings thereon shall be 50% vested and nonforfeitable after one Year of Service and 100% vested and nonforfeitable after two Years of Service. Notwithstanding the foregoing, Match Contributions and earnings thereon shall be 100% vested and nonforfeitable at all times for those Participants who have completed at least one Hour of Service on or before December 31, 2004.

2.23 “Match Contribution Account” shall mean the account established for each Participant for whom the Employer has allocated Match Contributions to the Trust and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto.

2.24 “Non-Elective Employer Contributions” shall mean Employer contributions that are made by the Employer pursuant to Section 4.03 of the Plan, whether or not the

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Employee has directed the Employer to make Salary Reduction Contributions to the Trust on his or her behalf. Eligibility to receive a Non-Elective Employer Contribution for a Plan Year is dependent upon the Employee remaining employed by First Allmerica on the last day of the Plan Year except where the Employee has terminated employment on account of death or retirement. Non-Elective Employer Contributions and earnings thereon shall be 50% vested and nonforfeitable after one Year of Service and 100% vested after two Years of Service. Notwithstanding the foregoing, Non-Elective Employer Contributions and earnings thereon shall be 100% vested and nonforfeitable at all times for those Employees who have completed at least one Hour of Service on or before December 31, 2004.

2.25 “Non-Elective Employer Contribution Account” shall mean the account established for each Employee for whom the Employer has made a Non-Elective Employer Contribution to the Trust and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto.

2.26 “Non-Highly Compensated Employee” shall mean any Employee who is not a Highly Compensated Employee.

2.27 “Non-Key Employee” shall mean any Employee who is not a Key Employee.

2.28 “Normal Retirement Age” shall mean the date on which the Participant attains Age 65. An actively employed Participant shall become fully vested in his or her Accrued Benefit upon attaining Normal Retirement Age.

2.29 “One Year Break in Service” shall mean any vesting computation period during which an Employee does not complete more than 500 Hours of Service.

Provided, however, for Plan Years commencing prior to January 1, 2005, for purposes of Article III, “One Year Break in Service” shall mean an Eligibility Computation Period during which an Employee does not complete more than 500 Hours of Service.

2.30 “Participant” shall mean any Employee who has met all of the requirements for participation under this Plan and has not for any reason become ineligible to participate further in the Plan.

2.31 “Plan Year” shall mean a calendar year.

2.32 “Profits” shall mean the net income or profits of the Employer for each calendar year before dividends to policyholders and federal income taxes and excluding capital gains and losses, as determined by the Employer in accordance with the accounting method used in computing the same or similar item for Annual Statement purposes, except that, in determining such figure, contributions under this Plan and Trust for the Plan Year shall not be taken into account.

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“Accumulated Profits” shall mean the accumulated net earnings or profits of the Employer.

The determination by First Allmerica of Profits and Accumulated Profits shall be final and conclusively binding on all parties.

2.33 “Policy” shall mean any form of individual life insurance or annuity contract, including any supplementary agreements or riders issued in connection therewith, issued by the Insurer on the life of a Participant. Any life insurance death benefits referred to in the following paragraphs of this Section 2.33 pertain to amounts purchased with other than Voluntary After-Tax Contributions.

(a) If ordinary life insurance contracts are purchased for a Participant, the aggregate life insurance premium for a Participant shall be less than 50% of the aggregate Employer contributions made on behalf of such Participant plus allocations of any forfeitures credited to the Accounts of such Participant. For purposes of these incidental insurance provisions, ordinary life insurance contracts are contracts with both non-decreasing death benefits and non-increasing premiums.

(b) If term insurance and universal life policies are used, the aggregate life insurance premium for a Participant shall not exceed 25% of the aggregate Employer contributions made on behalf of such Participant plus allocation of any forfeitures credited to the Accounts of such Participant.

(c) If a combination of ordinary life insurance and other life insurance policies is used, the aggregate premium for the ordinary life insurance plus twice the aggregate premium for the other life insurance shall be less than 50% of the aggregate Employer contributions made by the Employer on behalf of the Participant plus allocations of any forfeitures credited to the Accounts of such Participant.

The limitation on aggregate life insurance premium payments stated in this Section 2.33 shall not apply to any funds, from whatever source, which have accumulated in the Participant’s Account for a period of two (2) or more years, and are applied toward the purchase of such life insurance. Provided, however, that in no event may Tax Deductible Voluntary Contributions be invested in Policies of life insurance.

2.34 “Qualified Domestic Relations Order” shall mean any judgment, decree or order (including approval of a property settlement agreement) which:

(i) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a Participant;

(ii) is made pursuant to a state domestic relations law (including a community property law);

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(iii) constitutes a “qualified domestic relations order” within the meaning of Section 414(p) of the Code; and

(iv) is entered on or after January 1, 1985.

2.35 “Qualified Early Retirement Age” shall mean the later of:

(i) Age 55; or

(ii) the date on which the Participant begins participation.

2.36 “Qualified Joint and Survivor Annuity” shall mean an annuity for the life of the Participant, with a survivor annuity for the life of his or her spouse in an amount equal to 50% of the amount of the annuity payable during the joint lives of the Participant and his or her spouse, and which is the amount of benefit which can be purchased by the Participant’s Accrued Benefit.

2.37 “Regular Account” shall mean the account established and maintained for each Participant for whom the Employer has allocated Regular Employer Contributions to the Trust, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto.

2.38 “Regular Employer Contribution” shall mean a Regular Contribution made by the Employer to the Trust for years prior to 1995 pursuant to Section 4.01 of the Plan as in effect prior to 1995.

2.39 “Retirement Plan Committee” shall mean the persons charged by the Employer with the interpretation and administration of the Plan, as provided in Section 14.06 hereof.

2.40 “Rollover Account” shall mean the account established and maintained for each Participant who has made a Rollover Contribution to the Trust or whose accrued benefit from another qualified plan has been transferred to this Trust in accordance with Section 5.03 of the Plan, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto.

2.41 “Rollover Contribution” shall mean a contribution made to the Trust pursuant to Section 5.03 of the Plan.

2.42 “Suspense Account” shall mean the account established by the Trustee for maintaining contributions and forfeitures which have not yet been allocated to Participants.

2.43 “Tax Deductible Contribution Account” shall mean the account established and maintained for each Participant who has made a Tax Deductible Voluntary Contribution to the Trust, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto.

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2.44 “Tax Deductible Voluntary Contribution” shall mean a contribution made to the Trust for years before 1987 and pursuant to Section 5.02 of the Plan as in effect prior to 1995.

2.45 “Top Heavy Plan” shall mean for any Plan Year beginning after December 31, 1983 that any of the following conditions exists:

(i) If the top heavy ratio (as defined in Article VI) for this Plan exceeds 60 percent and this Plan is not part of any required aggregation group or permissive aggregation group of plans.

(ii) If this Plan is a part of a required aggregation group of plans (but not part of a permissive aggregation group) and the top heavy ratio for the group of plans exceeds 60 percent.

(iii) If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the top heavy ratio for the permissive aggregation group exceeds 60 percent.

See Article VI for requirements and additional definitions applicable to Top Heavy Plans.

2.46 “Top Heavy Plan Year” shall mean that, for a particular Plan Year, the Plan is a Top Heavy Plan.

2.47 “Totally and Permanently Disabled” shall mean the inability of a Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

In determining the nature, extent and duration of any Participant’s disability, the Plan Administrator may select a physician to examine the Participant. The final determination of the nature, extent and duration of such disability shall be made solely by the Plan Administrator upon the basis of such evidence as he or she deems necessary and acting in accordance with uniform principles consistently applied.

2.48 “Trustee” shall mean the bank or trust company or person or persons who shall be constituted the original trustee or trustees for the Plan and Trust created therefor, and also any and each successor trustee or trustees.

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2.49 “Trust Fund” shall mean, include and consist of any payments made to the Trustee by the Employer under the Plan and Trust Indenture, or the investments thereof, together with all income and gains of every nature thereon which shall be added to the principal thereof by the Trustee, less all losses thereon and all payments therefrom. The Trust Fund assets shall include any Policy issued to the Plan Trustee to fund benefits of the Plan.

2.50 “Trust Indenture” or “Trust” shall mean the Trust Indenture between the Employer and the Trustee in the form annexed hereto, and any and all amendments thereof or thereto.

2.51 “Valuation Date” shall mean each day as of which the value of the Trust Fund shall be calculated. The Plan Administrator reserves the right to change the frequency of Valuation Dates; provided, however, that in no event shall Valuation Dates occur less frequently than once each calendar quarter.

2.52 “Voluntary After-Tax Contributions” shall mean a contribution made to the Trust for years prior to 1995 pursuant to Section 5.01 of the Plan as in effect prior to 1995.

2.53 “Voluntary Contribution Account” shall mean the account established and maintained for each Participant who has made a Voluntary After-Tax Contribution to the Trust, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto.

2.54 “Year of Service” shall mean, for purposes of determining vesting under Article XIII, the twelve consecutive month period, commencing on the first day an Employee completes an Hour of Service and in which the Employee completes at least 1,000 Hours of Service. Thereafter, for purposes of determining vesting under Article XIII, the determination of a Year of Service will commence on the anniversary of the first day the Employee completed an Hour of Service and the twelve consecutive month period that follows, provided the Employee completes at least 1,000 Hours of Service during such period.

Provided, however, for purposes of determining Plan entry under Article III for Plan Years commencing prior to January 1, 2005, “Year of Service” means an Eligibility Computation Period during which an Employee completes at least 1,000 Hours of Service.

In computing a “Year of Service” for purposes of the Plan, each twelve month period shall be considered as completed as of the close of business on the last working day which occurs within such period, provided that the Employee had completed at least 1,000 Hours of Service during the period ending on such date.

Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Internal Revenue Code.

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ARTICLE III

ELIGIBILITY AND PARTICIPATION

3.01    (a) In General. Eligible Employees who were actively employed by the Employer, and who were Participants in the prior version of the Plan became Participants in this Plan on January 1, 2005.

For Plan Years beginning prior to January 1, 2005, every Employee shall be eligible to become a Plan Participant on the first day of the calendar month coincident with or following completion of one Year of Service, provided he or she is then employed in an eligible class of Employees.

Notwithstanding the foregoing, an Employee shall be eligible to become a Plan Participant upon completion of one Hour of Service by entering into a salary reduction agreement with the Employer in accordance with section 3.01(b). For Plan Years beginning prior to January 1, 2005, Employees shall be eligible to receive Match Contributions effective on the first day of the calendar month coincident with or following completion of one Year of Service, provided they are then employed in an eligible class of Employees. For Plan Years beginning on or after January 1, 2005, Employees shall be eligible to receive Match Contributions upon completion of one Hour of Service, provided they are then employed in an eligible class of Employees.

Notwithstanding the foregoing, the following Employees shall not be eligible to become or remain active Participants hereunder:

(i) All Employees holding a General Agent’s Contract with the Employer or with an Affiliate;

(ii) All Employees holding a Career Agent’s or Annuity Specialist’s Contract with the Employer or with an Affiliate;

(iii) Leased Employees within the meaning of Code Sections 414(n) and (o);

(iv) A contractor’s employee, i.e., a person working for a company providing goods or services (including temporary employee services) to the Employer or to an Affiliate whom the Employer does not regard to be its common law employee, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual is actually the Employer’s common law Employee; or

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(v) An independent contractor, i.e., a person who is classified by the Employer as an independent contractor, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual is actually the Employer’s common law Employee.

(b) Employee Participation. Effective on or after the date an Employee first becomes eligible to participate in the Plan, the Employee may direct the Employer to reduce his or her Compensation in order that the Employer may make Salary Reduction Contributions to the Plan, including Catch-up Contributions, on the Employee’s behalf. Any such Employee shall become a Participant on the date his or her salary reduction agreement becomes effective. Such direction shall be made in a form approved by the Plan Administrator (including, if applicable, by means of telephone, computer, or other paperless media). The Compensation of any eligible Employee electing salary reduction shall be reduced by the whole percentage requested by the Employee; provided, however, that the Plan Administrator will identify a maximum whole percentage on an annual basis and the Plan Administrator may reduce the Employee’s Compensation by a smaller percentage or refuse to enter into a salary reduction agreement with the Employee if the requirements of the Internal Revenue Code for salary reduction plans qualified under Section 401(k) and 414(v) of the Internal Revenue Code would otherwise be violated. Any salary reduction agreement shall become effective as soon as administratively feasible after the Employee elects to have his or her salary reduced.

A Participant may elect at any time to change or discontinue his or her salary reduction agreement with the Employer. Unless otherwise agreed to by the Plan Administrator, the election shall become effective as soon as administratively feasible after the Employee elects such change or discontinuance.

3.02 Classification Changes. In the event of a change in job classification, such that an Employee, although still in the employment of the Employer, no longer is an eligible Employee, all contributions to be allocated on his or her behalf shall cease and any amount credited to the Employee’s Accounts on the date the Employee shall become ineligible shall continue to vest, become payable or be forfeited, as the case may be, in the same manner and to the same extent as if the Employee had remained a Participant.

If a Participant’s salary reduction agreement is terminated because he or she is no longer a member of an eligible class of Employees, but the Participant has not terminated his or her employment, such Employee shall again be eligible to enter into a new salary reduction agreement immediately upon his or her return to an eligible class of Employees. If such Participant terminates his or her employment with the Employer, he or she shall again be eligible to enter into a salary reduction agreement immediately upon his or her recommencement of service as an eligible Employee.

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In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall be eligible to participate immediately.

3.03 Participant Cooperation. Each eligible Employee who becomes a Participant hereunder thereby agrees to be bound by all of the terms and conditions of this Plan and Trust. Each eligible Employee, by becoming a Participant hereunder, agrees to cooperate fully with the Insurer to which application may be made for a Policy or Policies providing benefits under the terms of this Plan, including completion and signing of such forms as are required by the Insurer.

ARTICLE IV

EMPLOYER CONTRIBUTIONS AND FORFEITURES

4.01 Salary Reduction Contributions. The Employer shall make Salary Reduction Contributions to the Plan and Trust, including Catch-up Contributions described in Code Section 414(v), out of current or Accumulated Profits for each Plan Year to the extent and in the manner specified in Subsection 3.01(b).

Salary Reduction Contributions, including Catch-up Contributions described in Code Section 414(v), shall be allocated to a Participant’s 401(k) Account as soon as administratively feasible after the earliest date on which such contributions can reasonably be segregated from the Employer’s general assets but in no event later than the 15^th business day of the month following the month in which the Salary Reduction Contributions would have otherwise been payable to the Participant.

4.02 Employer Matching Contributions. For Plan Years beginning on or after January 1, 2005, unless otherwise voted by the Board of Directors of the Employer, for each pay period that an eligible Salary Reduction Contribution is made by a Participant to the Trust, not to exceed the Code Section 402(g) limitation and not including Catch-up Contributions, the Employer shall make a Match Contribution to the Trust on the Participant’s behalf equal to 100% of the first 5% of the Participant’s Salary Reduction Contributions, not including Catch-up Contributions, made during the pay period. Such Match Contribution shall be made to the Match Contribution Account established for the Participant.

Note that Catch-up Contributions made by an eligible Participant shall not be matched in any event.

The Employer shall contribute Employer Matching Contributions to the Trust Fund as soon as practicable following the end of each pay period. Such contributions shall be made in cash (or in Employer Stock if so directed by the Board) and shall be allocated in accordance with the Plan current match formula to the Match Contribution Account of each eligible Participant. Such Match Contributions shall be invested per the directions of Participants in accordance with Section 16.02.

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For Plan Years beginning on or after January 1, 2005, within 30 days following the end of each Plan Year, if required, the Employer shall make a “true-up” Match Contribution to the Match Contribution Account of each Participant employed by the Employer on the last day of the Plan Year, such that the Employer match for such eligible Participants for the Plan Year shall be 100% of the eligible Employer Matching Contribution percentage of each such Participant’s Salary Reduction Contributions made during the entire Plan Year, not including Catch-up Contributions, not merely 100% of the eligible Employer Matching Contribution percentage of the Participant’s Salary Reduction Contributions, not including Catch-up Contributions, made each pay period.

4.03 Non-Elective Employer Contributions. For Plan Years beginning on or after January 1, 2005, unless otherwise voted by the Board of Directors of the Employer, eligible Employees who are employed by the Employer on the last day of the Plan Year will receive an Employer paid contribution, whether or not the Employee has elected to participate in the Plan, equal to 3% of eligible Plan Compensation. The contribution shall be made in cash or Employer Stock (if Employer Stock is so directed by the Board to be contributed). Such contribution shall be made to the Non-Elective Employer Contribution Account to be established for each such Employee and shall be invested per the direction of the Participant in accordance with Section 16.02 of the Plan.

4.04 Minimum Employer Contribution for Top Heavy Plan Years.

(a) Minimum Allocation for Non-Key Employees. Notwithstanding anything in the Plan to the contrary except (b) through (e) below, for any Top Heavy Plan Year Employer Contributions allocated to the Accounts of each Non-Key Employee Participant shall be equal to at least three percent of such Non-Key Employee’s Compensation (as defined for purposes of Article VII as limited by Section 401(a)(17) of the Code) for the Plan Year. However, should the Employer Contributions allocated to the Accounts of each Key Employee for such Top Heavy Plan Year be less than three percent of each Key Employee’s Compensation, the Employer Contribution allocated to the Accounts of each Non-Key Employee shall be equal to the largest percentage allocated to Accounts of a Key Employee. The preceding sentence shall not apply if this Plan is required to be included in an aggregation group (as described in Section 416 of the Internal Revenue Code) if such plan enables a defined benefit plan required to be included in such group to meet the requirements of Code Section 401(a)(4) or 410. For purposes of determining the percentage of Employer Contributions allocated to the Accounts of Key Employees, Salary Reduction Contributions made on their behalf shall be counted and be

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considered to be Employer Contributions. However, in determining whether a minimum Employer Contribution has been made to a Non-Key Employee’s Accounts, Salary Reduction Contributions made on his or her behalf shall be excluded and not considered.

(b) For purposes of the minimum allocations set forth above, the percentage allocated to the Accounts of any Key Employee shall be equal to the ratio of the sum of the Employer Contributions allocated on behalf of such Key Employee divided by the Employee’s Compensation for the Plan Year (as defined for purposes of Article VII), not in excess of the applicable Compensation dollar limitation imposed by Code Section 401(a)(17).

(c) For any Top Heavy Plan Year, the minimum allocations set forth above shall be allocated to the Accounts of all Non-Key Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Non-Key Employee Participants who have failed to complete a Year of Service.

(d) Notwithstanding anything herein to the contrary, in any Plan Year in which a Non-Key Employee is a Participant in both this Plan and a defined benefit pension plan included in a Required or Permissive Group of Top Heavy Plans, the Employer shall not be required to provide a Non-Key Employee with both the full separate minimum defined benefit plan benefit and the full separate minimum defined Contribution plan allocation described in this Section. Therefore, if the Employer maintains such a defined benefit and defined contribution plan, the top-heavy minimum benefits shall be provided as follows:

(i) If a Non-Key Employee is a participant in such defined benefit plan but is not a Participant in this defined contribution plan, the minimum benefits provided for Non-Key Employees in the defined benefit plan shall be provided to the employee if the defined benefit plan is a Top Heavy Plan and the minimum contributions described in this Section 4.04 shall not be provided.

(ii) If a Non-Key Employee is a participant in such defined benefit plan and is also a Participant in this defined contribution plan, the minimum benefits for Non-Key Employee participants in Top Heavy Plans provided in the defined benefit plan shall not be applicable to any such Non-Key Employee who receives the full maximum contribution described in the preceding sentence.

Notwithstanding anything herein to the contrary, no minimum contribution will be required under this Plan (or the minimum contribution under this Plan will be reduced, as the case may be) for any Plan Year if the Employer

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maintains another qualified defined contribution plan under which a minimum contribution is being made for such year for the Participant in accordance with Section 416 of the Internal Revenue Code.

(e) The minimum allocation required under this Section 4.04 (to the extent required to be nonforfeitable under Section 416(b) of the Code) may not be forfeited under Code Sections 411(a)(3)(B) or 411(a)(3)(D).

4.05 Application of Forfeitures. Amounts forfeited during a Plan Year shall be used to reduce Match Contributions for that Plan Year and each succeeding Plan Year, if necessary.

4.06 Limitations upon Employer Contributions. In no event shall the Employer contribution for any Plan Year exceed the maximum allowable under Sections 404 and 415 of the Internal Revenue Code or any similar or subsequent provision.

4.07 Payment of Contributions to Trustee. The Employer shall make payment of all contributions, including Participant contributions which shall be remitted to the Employer by payroll deduction or otherwise, directly to the Trustee in accordance with this Article IV but subject to Section 4.08.

4.08 Receipt of Contributions by Trustee. The Trustee shall accept and hold under the Trust such contributions of money, or other property approved by the Employer for acceptance by the Trustee, on behalf of the Employer and Participants as it may receive from time to time from the Employer, other than cash it is instructed to remit to the Insurer for deposit with the Insurer. However, the Employer may pay contributions directly to the Insurer and such payment shall be deemed a contribution to the Trust to the same extent as if payment had been made to the Trustee. All such contributions shall be accompanied by written instructions from the Employer accounting for the manner in which they are to be credited and specifying the appropriate Participant Account to which they are to be allocated.

ARTICLE V

EMPLOYEE CONTRIBUTIONS AND ROLLOVER CONTRIBUTIONS

5.01 Voluntary After-Tax Contributions. For Plan Years beginning prior to January 1, 1995, a Participant could contribute Voluntary After-Tax Contributions to the Plan and Trust in each Plan Year during which he or she was a Plan Participant in amounts as determined under the Plan in effect prior to 1995.

The Plan shall separately account for: (i) pre-1987 Voluntary After-Tax Contributions; (ii) investment income attributable to pre-1987 Voluntary After-Tax Contributions; and (iii) post-1986 Voluntary After-Tax Contributions and income attributable to such contributions.

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5.02 Tax Deductible Voluntary Contributions. The Plan Administrator will not accept Tax Deductible Voluntary Contributions made for years after 1986. Such contributions made for years prior to that date will be maintained in a separate account which will be nonforfeitable at all times, and which shall include gains and losses in accordance with Section 8.02. No part of the Tax Deductible Voluntary Contributions Account shall be used to purchase life insurance.

5.03 Rollover Contributions. With the consent of the Plan Administrator, the Trustee may accept funds transferred from other pension, profit sharing or stock bonus plans qualified under Section 401(a) of the Internal Revenue Code or Rollover Contributions, provided that the plan from which such funds are transferred permits the transfer to be made.

In the event of a transfer or Rollover Contribution to this Plan, the Plan Administrator shall maintain a 100% vested and nonforfeitable account for the amount transferred and its share of the Trust Fund’s accretions or losses, to be known as the Participant’s Rollover Account. Transferred and Rollover Contributions shall be separately accounted for.

“Rollover Contribution” means any rollover contribution described in Code Sections 402(c)(4), 403(a)(4), 403(b)(8), 408(d)(3) or 457(e)(16).

An Employee who makes a contribution to the Plan described in this Section shall become a Plan Participant on the date the Trustee accepts the contribution. However, no Employer Contributions will be made on behalf of such Employee, nor will the Employee be eligible to direct the Employer to make Salary Reduction Contributions on his or her behalf, until the Employee satisfies the Plan eligibility requirements for such contributions set forth in Article III.

Notwithstanding the above, for Plan Years beginning January 1, 1999 and thereafter, the Trustee shall no longer accept funds transferred from plans qualified under 401(a) of the Internal Revenue Code unless the transferor plan is maintained by the Employer or by an Affiliate. Rollover Contributions to the Plan shall continue to be allowed in accordance with this Section 5.03.

ARTICLE VI

PROVISIONS APPLICABLE TO TOP HEAVY PLANS

6.01 In general. For any Top Heavy Plan Year, the Plan shall provide the minimum contribution for Non-Key Employees described in Section 4.04.

If the Plan is or becomes a Top Heavy Plan, the provisions of this Article will supersede any conflicting provisions in the Plan.

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6.02 Determination of Top Heavy Status.

(a) This Plan shall be a Top Heavy Plan for any Plan Year commencing after December 31, 1983 if any of the following conditions exists:

(i) If the top heavy ratio for this Plan exceeds 60 percent and this Plan is not part of any required aggregation group or permissive aggregation group of plans.

(ii) If this Plan is a part of a required aggregation group of plans but not part of a permissive aggregation group and the top heavy ratio for the group of plans exceeds 60 percent.

(iii) If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the top heavy ratio for the permissive aggregation group exceeds 60 percent.

(b) The Plan top heavy ratio shall be determined as follows:

(i) Defined Contribution Plans Only: If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan, as defined in Section 408(k) of the Code) and the Employer has not maintained any defined benefit plan which during the 1-year period (5-year period in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002) ending on the determination date(s) has or has had accrued benefits, the top-heavy ratio for this Plan alone or for the required or permissive aggregation group, as appropriate, is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the determination date(s) (including any part of any account balance distributed in the 1-year period ending on the determination date(s) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability and in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 1-year period ending on the determination date(s)) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability and in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002), both computed in accordance with Section 416 of the Code and the Regulations thereunder. Both the numerator and denominator of the

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top-heavy ratio are increased to reflect any contribution not actually made as of the determination date, but which is required to be taken into account on that date under Section 416 of the Code and the Regulations thereunder.

(ii) Defined Contribution and Defined Benefit Plans: If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more defined benefit plans which during the 1-year period (5-year period in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002) ending on the determination date(s) has or has had any accrued benefits, the top-heavy ratio for any required or permissive aggregation group, as appropriate, is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (i) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the determination date(s), and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with (i) above, and the present value of accrued benefits under the defined benefit plan or plans for all Participants as of the determination date(s), all determined in accordance with Section 416 of the Code and the Regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the top-heavy ratio are increased for any distribution of an accrued benefit made in the 1-year period ending on the determination date (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability and in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002).

(iii) Determination of Values of Account Balances and Accrued Benefits: For purposes of (i) and (ii) above the value of Account balances and the present value of Accrued Benefits will be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the determination date, except as provided in Section 416 of the Code and the Regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was Key Employee in a prior year, or (2) who has not had at least one Hour of Service with the Employer at any time during the 1-year period (five-year period in determining whether the Plan is Top Heavy for Plan Years

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beginning before January 1, 2002) ending on the determination date will be disregarded. The calculation of the top-heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code and the Regulations thereunder. Tax Deductible Voluntary Employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the determination dates that fall within the same calendar year.

The Accrued Benefit of a Participant other than a Key Employee shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer; or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(l)(C) of the Code.

(c) Permissive aggregation group: The required aggregation group of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Section 401(a)(4) and 410 of the Internal Revenue Code.

(d) Required aggregation group: (i) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the Plan has terminated), and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of Section 401(a)(4) or 410 of the Internal Revenue Code.

(e) Determination date: The last day of the preceding Plan Year.

(f) Present Value: Present value shall be based on the 1971 Group Annuity Table, unprojected for post-retirement mortality, with no assumption for pre-retirement withdrawal and interest at the rate of 5% per annum.

ARTICLE VII

LIMITATIONS ON ALLOCATIONS

(See Sections 7.11-7.15 for definitions applicable to this Article VII).

7.01 If the Participant does not participate in, and has never participated in another qualified plan, a welfare benefit fund (as defined in Section 419(e) of the Code), an individual

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medical account (as defined in Section 415(l)(2) of the Code) or a simplified employee pension (as defined in Section 408(k) of the Code), maintained by the Employer, the amount of Annual Additions which may be credited to the Participant’s Accounts for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant’s Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount.

7.02 Prior to determining the Participant’s actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant’s annual Compensation for the Limitation Year, uniformly determined for all Participants similarly situated.

7.03 As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant’s actual Compensation for the Limitation Year.

7.04 If, pursuant to Section 7.03, or as a result of the allocation of forfeitures, any Excess Amount and earnings attributable thereto will be disposed of as follows:

(i) Any Voluntary After-Tax Contributions (plus attributable earnings), to the extent they would reduce the Excess Amount, will be distributed to the Participant;

(ii) Any Salary Reduction Contributions to the extent they would reduce the Excess Amount, will be distributed to the Participant; and

(iii) If after the application of paragraphs (i) and (ii) an Excess Amount still exists, the Excess Amount will be held unallocated in a Suspense Account. The Suspense Account will be applied to reduce future Employer Match Contributions for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary.

For Plan Years beginning January 1, 1998 and thereafter, if any Match Contributions are attributable to returned Salary Reduction Contributions in (ii) above, such Match Contributions shall be forfeited and applied in accordance with Section 4.05.

If a Suspense Account is in existence at any time during the Limitation Year pursuant to this Section, it will not participate in the allocation of the Trust’s investment gains and losses.

If a Suspense Account is in existence at any time during a particular Limitation Year, all amounts in the Suspense Account must be allocated and reallocated to Participants’

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Accounts before any Employer contributions may be made to the Plan for that Limitation Year. Excess amounts may not be distributed to Participants or Former Participants.

Sections 7.05 through 7.10 (These Sections apply if, in addition to this Plan, the Participant is covered under another qualified defined contribution plan, a welfare benefit fund, an individual medical account or a simplified employee pension maintained by the Employer during any Limitation Year.)

7.05 The Annual Additions which may be credited to a Participant’s Accounts under this Plan for any such Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participant’s account under the other plans, welfare benefit funds, individual medical accounts and simplified employee pensions for the same Limitation Year. If the Annual Additions with respect to the Participant under other defined contribution plans, welfare benefit funds, individual medical accounts and simplified employee pensions maintained by the Employer are less than the Maximum Permissible Amount and the Employer contribution that would otherwise be contributed or allocated to the Participant’s Accounts under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans and funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other defined contribution plans, welfare benefit funds, individual medical accounts and simplified employee pensions in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant’s Accounts under this Plan for the Limitation Year.

7.06 Prior to determining the Participant’s actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount in the manner described in Section 7.02.

7.07 As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant’s actual Compensation for the Limitation Year.

7.08 If, pursuant to Section 7.07, or as a result of the allocation of forfeitures, a Participant’s Annual Additions under this Plan and such other plans would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a simplified employee pension will be deemed to have been allocated first, followed by Annual Additions to a welfare benefit fund or individual medical account, regardless of the actual allocation date.

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7.09 If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of:

(i) the total Excess Amount allocated as of such date, times

(ii) the ratio of (A) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (B) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified defined contribution plans.

7.10 Any Excess Amount attributed to this Plan will be disposed of in the manner described in Section 7.04.

(Sections 7.11—7.15 are definitions used in this Article VII).

7.11 Annual Additions—The sum of the following amounts credited to a Participant’s Accounts for the Limitation Year:

(i) Employer contributions (including Salary Reduction Contributions);

(ii) Employee contributions;

(iii) forfeitures; and

(iv) allocations under a simplified employee pension.

For this purpose, any Excess Amount applied under Sections 7.04 or 7.10 in the Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year.

Amounts allocated after March 31, 1984, to an individual medical account, as defined in Section 415(l)(1) of the Internal Revenue Code, which is part of a defined benefit plan maintained by the Employer, are treated as annual additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in Section 419(A)(d)(3) of the Code, under a welfare benefit fund, as defined in Code Section 419(e), maintained by the Employer, are treated as annual additions to a defined contribution plan.

7.12 Defined Contribution Dollar Limitation—$40,000 as adjusted under Code Section 415(d).

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7.13 Employer—For purposes of this Article, Employer shall mean the Employer that adopts this plan and all members of a controlled group of corporations (as defined in Section 414(b) of the Code as modified by Section 415(h)), all trades or business under common control (as defined in Code Section 414(c) as modified by Section 415(h) of the Code), or all members of an affiliated service group (as defined in Code Section 414(m) of the Code) of which the Employer is a part, and any other entity required to be aggregated with the Employer pursuant to regulations promulgated under Code Section 414(o).

7.14 Excess Amount—The excess of the Participant’s Annual Additions for the Limitation Year over the Maximum Permissible Amount.

7.15 Maximum Permissible Amount—The maximum Annual Addition that may be contributed or allocated to a Participant’s Accounts under the Plan for any Limitation Year shall not exceed the lesser of:

(i) the Defined Contribution Dollar Limitation; or

(ii) 25 percent of the Participant’s Compensation for the Limitation Year.

The Compensation limitation referred to in (ii) shall not apply to any contribution for medical benefits (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition under Section 415(c)(1) or 419A(d)(2) of the Code.

If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the maximum permissible amount will not exceed the Defined Contribution Dollar Limitation multiplied by the following fraction:

Number of months in the short Limitation Year

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ARTICLE VIII

PARTICIPANT ACCOUNTS AND VALUATION OF ASSETS

8.01 Participant Accounts. The Trustee shall establish and maintain a 401(k) Account, Match Contribution Account, Non-Elective Employer Contribution Account, Regular Account, Rollover Account, Tax Deductible Contribution Account and Voluntary Contribution Account for each Participant, when appropriate, to account for the Participant’s Accrued Benefit. All contributions by or on behalf of a Participant shall be deposited to the appropriate Account.

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The Plan Administrator shall instruct the Trustee to credit all appropriate amounts to each Participant’s Accounts, including contributions made by or on behalf of the Participant and any Policies issued on the life of the Participant. The Plan Administrator shall keep records which shall include the Account balances of each Participant.

8.02 Valuation of Trust Fund. As of each Valuation Date the Trustee shall determine (or cause to be determined) the net worth of the assets of the Trust Fund and report such value to the Plan Administrator in writing. In determining such net worth, the Trustee shall evaluate the assets of the Trust Fund at their fair market value as of such Valuation Date. In making any such valuation of the Trust Fund, the Trustee shall not include any contributions made by the Employer which have not been allocated to Participant Accounts prior to such Valuation Date or any Policies purchased as investments for Participant Accounts.

ARTICLE IX

401(k) ALLOCATION LIMITATIONS

9.01 Definitions. For purposes of this Article, the following definitions shall be used:

(a) “Actual Deferral Percentage” or “ADP” means the ratio (expressed as a percentage) of Salary Reduction Contributions, other than Catch-up Contributions, made on behalf of an Eligible Participant to that Participant’s Compensation for the Plan Year. Two Actual Deferral Percentages shall be calculated and used, one including and the second excluding any Salary Reduction Contributions that are included in the Contribution Percentage of the Participant as defined in Plan Section 10.01(b). The Plan Administrator may include 100% vested and non-forfeitable Match Contributions made for the Participant for the Plan Year in the above described numerator, if such inclusion is made on a uniform nondiscriminatory basis for all Participants; however, Match Contributions that are included in the Actual Deferral Percentage of the Participant may not be included in the numerator of the Contribution Percentage of the Participant as defined in Section 10.01(b). To be considered as contributed for a given Plan Year for purposes of inclusion in a given Actual Deferral Percentage, Contributions must be made by the end of the 12 month period immediately following the Plan Year to which the contribution relates.

Additionally, if one or more other plans allowing contributions under Code Section 401(k) are considered with this Plan as one for purposes of Code Section 401(a)(4) or 410(b), the Actual Deferral Percentages for all Eligible Participants under all such plans shall be determined as if this Plan and all such other plans were one; for Plan Years beginning after 1989, such Plans must have the same Plan Year. If any Highly Compensated Employee is also

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an Eligible Participant in one or more other plans allowing contributions under Code Section 401(k), the Actual Deferral Percentage for that Employee shall be determined as if this Plan and all such other plans were one; if such plans have different Plan Years, the Plan Years ending with or within the same calendar year shall be used.

(b) “Average Actual Deferral Percentage” means the average (expressed as a percentage) of the Actual Deferral Percentages of a group.

(c) “Eligible Participant” means a Participant eligible to have Salary Reduction Contributions made on his or her behalf.

(d) “Excess 401(k) Contributions” means with respect to any Plan Year, the excess of: (i) the aggregate amount of Employer contributions actually taken into account in computing the Actual Deferral Percentages of Highly Compensated Employees for such Plan Year, over (ii) the maximum amount of such contributions permitted by the Actual Deferral Percentage Test (determined by hypothetically reducing the numerators of Highly Compensated Employees in order of their Actual Deferral Percentages beginning with the highest of such percentages).

(e) “Excess Elective Deferrals” means those Salary Reduction Contributions of a Participant that either (1) are made during the Participant’s taxable year and exceed the dollar limitation under Code Section 402(g) (including, if applicable, the dollar limitation on Catch-up Contributions defined in Code Section 414(v)) for such year; or (2) are made during a calendar year and exceed the dollar limitation under Code Section 402(g) (including, if applicable, the dollar limitation on Catch-up Contributions defined in Code Section 414(v)) for the Participant’s taxable year beginning in such calendar year, counting only Salary Reduction Contributions made under this Plan and any other 401(k) qualified retirement plan, contract or arrangement maintained by the Employer.

9.02 Average Actual Deferral Percentage Tests. The Average Actual Deferral Percentage for Highly Compensated Employees for each Plan Year compared to the Average Actual Deferral Percentage for Non-Highly Compensated Employees for the Plan Year must satisfy one of the following tests:

(i) The Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; or

(ii) The Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Non-Highly Compensated Employees for the Plan Year multiplied by 2, provided that the Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees does not exceed the Average Actual Deferral Percentage for Non-Highly

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Compensated Employees for the Plan Year by more than two (2) percentage points.

A Participant is a Highly Compensated Employee for a particular Plan Year if he or she meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Non-Highly Compensated Employee for a particular Plan Year if he or she does not meet the definition of a Highly Compensated Employee in effect for that Plan Year.

For Plan Years beginning on or after January 1, 1999, all eligible Non-Highly Compensated Employees who have not met the age and service requirements of Code Section 410(a)(1)(A), may be disregarded in performing the Average Actual Deferral Percentage Tests as provided in Code Section 401(k)(3)(F) and the Regulations thereunder.

9.03 Refund of Excess 401(k) Contributions. Notwithstanding any other provision of this Plan except Section 9.05, Excess 401(k) Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess 401(k) Contributions were allocated for the preceding Plan Year. Excess 401(k) Contributions are allocated to the Highly Compensated Employees with the largest dollar amounts of Employer contributions taken into account in calculating the Actual Deferral Percentage test for the year in which the excess arose, beginning with the Highly Compensated Employee with the largest dollar amount of such Employer contributions and continuing in descending order until all the Excess Contributions have been allocated. For purposes of the preceding sentence, the “largest amount” is determined after distribution of any Excess 401(k) Contributions. The income or loss allocable to Excess 401(k) Contributions allocated to each Participant shall be the income or loss allocable to the 401(k) Contributions for the Plan Year multiplied by a fraction, the numerator of which is the Participant’s Excess 401(k) Contributions for the Plan Year and the denominator of which is the sum of all Accounts of the contribution types to which Excess 401(k) Contributions have been attributed as of the Plan Year and the sum of such contribution types made during the Plan Year, determined without regard to any income or loss occurring during such Plan Year. The Plan Administrator shall make every effort to make all required distributions and forfeitures within 2 ¹/2 months of the end of the affected Plan Year; however, in no event shall such distributions be made later than the end of the following Plan Year. Distributions and forfeitures made later than 2 ¹/2 months after the end of the affected Plan Year will be subject to tax under Code Section 4979.

All forfeitures arising under this Section shall be applied as specified in Section 4.05 of the Plan and treated as arising in the Plan Year after that in which the Excess 401(k) Contributions were made; however, no forfeitures arising under this Section shall be allocated to the Account of any affected Highly Compensated Employee.

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Excess 401(k) Contributions shall be treated as Annual Additions under the Plan.

For a period of four 12 month periods beginning from the given Plan Year, or such other period as the Secretary of the Treasury may designate, the Employer shall maintain records showing what contributions and Compensation were used to satisfy this Section and Section 9.02.

9.04 Accounting for Excess 401(k) Contributions. Excess 401(k) Contributions allocated to a Participant shall be distributed from the Participant’s 401(k) Account and Match Contribution Account (if applicable) in proportion to the Participant’s Salary Reduction Contributions and Employer Match Contributions (to the extent used in the Actual Deferral Percentage Test) for the Plan Year.

9.05 Special Contributions. Notwithstanding any other provisions of this Plan except Section 9.09, in lieu of distributing Excess 401(k) Contributions as provided in Section 9.03, the Employer may make 401(k) Employer Contributions on behalf of Non-Highly Compensated Employees that are sufficient to satisfy either of the actual deferral percentage tests.

9.06 Maximum Salary Reduction Contributions. No Employee shall be permitted to have Salary Reduction Contributions made under this Plan, other than Catch-up Contributions, during any calendar year in excess of $7,000 (or such other amount as is designated by the Secretary of the Treasury as the limit under Code Section 402(g)).

9.07 Participant Claims. Participants under other plans described in Code Sections 401(k), 408(k) or 403(b) may submit a claim to the Plan Administrator specifying the amount of their Excess Elective Deferral. Such claim shall: (i) be in writing; (ii) be submitted no later than March 1 of the year after the Excess Elective Deferral was made; and (iii) state that such amount, when added to amounts deferred under other plans described in Code Sections 401(k), 408(k) or 403(b), exceeds $7,000 (or such other amount as the Secretary of the Treasury may designate).

9.08 Distribution of Excess Elective Deferrals. Notwithstanding any other provision of this Plan, Excess Elective Deferrals and income allocable thereto shall be distributed to the affected Participant no later than the April 15 following the calendar year in which such Excess Elective Deferrals were made. For Plan Years beginning after 1990, allocable income or loss shall be income or loss allocable to Salary Reduction Contributions for the Plan Year multiplied by a fraction, the numerator of which is the Participant’s Excess Elective Deferrals for the Plan Year and the denominator is the Participant’s Salary Reduction Contribution Account as of the beginning of the Plan Year and the sum of such contribution types made during the Plan Year, determined without regard to any income or loss occurring during such Plan Year.

Notwithstanding any provision of this Plan to the contrary, any Match Contributions plus earnings that are attributable to any Excess Elective Deferrals that have been

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refunded shall be forfeited. All such forfeitures shall be treated as arising in the Plan Year after that in which the refunded Excess Deferrals were made and shall be used to reduce future Employer Match Contributions.

9.09 Operation in Accordance With Regulations. The determination and treatment of Actual Deferral Percentages and Excess 401(k) Contributions, and the operation of the Average Actual Deferral Percentage Test shall be in accordance with such additional requirements as may be prescribed by the Secretary of the Treasury.

ARTICLE X

401(m) ALLOCATION LIMITATIONS

10.01 Definitions. For purposes of this Article, the following Definitions shall be used:

(a) “Average Contribution Percentage” means the average (expressed as a percentage) of the Contribution Percentages of a group.

(b) “Contribution Percentage” means the ratio (expressed as a percentage) of: the Employer Match and Voluntary After Tax Contributions made on behalf of the Participant to the Participant’s Compensation for the Plan Year. The Plan Administrator may include Salary Reduction Contributions (other than Catch-up Contributions) for the Participant for the Plan Year in the above described numerator, if such inclusion is made on a uniform nondiscriminatory basis for all Participants. To be considered as contributed for a given Plan Year for purposes of inclusion in a given Average Contribution Percentage, Contributions must be made by the end of the 12 month period immediately following the Plan Year to which the contribution relates. The Plan Administrator may not include Employer Match Contributions in the numerator to the extent such contributions are included in the Actual Deferral Percentage of the Participant, as defined in Section 9.01(a), and may not include Salary Reduction Contributions unless Section 9.02 can be satisfied by both including and excluding such Salary Reduction Contributions.

Additionally, if one or more other Plans allowing contributions under Code Section 401(k), voluntary after tax contributions or employer match Contributions are considered with this Plan as one for purposes of Code Section 401(a)(4) or 410(b), the Contribution Percentages for all eligible participants under all such plans shall be determined as if this Plan and all such others were one; for Plan Years beginning after 1989, such Plans must have the same Plan Year.

If any Highly Compensated Employee is also an eligible participant in one or more other plans allowing contributions under Code Section 401(k), voluntary after tax contributions or employer match Contributions, the

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Contribution Percentage for that Employee shall be determined as if this Plan and all such other plans were one; if such plans have different Plan Years, the Plan Years ending with or within the same calendar year shall be used.

For Plan Years beginning January 1, 1999 and thereafter, all eligible Non-Highly Compensated Employees who have not met the age and service requirements of section 410(a)(1)(A), may be disregarded in performing the Average Contribution Percentage Tests as provided in Code Section 401(m)(5)(C).

Notwithstanding the foregoing, in determining a Participant’s Contribution Percentage Employer Match Contributions shall not include Match Contributions forfeited because they were attributable to Excess 401(k) Contributions or to Excess Elective Deferrals.

(c) “Eligible Participant” means a Participant eligible to have Employer Match, Salary Reduction or Voluntary After Tax Contributions made on his or her behalf.

(d) “Excess 401(m) Contributions” means with respect to any Plan Year, the excess of: (1) the aggregate Contribution Percentage amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year; over (2) the maximum Contribution Percentage amounts permitted by the Average Contribution Percentage test (determined by hypothetically reducing the numerators of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such Percentages).

10.02 Average Contribution Percentage Tests. The Average Contribution Percentage for Highly Compensated Employees for each Plan Year compared to the Average Contribution Percentage for Non-Highly Compensated Employees for the Plan Year must satisfy one of the following tests:

(i) The Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; or

(ii) The Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Non-Highly Compensated Employees for the Plan Year multiplied by 2, provided that the Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees does not exceed the Average Contribution Percentage for Non-Highly Compensated Employees for the Plan Year by more than two (2) percentage points.

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10.03 Refund and Forfeiture of Excess 401(m) Contributions. Notwithstanding any other provision of this Plan except Sections 10.05 and 10.06, Excess 401(m) Contributions and the income or loss allocable thereto treated as Employer Match, Salary Reduction, Voluntary After Tax or 401(k) Employer Contributions shall be distributed to affected Highly Compensated Employees. The income or loss shall be income or loss allocable to the affected accounts for the Plan Year multiplied by a fraction, the numerator of which is the Participant’s Excess 401(m) Contributions for the Plan Year and the denominator of which is the sum of all Accounts of the Contribution types to which Excess 401(m) Contributions have been attributed as of the beginning of the Plan Year and the sum of such contribution types made during the Plan Year, determined without regard to any income or loss occurring during such Plan Year. The Plan Administrator shall make every effort to refund all Excess 401(m) Contributions within 2 ¹/2 months of the end of the affected Plan Year; however, in no event shall Excess 401(m) Contributions be refunded later than the end of the following Plan Year. Distributions made later than 2 ¹/2 months after the end of the affected Plan Year will be subject to tax under Code Section 4979.

Notwithstanding any provision of this Plan to the contrary, any Match Contributions plus earnings that are attributable to any Excess 401(m) Contributions that have been refunded shall be forfeited. All such forfeitures shall be treated as arising in the Plan Year after that in which the refunded Excess 401(m) Contributions were made and shall be used to reduce future Employer Match Contributions.

For a period of four 12 month periods beginning from the given Plan Year, or such other period as the Secretary of the Treasury may designate, the Employer shall maintain records showing what contributions and compensation were used to satisfy this Section and Section 10.02.

10.04 Accounting for Excess 401(m) Contributions. Excess 401(m) Contributions allocated to a Participant shall be forfeited, if forfeitable or distributed on a pro-rata basis from the Participant’s Voluntary After Tax Contribution Account, 401(k) Account and Match Contribution Account.

10.05 Special 401(k) Employer Contributions. Notwithstanding any other provisions of this Plan except Section 10.07, in lieu of refunding Excess 401(m) Contributions as provided in Section 10.03, the Employer may make 401(k) Employer Contributions on behalf of Non-Highly Compensated Employees that are sufficient to satisfy the Average Contribution Percentage test.

10.06 Order of Determinations. The determination of Excess 401(m) Contributions shall be made after first determining Excess Elective Deferrals, and then determining Excess 401(k) Contributions.

10.07 Operation in Accordance With Regulations. The determination and treatment of Contribution Percentages and Excess 401(m) Contributions, and the operation of the

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Average Contribution Percentage Test shall be in accordance with such additional requirements as may be prescribed by the Secretary of the Treasury.

ARTICLE XI

IN-SERVICE WITHDRAWALS

11.01 Withdrawals from Tax Deductible Contribution or Voluntary Contribution Accounts. A Participant shall have the right at any time to request the Plan Administrator for a withdrawal in cash of amounts in his or her Tax Deductible Contribution Account or Voluntary Contribution Account.

11.02 Withdrawals from Match Contribution or 401(k) Accounts. At any time after a Participant attains Age 59 ¹/2 or is Totally and Permanently Disabled, a Participant shall have the right to request the Plan Administrator for a withdrawal in cash of amounts in his or her Match Contribution or 401(k) Account. For Plan Years beginning after 1988, a Participant shall have the right at any time to request the Plan Administrator for a withdrawal in cash of Salary Reduction Contributions, with earnings accrued thereon as of December 31, 1988 for “financial hardship”. For Plan Years beginning after 1991, financial hardship distributions may be increased by 401(k) Employer Contributions plus earnings thereon, as of December 31, 1988. The Plan Administrator shall determine whether an event constitutes a financial hardship. Such determination shall be based upon non-discriminatory rules and procedures, which shall be conclusive and binding upon all persons.

The processing of applications and any distributions of amounts under this Section shall be made as soon as administratively feasible. The amount of a distribution based upon “financial hardship,” less any income and penalty taxes, cannot exceed the amount required to meet the immediate financial need created by the hardship and not reasonably available from other resources of the Participant.

In determining whether a hardship distribution is permissible the following special rules shall apply:

(i) The following are the only financial needs considered immediate and heavy: deductible medical expenses (whether incurred or necessary to obtain medical care)(within the meaning of Section 213(d) of the Code) of the Employee, the Employee’s spouse, children, or dependents (within the meaning of Code Section 152); the purchase (excluding mortgage payments) of a principal residence for the Employee; payment of tuition, related educational fees, and room and board expenses for the next twelve months of post-secondary education for the Employee, the Employee’s spouse, children or dependents; or the need to prevent the eviction of the Employee from, or a foreclosure on the mortgage of, the Employee’s principal residence.

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(ii) A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Employee only if:

(A) The Employee has obtained all distributions, other than hardship distributions, and all nontaxable loans under all plans maintained by the Employer;

(B) All plans maintained by the Employer provide that the Employee’s Elective Deferrals (and Employee Contributions) will be suspended for six months (twelve months for hardship distributions made prior to January 1, 2002) after the receipt of the hardship distribution;

(C) The distribution, less any income and penalty taxes, is not in excess of the amount of an immediate and heavy financial need; and

(D) In addition for hardship distributions made before 2002, all plans maintained by the Employer provide that the Employee may not make Elective Deferrals for the Employee’s taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Section 402(g) of the Code for such taxable year less the amount of such Employee’s Elective Deferrals for the taxable year of the hardship distribution.

11.03 Withdrawals from Regular or Rollover Accounts. Once a Participant has participated in the Plan for two years, at any time thereafter the Participant shall have the right at any time to request the Plan Administrator for a withdrawal in cash of amounts allocated to his or her Rollover Account. For Plan Years beginning January 1, 1999, and thereafter, the Participant may request a withdrawal of cash amounts allocated to his or her Rollover Account immediately upon the Trustee’s receipt of such Rollover Contribution. Once a Participant’s Regular Account is 100% vested the Participant shall have the right at any time to request the Plan Administrator for a withdrawal in cash of amounts allocated to such Account; provided, however, that unless the Participant is over Age 59 ¹/2 or is Permanently and Totally Disabled, the amount subject to withdrawal shall not include amounts attributable to contributions made to the Regular Account during the two-year period preceding the date of payment.

11.04 Rules for In-Service Withdrawals. The Plan Administrator may impose a dollar minimum for partial withdrawals. If the amount in the Participant’s appropriate Account is less than the minimum, the Plan Administrator shall pay the Participant the entire amount then in the Participant’s Account from which the withdrawal is to be made if a withdrawal of the entire amount is otherwise permissible under the rules set forth in this Article. If the entire amount cannot be paid under such rules, whatever amount is permissible shall be paid.

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In the case of a withdrawal from a Rollover Account described in Section 13.03, if necessary to comply with the joint and survivor rules of Code Sections 401(a)(11) and 417, the Plan Administrator shall require the consent of any Participant’s spouse before making any in-service withdrawal. Any such consent shall satisfy the requirements of Section 13.07.

Any amount to be withdrawn shall be payable as of the Valuation Date coincident with or next following the date which is 15 days following receipt of the written request by the Plan Administrator.

ARTICLE XII

PLAN LOANS

12.01 General Rules. Upon the application of any Participant, Beneficiary or, for Plan Years beginning prior to January 1, 1999 an alternate payee entitled to Plan benefits pursuant to a Qualified Domestic Relations Order, the Plan Administrator may enter into a loan agreement with such person and authorize the Trustee to make a loan pursuant thereto. The amount of any such loan and the provisions for its repayment shall be in accordance with such non-discriminatory rules and procedures as are adopted by the Retirement Plan Committee and uniformly applied to all borrowers. Such written procedures shall be part of this Plan document.

Applications for loans will be made to the Plan Administrator using forms provided by the Plan Administrator. Loan applications meeting the requirements of this Article will be granted and all borrowers must execute a promissory note meeting the requirements of this Article.

Plan loans shall be granted on a uniform nondiscriminatory basis, so that they are available to all borrowers on a reasonably equivalent basis and are not made available to highly compensated Employees or officers of the Employer in an amount greater than the amount made available to other Employees. Loans will be made available to Former Participants to the extent required by regulations issued by the Department of Labor under Section 408(b) of ERISA and to other Former Participants as is needed to satisfy Code Section 401(a)(4) and the Regulations promulgated thereunder. Such loans shall be adequately secured, shall bear a reasonable rate of interest and shall provide for periodic repayment over a reasonable period of time, all in accordance with the Committee’s rules and procedures for Plan loans.

To the extent required under Sections 401(a)(11) and 417 of the Internal Revenue Code and the Regulations promulgated thereunder, a Participant must obtain the consent of his or her spouse, if any, within the 90 day period before the time the Participant’s Accrued Benefit is used as security for a Plan loan. A new consent is required if the Accrued Benefit is used for any increase in the amount of security. The consent shall comply with the requirements of Section 417 of the Internal Revenue

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Code, but shall be deemed to meet any requirements contained in such section relating to the consent of any subsequent spouse.

Tax Deductible Voluntary Contributions, plus earnings thereon, may not be used as security for Plan loans.

The Plan Administrator may not require a minimum loan amount greater than $1,000.

No loan shall be made to the extent such loan when added to the outstanding balance of all other loans to the borrower would exceed one-half ( ¹/2) of the present value of the nonforfeitable Accrued Benefit of the borrower under the Plan (but not more than $50,000 reduced by the difference between the highest outstanding balance during the previous 365 days and the current outstanding balance).

For purposes of calculating the above limitations, all loans and accrued benefits from all plans of the Employer and other members of a group of employers described in Code Sections 414(b), (c) and (m) are aggregated.

The Plan Administrator shall determine a reasonable rate of interest for each loan by identifying the rate(s) charged for similar and equivalent commercial loans by institutions in the business of making loans. No loan shall be granted to any borrower or other person who already has a total of two loans or more outstanding under this Plan or any other plan maintained by the Employer (or five loans outstanding for Plan Years beginning before January 1, 1996) or who is in default on any loan.

The Retirement Plan Committee may direct the Trustee to deduct from a Participant’s Accounts under the Plan a reasonable fee (as determined by the Committee) to offset the cost of processing and administering the loan.

12.02 Loan Repayments. Any such loans shall be repaid by the borrower in accordance with the loan agreement. Loans shall provide for periodic repayment, with payment to be no less frequent than quarterly over a period not to exceed five (5) years; provided, however, that loans used to acquire any dwelling unit which, within a reasonable time, is to be used (determined at the time the loan is made) as a principal residence of a Participant, may provide for periodic repayment, with payment to be no less frequent than quarterly over a reasonable period of time that exceeds five (5) years.

In the event the loan is not repaid within the time period prescribed, the Plan Administrator shall direct the Trustee to deduct the total amount due and payable, plus interest thereon, from distributable amounts in the borrower’s Accounts. If distributable amounts in the borrower’s Accounts are not sufficient to repay such amount, the Plan Administrator shall enforce the terms of any agreement providing additional security for the loan and shall pursue such other remedies available at law to collect the indebtedness.

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In the event of a loan default, attachment of the borrower’s Accrued Benefit will not occur until a distributable event occurs in the Plan. Default shall occur upon the earlier of any uncured failure to make payments in accordance with the promissory note or the death of the borrower.

Loan repayments will be suspended under this Plan as permitted under 414(u)(4) of the Internal Revenue Code.

ARTICLE XIII

RETIREMENT, TERMINATION AND DEATH BENEFITS

13.01 Retirement or Termination from Service. The Accrued Benefit of each Employee who was hired prior to December 2, 1986 and who became a Participant in the Plan on or prior to January 1, 1989, shall be 100% vested and nonforfeitable at all times. The Regular Account of Employees who are hired on or after December 2, 1986 and who become Participants after December 31, 1988 shall vest according to the following schedule:

Completed Years of Service	Vested Percentage
Less than 2	0
2	25
3	50
4	75
5	100

The Match Contribution and Non-Elective Employer Contribution Accounts of each Employee who was hired after December 1,1986 shall be 50% vested and nonforfeitable after the completion of one Year of Service and 100% vested and nonforfeitable after the completion of two Years of Service. Provided, however, that the Match Contribution and Non-Elective Employer Contribution Accounts of such Employees shall be 100% vested and nonforfeitable at all times for such Employees who completed at least one Hour of Service on or before December 31, 2004.

Any amendment to the above schedule shall comply with the requirements of Section 20.02 of the Plan.

Notwithstanding the foregoing, each actively employed Participant’s Accrued Benefit shall become 100% vested and nonforfeitable when the Participant attains his or her Normal Retirement Age or becomes Totally and Permanently Disabled.

The Salary Reduction Contributions, Employer Match Contributions contributed to the Plan for Plan Years commencing prior to January 1, 2005, 401(k) Employer Contributions, Tax Deductible Contributions and Voluntary After-Tax Contributions

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of all Participants, plus earnings thereon, shall be 100% vested and nonforfeitable at all times.

Upon a Participant’s attainment of his or her Normal Retirement Age or termination of employment, the Participant shall be entitled to a benefit that can be provided by the value of his or her vested Accrued Benefit in accordance with the further provisions of this Article.

The Plan Administrator shall notify the Trustee when the Normal Retirement Age or termination of employment of each Participant shall occur and shall also advise the Trustee as to the manner in which retirement or termination benefits are to be distributed to a Participant, subject to the provisions of this Article. Upon receipt of such notification and subject to the other provisions of this Article, the Trustee shall take such action as may be necessary in order to distribute the Participant’s vested Accrued Benefit.

13.02 Late Retirement Benefits. If a Participant shall continue in active employment following his or her Normal Retirement Age, he or she shall continue to participate under the Plan and Trust. Except as provided in Section 13.05, upon actual retirement such Participant shall be entitled to a benefit that can be provided by the value of his or her Accrued Benefit. Late Retirement benefits shall be distributed in accordance with the further provisions of this Article.

13.03 Death Benefits. If a Participant or Former Participant shall die prior to the commencement of any benefits otherwise provided under this Article XIII, except as provided below his or her Beneficiary shall be entitled to a lump sum death benefit equal to the amount credited to the Participant’s Accounts as of the date the Plan Administrator (or Insurer, in the case of amounts allocated to any Policy) receives due proof of the Participant’s death. A Participant’s death benefit shall also include the death proceeds of any Policy allocated to one of the Participant’s Accounts. In lieu of receiving benefits in a lump sum, a Beneficiary may elect to receive benefits under any option described in Section 13.05.

Notwithstanding anything in the Plan to the contrary, if a Participant or Former Participant is married on the date of his or her death, Plan pre-retirement death benefits will be paid to the Participant’s or Former Participant’s then spouse unless such spouse has consented to payment to another Beneficiary, as provided in Section 13.07.

Notwithstanding the first paragraph, if a Rollover Account is being maintained for a married Participant who dies prior to the commencement of Plan benefits and if any portion of the amount in the Rollover Account is attributable to amounts transferred directly (or indirectly from another transferee Plan) to this Plan from a defined benefit pension plan, from a money purchase pension plan or from a stock bonus or profit sharing plan which would otherwise provide for a life annuity form of payment to the Participant, the amount in the Rollover Account will be used to purchase a life annuity

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for the Participant’s spouse unless the Participant has requested that the Rollover Account be distributed in a different form or be paid to another Beneficiary. Any such request must be made during the election period which shall begin on the first day of the Plan Year in which the Participant attains Age 35 and shall end on the date of the Participant’s death. If a Participant separates from service prior to the first day of the Plan Year in which Age 35 is attained, with respect to the value of the Rollover Account as of the date of separation, the election period shall begin on the date of separation. Any such request must be consented to by the Participant’s spouse. To be effective, the spousal consent must meet the requirements of Section 13.07. Any annuity provided with a portion of Participant’s Rollover Account in accordance with this paragraph shall be payable for the life of the Participant’s spouse and shall commence on the date the Participant would have attained Age 55 or, if the Participant was over Age 55 on the date of his or her death, such life annuity shall commence immediately. For Plan Years beginning January 1, 1998 and thereafter, at the request of the spouse, such Rollover Account may be used to purchase a life annuity or may be taken in another form allowed under the Plan at an earlier or later commencement date.

If a Participant shall die subsequent to the commencement of any benefit otherwise provided under this Article XIII, the death benefit, if any, shall be determined in accordance with the benefit option in effect for the Participant.

The Plan Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the value of the Accounts of a deceased Participant or a deceased Former Participant as the Administrator deems necessary. The Administrator’s determination of death and of the right of any person to receive payment shall be conclusive and binding on all persons.

13.04 Designation of Beneficiary. Each Participant shall designate his or her Beneficiary on a form provided by the Plan Administrator, and such designation may include primary and contingent beneficiaries; provided, however, that if a Participant or Former Participant is married on the date of his or her death, the Participant’s then spouse shall be the Participant’s Beneficiary unless such spouse consented to the designation of another Beneficiary in accordance with Section 13.07. If a Participant does not designate a Beneficiary and is not married at the date of his or her death, the estate of the Participant shall be deemed to be the designated Beneficiary.

Notwithstanding the foregoing, Policy proceeds shall be payable to the Trustee as beneficiary and the Trustee shall pay the Policy proceeds to the appropriate Plan Beneficiary.

13.05 Distribution of Benefits. The Plan Administrator shall direct the Trustee to make, or cause the Insurer to make, payment of any benefits provided under this Article XIII upon the event giving rise to distribution of such benefit, or within 60 days thereafter.

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All distributions required under the Plan shall be determined and made in accordance with Code Section 401(a)(9) and Regulations issued thereunder.

Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the latest of the close of the Plan Year in which:

(i) the Participant attains Age 65 ;

(ii) occurs the 10th anniversary of the year in which the Participant commenced participation in the Plan; or,

(iii) the Participant terminates service with the Employer.

Notwithstanding the foregoing, the failure of a Participant and spouse to consent to a distribution when a benefit is immediately distributable, within the meaning of Section 13.11 of the Plan, shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section. Except as provided in this Article, in no event will benefits begin to be distributed prior to the later of Age 62 or Normal Retirement Age without the consent of the Participant.

Except as provided below and in Sections 13.03, 13.06, 13.10 and 13.11, if benefits become payable to a Participant as a result of termination of employment or retirement, the Participant’s vested Accrued Benefit shall be distributed by the Trustee in such manner as the Participant shall direct, in accordance with one or more of the options listed below. Provided, however, that a married Participant may not choose an option involving a life contingency without the consent of his or her spouse. To be effective, the spousal consent must meet the requirements of Section 13.07.

Notwithstanding the foregoing, if on the date of separation from service of a married Participant prior to the attainment of his or her Qualified Early Retirement Age a Rollover Account as described in Section 13.03 is being maintained for the Participant, such Account will remain in force until the Former Participant attains Age 55 when, if the Former Participant is then married, the value of such Rollover Account will be used to purchase a Qualified Joint and Survivor Annuity for the benefit of the Former Participant and his or her then spouse. At any time prior to the date of purchase, the Former Participant may request that his or her Rollover Account be distributed under one or more of the options listed below; provided, however, that if the Former Participant is married on the date of the request, the Former Participant’s then spouse must consent thereto. To be effective, the spousal consent must meet the requirements of Section 13.07. If a Former Participant who was married on the date of his or her separation from service is not married at Age 55, at Age 55 the Former Participant’s Rollover Account shall be distributed by the Trustee in such manner as the Former Participant shall direct, in accordance with one or more of the options listed below. If a Former Participant entitled to a deferred benefit pursuant to this paragraph dies prior to Age 55 and prior to commencement of Plan benefits, his or her

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Beneficiary shall be entitled to a death benefit pursuant to Section 13.03.

If a Qualified Joint and Survivor Annuity is not required under the above rules or under the requirements of Section 13.06, a Participant’s Accrued Benefit shall be distributed by the Trustee in such manner as the Participant shall direct, in accordance with one or more of the following ways, and which may be paid in cash or in kind, or a combination of them:

(i) One sum.

(ii) An annuity for the life of the Participant.

(iii) An annuity for the joint lives of the Participant and his or her spouse with 50%, 66  ² /3% or 100% (whichever is specified when this option is elected) of such amount payable as an annuity for life to the survivor. No further benefits are payable after the death of both the Participant and his or her spouse.

(iv) An annuity for the life of the Participant with installment payments for a period certain not longer than the life expectancy of the Participant.

(v) Installment payments for a period certain not longer than the life expectancy of the Participant and his or her spouse.

All optional forms of benefits shall be actuarially equivalent.

Notwithstanding anything in the Plan to the contrary, any annuity Policy which is distributed by the Trustee shall provide by its terms that the same shall not be sold, transferred, assigned, discounted, pledged or encumbered in any way except to or through the insurer, and then only in accordance with a right conferred under the terms of the Policy.

Notwithstanding anything in the Plan to the contrary, the entire interest of a Participant must be distributed or begin to be distributed no later than the Participant’s Required Beginning Date.

The Required Beginning Date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70 ¹/2; provided, however, that a Participant, who is not a Five Percent Owner and who does not retire by the end of the calendar year in which such Participant reaches age 70 ¹/2, may elect to defer their Required Beginning Date to the first day of April of the calendar year following the calendar year in which the Participant retires. If, after the date of such election, a Participant becomes a Five Percent Owner, the Required Beginning Date is the first day of April following the later of: (i) the calendar year in which the Participant attains age 70 ¹/2; or (ii) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a Five Percent Owner, or the calendar year in which the Participant retires.

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13.06 Automatic Joint and Survivor Annuity. Notwithstanding anything in Section 13.05 to the contrary, if a Rollover Account as described in Section 13.03 is being maintained for a married Participant and if Plan benefits become payable to such Participant on or after the Participant’s Qualified Early Retirement Age, such Rollover Account will be used to purchase a Qualified Joint and Survivor Annuity unless the Participant has elected otherwise. To be effective, any election out of a Qualified Joint and Survivor Annuity must be consented to by the Participant’s spouse at the time Plan benefits become payable. Any Participant election and spousal consent shall be in accordance with the rules of Section 13.07.

13.07 Participant Elections and Spousal Consents. Married Participants may choose a Beneficiary other than their spouse or, in the case of a Rollover Account described in Section 13.03, may choose a form of retirement benefit other than a Qualified Joint and Survivor Annuity. Any Beneficiary designation shall be in accordance with the requirements of Section 13.04. Any election out of a Qualified Joint and Survivor Annuity must be in writing and may be made during the election period which shall be the 90-day period ending on the annuity starting date. To be effective, any designation of a Beneficiary who is not the spouse of the Participant on the date of the Participant’s death or any election out of the Qualified Joint and Survivor Annuity must be consented to by Participant’s spouse. For purposes of this Section the term “spouse” means the lawful spouse of the Participant on the date of the Participant’s death or on the date Plan benefits commence, whichever is applicable.

To be effective, spousal consent must be in writing on a form furnished by or satisfactory to the Plan Administrator and witnessed by a Plan representative or notary public. Provided, however, spousal consent shall not be required under such circumstances as may be prescribed by the Plan Administrator in accordance with Rules and Regulations promulgated by the Secretary and the Treasury. Any spousal consent will be valid only with respect to the spouse who signs the consent. Additionally, a revocation of an election out of a Qualified Joint and Survivor Annuity may be made by a Participant without the consent of the spouse at any time before the commencement of plan benefits. The number of revocations shall not be limited.

13.08 Distribution to a Minor Participant or Beneficiary. In the event a distribution is to be made to a minor, then the Plan Administrator may, in the Administrator’s sole discretion, direct that such distribution be paid to the legal guardian of the minor, or if none, to a parent of such minor or a responsible adult with whom the minor maintains his or her residence, or to the custodian for such minor under the Uniform Gift to Minors Act, if such is permitted by the laws of the state in which said minor resides. Such a payment to the legal guardian or parent of a minor or to such a custodian shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof.

13.09 Location of Participant or Beneficiary Unknown. In the event that all, or any portion, of the distribution payable to a Participant or his or her Beneficiary hereunder shall, at

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the expiration of five years after it shall become payable, remain unpaid solely by reason of the inability of the Plan Administrator, after sending a registered letter, return receipt requested, to the payee’s last known address, and after reasonable effort, to ascertain the whereabouts of such Participant or his or her Beneficiary, the amount so distributable shall be forfeited and allocated in accordance with the terms of this Plan. In the event a Participant or Beneficiary is located subsequent to his or her benefit being forfeited, such benefit shall be restored.

13.10 Small Balances; Forfeitures; Restoration of Benefits Upon Reemployment. If a Participant terminates from employment and the present value of the Participant’s vested Accrued Benefit does not exceed (or at the time of any prior distribution did not exceed) $3,500 ($5,000 for periods between January 1, 1998 and March 27, 2005), except as provided in Section 13.13, for distributions made prior to March 28, 2005, the Participant will receive a lump sum distribution of the present value of the entire vested portion of such Accrued Benefit and the nonvested portion will be forfeited and applied to reduce Employer Match Contributions. Provided, however, if a Rollover Account described in Section 13.03 is being maintained for a Participant, no such distribution may be made to the Participant after Age 55 unless the Participant (and the spouse of the Participant) consents in writing to such distribution. For purposes of this paragraph, for terminations occurring at any time (including terminations occurring on or after March 28, 2005), if the value of the Participant’s vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested Accrued Benefit.

If a Participant terminates from employment and the present value of the Participant’s vested Accrued Benefit exceeds $3,500 ($5,000 for periods between January 1, 1998 and March 27, 2005), or any dollar amount if the distribution would otherwise be made on or after March 28, 2005, the Participant’s vested Accrued Benefit shall be deferred to the earliest of the Participant’s death, Total and Permanent Disability or attainment of Normal Retirement Age, at which time such vested benefit shall be payable in accordance with Sections 13.05 and 13.12. Notwithstanding the foregoing, such a Participant may elect to have payments commence at any time after termination in accordance with Section 13.05. Partial distributions of vested benefits will not be permitted except in accordance with Section 13.05. The nonvested portion of the Participant’s Accrued Benefit shall be forfeited when the Participant incurs five consecutive One Year Breaks in Service or, if earlier, when the Participant or his or her spouse (or surviving spouse) receives a distribution of his or her vested Accrued Benefit.

Notwithstanding the above, the $5,000 amount shall apply to any Participant with a vested Accrued Benefit on or after January 1, 1998, including those Participants whose vested Accrued Benefit exceeded the prior cash-out amount under the Plan. Further, in determining whether the vested Accrued Benefit exceeds $5,000 for

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distributions made in accordance with this Section on or after October 17, 2000, the look-back rule shall not apply, except in the case of periodic distributions already in effect.

Except as provided below, the nonvested portion of the Accrued Benefit of any terminated Participant will be used to reduce Employer Match Contributions for the Plan Year in which the forfeiture occurs and for subsequent Plan Years, if necessary. A Participant who separates from service and who subsequently resumes employment with the Employer will again become a Participant on the entry date determined in accordance with Plan Section 3.01.

If a Former Participant is subsequently reemployed, the following rules shall also be applicable:

(i) If any Former Participant shall be reemployed by the Employer before incurring five consecutive One Year Breaks in Service, and such Former Participant had received a distribution of his or her vested Accrued Benefit prior to his or her reemployment, his or her forfeited Account balance shall be reinstated if he or she repays the full amount attributable to Employer Contributions which was distributed to him or her, not including, at the Participant’s option, amounts attributable to any Salary Reduction Contributions. Such repayment must be made by the Former Participant before the date on which the individual incurs five consecutive One Year Breaks in Service following the date of distribution. A Participant who was deemed to have received a distribution of his or her vested amount shall be deemed to have repaid such amount as of the first date on which he or she again becomes a Participant. In the event the Former Participant does repay the full amount distributed to him or her, the forfeited portion of the Participant’s Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the date of distribution.

(ii) Restorations of forfeitures will be made as of the date that the Plan Administrator is notified that the required repayment has been received by the Trustee. Any forfeiture amount that must be restored to a Participant’s Account will be taken from any forfeitures that have not yet been applied and, if the amount of forfeitures available for this purpose is insufficient, the Employer will make a timely supplemental contribution of an amount sufficient to enable the Trustee to restore the forfeiture amount to the Participant’s Account.

(iii) If a Former Participant resumes service after incurring five consecutive One Year Breaks in Service, forfeited amounts will not be restored under any circumstances.

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If a Former Participant resumes service before incurring five consecutive One Year Breaks in Service, both the pre-break and post-break service will count in vesting both any restored pre-break and post-break employer-derived Account balance.

13.11 Restrictions on Immediate Distributions

(a) If the value of a Participant’s vested Accrued Benefit derived from Employer and Employee Contributions exceeds (or at the time of any prior distribution exceeded) $3,500 ($5,000 for Plan Years beginning January 1, 1998 and thereafter) and the Accrued Benefit is immediately distributable, the Participant and the Participant’s spouse (or where either the Participant or the spouse has died, the survivor must consent to any distribution of such Accrued Benefit. Notwithstanding the above, in determining whether such consent is necessary, the $5,000 amount shall apply to any Participant with an Accrued Benefit on or after January 1, 1998, including those Participants whose Accrued Benefit exceeded the prior cash-out amount under the Plan. Further, in determining whether such consent is necessary for distributions on or after October 17, 2000, the look-back rule shall not apply, except in the case of periodic distributions already in effect.

Except as provided below, the consent of the Participant and the Participant’s spouse shall be obtained in writing within the 90-day period ending on the annuity starting date. The annuity starting date is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant and the Participant’s spouse of the right to defer any distribution until the Participant’s Accrued Benefit is no longer immediately distributable. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Section 417(a)(3) of the Code, if applicable, and shall be provided no less than 30 days and no more than 90 days prior to the annuity starting date. However, distribution may commence less than 30 days after the notice described in the preceding sentence is given, provided the distribution is one to which sections 401(a)(11) and 417 of the Internal Revenue Code do not apply, the Plan Administrator clearly informs the participant that the participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and the participant, after receiving the notice, affirmatively elects a distribution.

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For Plan Years beginning January 1, 1998, and thereafter, the annuity starting date for a distribution to which 401(a)(11) and 417 apply, in a form other than a qualified joint and survivor annuity, may be less than 30 days after receipt of the written explanation required in accordance with 417 (or the annuity date may precede receipt of such notice) provided: (a) the participant has been provided with information that clearly indicates that the participant has at least 30 days to consider whether to waive the qualified joint and survivor annuity; and (b) the Participant receives the notice at least 7 days prior to the later of the Participant’s annuity starting date or the date he receives a distribution from the Plan, and the Participant may revoke his or her election until the later of these two dates.

Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the Accrued Benefit is immediately distributable. Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant, only the Participant need consent to the distribution of an Accrued Benefit that is immediately distributable. The consent of the Participant or the Participant’s spouse shall not be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition, upon termination of this Plan if the Plan does not offer an annuity option (purchased from a commercial provider) and if the Employer or any entity within the same controlled group as the Employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), the Participant’s Accrued Benefit may, without the Participant’s consent, be distributed to the Participant. However, if any entity within the same controlled group as the Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code) then the Participant’s Accrued Benefit will be transferred, without the Participant’s consent, to the other plan if the Participant does not consent to an immediate distribution.

An Accrued Benefit is immediately distributable if any part of the Accrued Benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or age 62.

13.12 Rollovers to Other Qualified Plans.

(a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election under this Article, a distributee

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may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.

(b) Definitions.

(i) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; any hardship distribution described in section 401(k)(2)(B)(i)(iv) received after December 31, 1998; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and any other distribution(s) that is reasonably expected to total less than $200 during a year.

(ii) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified Plan described in section 401(a) of the Code, that accepts the distributee’s eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity.

(iii) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse.

(iv) Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee.

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13.13 Payment under Qualified Domestic Relations Orders. Notwithstanding any provisions of the Plan to the contrary, if there is entered any Qualified Domestic Relations Order that affects the payment of benefits hereunder, such benefits shall be paid in accordance with the applicable requirements of such Order, provided that such Order (i) does not require the Plan to provide any type or form of benefits, or any option, that is not otherwise provided hereunder, (ii) does not require the Plan to provide increased benefits, and (iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a Qualified Domestic Relations Order.

To the extent required or permitted by any such Order, at any time on or after the date the Plan Administrator has determined that the Order is a Qualified Domestic Relations Order, the alternate payee shall have the right to request the Plan Administrator to commence distribution of benefits under the Plan regardless of whether the Participant is otherwise entitled to a distribution at such time under the Plan.

13.14 Notwithstanding anything in the Plan to the contrary, effective January 1, 2002, for purposes of computing the value of involuntary distributions of vested Accrued Benefits of $5,000 or less, the value of a Participant’s nonforfeitable Account balances shall be determined without regard to that portion of the Account balances that are attributable to Rollover Contributions (and earnings allocable thereto) within the meaning of Code Sections 402(c)(4), 403(a)(4), 403(b)(8), 408(d)(3) and 457(e)(16). If the value of the Participant’s nonforfeitable Account balances as so determined is $5,000 or less, for periods prior to March 28, 2005, the Plan shall distribute the Participant’s entire vested Account balances as soon as administratively feasible.

ARTICLE XIV

PLAN FIDUCIARY RESPONSIBILITIES

14.01 Plan Fiduciaries. The Plan Fiduciaries shall be:

(i) the Board of Directors of First Allmerica;

(ii) the Trustee(s) of the Plan;

(iii) the Plan Administrator;

(iv) the Retirement Plan Committee; and

such other person or persons as may be designated as a Fiduciary by First Allmerica or by its Chief Executive Officer in accordance with the further provisions of this Article XIV.

14.02 General Fiduciary Duties. Each Plan Fiduciary shall discharge his or her duties solely

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in the interest of the Participants and their Beneficiaries and act:

(i) for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan;

(ii) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(iii) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so, if the Fiduciary has the responsibility to invest plan assets; and

(iv) in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with the provisions of current laws and regulations.

Each Plan Fiduciary shall perform the duties specifically assigned to him or her. No Plan Fiduciary shall have any responsibility for the performance or non-performance of any duties not specifically allocated to him or her.

14.03 Duties of the Board of Directors. The Board of Directors shall:

(i) establish an investment policy and funding method consistent with objectives of the Plan and with the requirements of applicable laws and regulations;

(ii) invest Plan assets except to the extent that they have delegated investment duties to an Investment Manager; and

(iii) evaluate from time to time investment policy and the performance of any Investment Manager or Investment Advisor appointed by it.

14.04 Duties of the Trustee(s). The specific responsibilities and duties of the Trustee(s) are set forth in the Trust Indenture between First Allmerica and the Trustee(s). In general the Trustee(s) shall:

(i) invest Plan assets, subject to directions from the Board of Directors or from any duly appointed Investment Manager;

(ii) maintain adequate records of receipts, disbursements, and other transactions involving the Plan; and

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(iii) prepare such reports, statements, tax returns and other forms as may be required under the Trust Indenture or applicable laws and regulations.

14.05 Duties of the Plan Administrator. The Plan Administrator is First Allmerica. The Plan Administrator shall:

(i) administer the Plan on a day-to-day basis in accordance with the provisions of this Plan and all other pertinent documents;

(ii) retain and maintain Plan records, including Participant census data, participation dates, compensation records, and such other records necessary or desirable for proper Plan administration;

(iii) prepare and arrange for delivery to Participants of such summaries, descriptions, announcements and reports as are required to be given to participants under applicable laws and regulations;

(iv) file with the U.S. Department of Labor, the Internal Revenue Service and other regulatory agencies on a timely basis all required reports, forms and other documents; and

(v) prepare and furnish to the Trustee(s) sufficient records and data to enable the Trustee(s) to properly perform its obligations under the Trust Indenture.

Notwithstanding any provision elsewhere to the contrary, the Plan Administrator shall have total discretion to fulfill the above responsibilities as it sees fit on a uniform and consistent basis and as it believes a prudent person acting in a like capacity and familiar with such matters would do.

14.06 Duties of the Retirement Plan Committee. The Retirement Plan Committee shall:

(i) interpret and construe the Plan;

(ii) determine questions of eligibility and of rights of Participants and their Beneficiaries;

(iii) provide guidelines for the Plan Administrator, as required for the orderly and uniform administration of the Plan; and

(iv) exercise overall control of the operation and administration of the Plan in matters not allocated to some other Fiduciary either by the terms of this Plan or by delegation from the Chief Executive Officer of First Allmerica.

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Notwithstanding any provisions elsewhere to the contrary, the Retirement Plan Committee shall have total discretion to fulfill the above responsibilities as they see fit on a uniform and consistent basis and as they believe a prudent person acting in a like capacity and familiar with such matters would do.

14.07 Designation of Fiduciaries. The Board of Directors of First Allmerica shall have the authority to appoint and remove Trustee(s) in accordance with the Trust Indenture. The Board of Directors may appoint and remove an Investment Manager and delegate to said Investment Manager power to manage, acquire or dispose of any assets of the Plan.

While there is an Investment Manager, the Board of Directors shall have no obligation under this Plan with regard to the performance or non-performance of the duties delegated to the Investment Manager.

All other Fiduciaries shall be appointed by the Chief Executive Officer of First Allmerica. In making his or her delegation, he or she may designate all of the responsibilities to one person or he or she may allocate the responsibilities, on a continuing basis or on an ad hoc basis, to one or more individuals either jointly or severally. No individual named a Fiduciary shall have any responsibility for the performance or non-performance of any responsibilities or duties not allocated to him or her.

The appointing authority of a Fiduciary shall periodically, but not less frequently than annually, review the performance of each fiduciary appointed in order to carry out the general fiduciary duties specified in Section 14.02 and, where appropriate, take or recommend remedial action.

14.08 Delegation of Duties by a Fiduciary. Except as provided in this Plan or in the appointment as a Fiduciary, no Plan Fiduciary may delegate his or her fiduciary responsibilities. If authorized by the appointing authority, a Fiduciary may appoint such agents as may be deemed necessary and delegate to such agents any non-fiduciary powers or duties, whether ministerial or discretionary. No Fiduciary or agent of a Fiduciary who is a full-time employee of the Employer will receive any compensation from the Plan for his or her services.

ARTICLE XV

RETIREMENT PLAN COMMITTEE

15.01 Appointment of Retirement Plan Committee. The Committee shall consist of three or more members appointed by the Chief Executive Officer of the Employer, who shall also designate one of the members as chairman. Each member of the Committee and its chairman shall serve at the pleasure of the Chief Executive Officer of the Employer.

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15.02 Retirement Plan Committee to Act by Majority Vote, etc. The Committee shall act by majority vote of all members. All actions, determinations, interpretations and decisions of the Committee with respect to any matter within their jurisdiction will be conclusive and binding on all persons. Any person may rely conclusively upon any action if certified by the Committee.

15.03 Records and Reports of the Retirement Plan Committee. The Committee shall keep a record of all of its proceedings and acts, and shall keep such books of account, records and other data as may be necessary for the proper administration of the Plan and file or deliver to Participants and their Beneficiaries whatever reports are required by any regulatory authority.

15.04 Costs and Expenses of Administration. All expenses and costs of administering the Plan, including Trustee’s fees, shall be paid by the Employer. Effective September 22, 1998, notwithstanding any provisions of the Plan to the contrary (but subject to the provisions of Section 12.01), all clerical, legal and other expenses of the Plan and the Trust, including Trustee’s fees, shall be paid by the Plan, except to the extent the Employer elects to pay such amounts; provided, however, that if the Employer pays such amounts it shall be reimbursed by the Trust for such amounts unless the Employers elects not to be so reimbursed.

ARTICLE XVI

INVESTMENT OF THE TRUST FUND

16.01 In General. Subject to the direction of the Board of Directors or any duly appointed Investment Manager in accordance with Section 14.07 (or subject to the direction of the Plan Administrator if a Participant has requested that an individual life insurance or annuity Policy be issued on his or her life in accordance with Article XVII), the Trustee shall receive all contributions to the Trust and shall hold, invest and control the whole or any part of the assets in accordance with the provisions of the annexed Trust Indenture.

16.02 Investment of the Trust Fund. In order to provide retirement and other benefits for Plan Participants and their Beneficiaries, the Trustee shall invest Plan assets in one or more permissible investments specified in the Trust Indenture and in such collective investment trusts or group trusts that may be established for the primary objective of investing in securities issued by Allmerica Financial Corporation, which investments shall be considered as investments in qualifying employer securities as defined in Section 407(d) of the Employee Retirement Income Security Act of 1974, as amended, as directed by the Board of Directors of the Employer. Such permissible investments shall include the Allmerica Financial Corporation Stock Fund, a group trust established by the Allmerica Trust Company, N.A. for the purposes of investing in the common stock of Allmerica Financial Corporation (“The AFC Stock Fund”). In addition, when directed by the Plan Administrator per the request of a Participant,

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Plan assets shall be invested in individual life insurance and annuity Policies in accordance with Article XVII. The Insurer shall only issue life insurance and annuity policies which conform to the terms of the Plan. All collective investment trusts and group trusts shall also confirm to the terms of the Plan. Notwithstanding the foregoing, in no event may amounts allocated to Participant’s Tax Deductible Contribution Account be invested in Policies of life insurance.

Each Participant is responsible and has sole discretion to give directions to the Trustee in such form as the Trustee may require concerning the investment of his or her Accrued Benefit in one or more of the investments made available in accordance with the preceding paragraph, which directions must be followed by the Trustee, subject to the restrictions on life insurance premiums described in Article XVII. All voting rights with respect to a Participant’s investment in the AFC Stock Fund shall be the responsibility of that Participant, and the Trustee shall receive direction from the Participant for such voting rights. Neither the Plan Administrator, the Trustee, the Employer nor any other person shall be under any duty to question any investment, voting or other direction of the Participant or make any suggestions to the Participant in connection therewith, and the Trustee shall comply as promptly as practicable with directions given by the Participant hereunder. All such directions may be of continuing nature or otherwise and may be revoked by the Participant at any time in such form as the Trustee may require. Neither the Plan Administrator, the Trustee, the Employer nor any other person shall be responsible or liable for any costs, losses or expenses which may arise or result from or be related to the compliance or refusal or failure to comply with any directions from the Participant. The Trustee may refuse to comply with any direction from the Participant in the event the Trustee, in its sole or absolute discretion, deems such directions improper by virtue of applicable law or regulations. For purposes of this section, all references to “Participant” shall include all Beneficiaries of Participants who are deceased and any Alternate Payees under a Qualified Domestic Relations Order, as provided for in Section 20.01.

ARTICLE XVII

INDIVIDUAL LIFE INSURANCE AND ANNUITY POLICIES

17.01 General Rules. For Plan Years beginning prior to January 1, 1999, once a Participant becomes 100% vested, upon the written request of the Participant made to the Plan Administrator, the Administrator in its sole discretion shall direct the Trustee to purchase an individual life insurance or annuity Policy from the Insurer to be issued upon the life of the Participant. Any such Policy shall be of the type requested by the Participant, subject to the following:

(a) each Policy shall be issued by the Insurer to the Trustee only and shall provide for premiums to be payable in accordance with the terms of the Policy. Purchase of Policies in accordance with this Section 17.01 shall constitute an investment of amounts allocated to the appropriate Account

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of the Participant, and each such Account shall be reduced by the amount paid for such Policies;

(b) any purchase of life insurance Policies shall be subject to the incidental death benefit restrictions specified in Section 2.33;

(c) as provided in Section 13.04, the Trustee shall be designated as beneficiary of any individual life insurance or annuity Policy issued hereunder, and upon the death of the Participant the Trustee shall pay the Policy proceeds to the appropriate Plan Beneficiary;

(d) each Policy shall be a Policy between the Insurer and Trustee and shall reserve to the Trustee all rights, options and benefits;

(e) each life insurance Policy shall provide a full or increasing death benefit, or if an annuity Policy is issued, contain a provision for refund in the event of the death of the annuitant;

(f) each Policy shall provide settlement options (including lump sum cash payment in the event of the surrender or maturity of such Policy) subject, however, to Section 13.05;

(g) any dividend payable while a Policy is on a premium paying basis shall be applied or accumulated as indicated on the Policy application for the benefit of the Participant on whose life the Policy was issued;

(h) all classes of life insurance Policies purchased hereunder shall be alike or substantially alike as to settlement option provisions, cash values, and as to other Policy provisions, subject, however, to the provisions of Section 17.01(i), 17.01(j) and 17.01(k);

(i) if an eligible Employee is determined to be insurable by the Insurer at its standard rates, a Policy shall be obtained upon his or her life, if available from the Insurer, which provides a life insurance death benefit prior to retirement to which the eligible Employee is entitled;

(j) if an eligible Employee is not insurable at the standard rates of such Insurer, if such coverage is available from the Insurer, the Policy shall provide for a reduced but increasing death benefit as determined by the Insurer (usually called increasing or graded death benefit);

(k) if an eligible Employee is not insurable at the standard rates of the Insurer, each Employer may elect to pay any excess premium that may be required in order to obtain a Policy providing for full death benefits described in Section 17.01(i), if the Insurer shall agree to issue such a Policy;

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(l) the Trustee shall have the right at any time, or from time to time, to increase or decrease the amount of any life insurance and annuity policy coverages under the Plan and within the limits prescribed in Section 2.33;

(m) in no event may amounts allocated to a Participant’s Tax Deductible Contribution Account be invested in Policies of life insurance; and

(n) the Insurer shall only issue Policies which conform to the terms of the Plan.

17.02 Procedure Followed to Obtain Policies. When requested by the Plan Administrator, the Trustee shall apply to the Insurer for Policies on the lives of Participants with completed applications as may be required by the Insurer, such Policies to have benefits which are purchasable by a premium or stipulated payment equal to the portion of the contribution allocated for that purpose.

ARTICLE XVIII

CLAIMS PROCEDURE

18.01 Claims Fiduciary. The Plan Administrator and Retirement Plan Committee will act as Claims Fiduciaries except to the extent that the Chief Executive Officer of the Employer has allocated the function to someone else.

Notwithstanding any provision elsewhere to be contrary, the Claims Fiduciaries shall have total discretion to fulfill their fiduciary duties as they see fit on a uniform and consistent basis as they believe a prudent person acting in a like capacity and familiar with such matters would do.

18.02 Claims for Benefits. Claims for benefits under the Plan may be filed with the Plan Administrator on forms supplied by the Employer. For the purpose of this procedure, “claim” means a request for a Plan benefit by a Participant or a Beneficiary of a Participant. If the basis of the claim includes documentation not a part of the records of the Plan or of the Employer, all such documentation must be included with the claim.

18.03 Notice of Denial of Claim. If a claim is wholly or partially denied, the Plan Administrator shall notify the claimant of the denial of the claim within a reasonable period of time. Such notice of denial (i) shall be in writing, (ii) shall be written in a manner calculated to be understood by the claimant, and (iii) shall contain (A) the specific reason or reasons for denial of the claim, (B) a specific reference to the pertinent Plan provisions upon which the denial is based, (C) a description of any

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additional material or information necessary for the claimant to perfect the claim, along with an explanation why such material or information is necessary, and (D) an explanation of the Plan’s claim review procedure. Unless special circumstances require an extension of time for processing the claim, the Plan Administrator shall notify the claimant of the claim denial no later than 90 days after receipt of the claim. If such an extension is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. The extension notice shall indicate the special circumstances requiring the extension of time and the date by which the Plan Administrator expects to render the final decision.

18.04 Request for Review of Denial of Claim. Within 120 days of the receipt of the claimant of the written notice of the denial of the claim, or such later time as shall be deemed reasonable taking into account the nature of the benefit subject to the claim and any other attendant circumstances or if the claim has not been granted within a reasonable period of time, the claimant may file a written request with the Retirement Plan Committee to conduct a full and fair review of the denial of the claimant’s claim for benefits. In connection with the claimant’s appeal of the denial of his or her benefit, the claimant may review pertinent documents and may submit issues and comments in writing.

18.05 Decision on Review of Denial of Claim. The Retirement Plan Committee shall deliver to the claimant a written decision on the claim promptly, but not later than 60 days, after the receipt of the claimant’s request for review, except that if there are special circumstances which require an extension of time for processing, the aforesaid 60-day period may be extended to 120 days. Such decision shall (i) be written in a manner calculated to be understood by the claimant, (ii) include specific reasons for the decision, and (iii) contain specific references to the pertinent Plan provisions upon which the decision is based.

ARTICLE XIX

AMENDMENT AND TERMINATION

19.01 Employer May Amend Plan. The Plan may be modified or amended in whole or in part by the action of the Board of Directors of the Employer at any time or times, and retroactively if it is deemed advisable by the Directors to conform the Plan to conditions which must be met to qualify the Plan or the Trust Indenture for tax benefits available under the applicable provisions of the Internal Revenue Code as it exists at any such time or times; provided, however, that no such modifications or amendment shall make it possible for any part of the Trust Fund to be used for purposes other than the exclusive benefit of the Participants or their Beneficiaries.

Notwithstanding the foregoing, no amendment to the Plan shall decrease a Participant’s Accrued Benefit or eliminate an optional form of distribution. Furthermore, no amendment to the Plan shall have the effect of decreasing a

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Participant’s vested Accrued Benefit determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective.

19.02 Employer May Discontinue Plan. The Employer reserves the right at any time to partially terminate the Plan or to terminate the Plan in its entirety. Any such termination or partial termination of such Plan shall become effective immediately upon receipt by the Trustee of a copy of the vote or resolutions of the Directors of the Employer terminating its Plan, certified as true and correct by the clerk or secretary of the Employer.

In the event of termination of the Plan there shall be a 100% vesting and nonforfeitability of all rights and benefits under this Trust and Plan irrespective of the length of participation under the Plan. However, the Trust shall remain in existence, and all of the provisions of the Trust shall remain in force which are necessary in the sole opinion of the Trustees other than the provisions relating to Employer and Employee contributions. All of the assets on hand on the date specified in such resolution shall be held, administered and distributed by the Trustees in the manner provided in the Plan, except that a Participant shall have a 100% vested and nonforfeitable interest in his or her Accounts, subject to Section 19.05.

Subject to Section 19.05, any other remaining assets of the Trust Fund shall also be vested in Participants on a pro rata basis based on their respective Accrued Benefit in relation to the aggregate of the Accrued Benefits of all Participants.

In the event of a partial termination of Plan, this section will only apply to those Participants who are affected by such partial termination of Plan.

In the event that the Board of Directors of the Employer shall decide to terminate completely the Plan and Trust, they shall be terminated as of a date to be specified in certified copies of its resolution to be delivered to the Trustees. Upon termination of the Plan and Trust, after payment of all expenses and proportional adjustment of Participants’ Accounts to reflect such expenses, fund profits or losses and reallocations to the date of termination, each Participant shall be entitled to receive in cash any amounts then credited to his or her Participants’ Accounts.

19.03 Discontinuance of Contributions. In the event that the Employer shall completely discontinue its contributions, each Participant or Beneficiary of a Participant affected shall be fully vested in any values credited to his or her Participant’s accounts.

All of the assets on hand on the date contributions are discontinued shall be held, administered and distributed by the Trustees in the manner provided in the Plan.

19.04 Merger and Consolidation of Plan, Transfer of Plan Assets or Liabilities. In the case of any merger, consolidation with or transfer of assets or liabilities by the Employer to another plan, each Participant in the Plan on the date of the transaction shall have a

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benefit in the surviving plan (determined as if such plan were terminated immediately after the transaction) at least equal to the benefit to which he or she would have been entitled to receive immediately prior to the transaction if the plan had then terminated.

19.05 Return of Employer Contributions Under Special Circumstances. Notwithstanding any provisions of this Plan to the contrary:

(a) Any monies or other Plan assets held in Trust by the Trustee attributable to any contributions made to this Plan by the Employer because of a mistake of fact may be returned to the Employer within one year after the date of contribution.

(b) Any monies or other Plan assets held in Trust by the Trustee attributable to any contribution made by the Employer which is conditional on the initial qualification of the Plan, as amended, under the Internal Revenue Code may be refunded to the Employer; provided that:

(i) the Plan amendment is submitted to the Internal Revenue Service for qualification within one year from the date the amendment is adopted, and

(ii) Such contribution that was made conditioned upon Plan requalification is returned to the Employer within one year after the date the Plan’s requalification is denied.

(c) Any monies or other Plan assets held in Trust by the Trustee attributable to any contribution made by the Employer which is conditional on the deductibility of such contribution may be refunded to the Employer, to the extent the deduction is disallowed under Section 404 of the Code, within one year after the date of such disallowance.

ARTICLE XX

MISCELLANEOUS

20.01 Protection of Employee Interest. No Participant, Beneficiary or other person, including alternate payees entitled to benefits pursuant to a Qualified Domestic Relations Order, shall have the right to assign, pledge, alienate or convey any right, benefit or payment to which he or she shall be entitled in accordance with the provisions of the Plan, and any such attempted assignment, pledge, alienation or conveyance shall be null and void and of no effect. To the extent permitted by law, none of the benefits, payments, proceeds or rights herein created and provided for shall in any way be subject to any debts, contracts or engagements of any Participant, Beneficiary, alternate payee or other person entitled to benefits hereunder, nor to any suits, actions or other judicial process to levy upon or attach the same for the payment

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thereof. Provided, however, that this provision does not preclude the Plan Administrator from complying with the terms of a Qualified Domestic Relations Order.

If any Participant shall attempt to alienate or assign his or her interest provided by the Plan, the Plan Administrator shall take such steps as it deems necessary to preserve such interest for the benefit of the Participant or his or her Beneficiary.

Notwithstanding anything in this Section or Plan to the contrary, the Plan Administrator (i) shall comply with the terms of any Qualified Domestic Relations Order, as described in Section 414(p) of the Internal Revenue Code entered on or after January 1, 1985, and (ii) shall comply with the terms of any domestic relations order entered before January 1, 1985 if the Administrator is paying benefits pursuant to such order on such date.

20.02 USERRA Compliance. Notwithstanding any provisions of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with the rules and requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994 (“ERISA”) and Section 414(u) of the Code.

20.03 Amendment to Vesting Schedule. No amendment to the Plan vesting schedule shall deprive a Participant of his or her nonforfeitable rights to benefits accrued to the date of the amendment. Further, if the vesting schedule of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of a Participant’s nonforfeitable percentage, each Participant with at least 3 Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment, to have his or her nonforfeitable percentage computed under the Plan without regard to such amendment. The period during which the election may be made shall commence with the date the amendment is adopted and shall end on the latest of:

(i) 60 days after the amendment is adopted;

(ii) 60 days after the amendment becomes effective; or

(iii) 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator.

20.04 Meaning of Words Used in Plan. Wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine or neuter gender in all cases where they would so apply. Wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply.

Titles used herein are for general information only and this Plan is not to be construed

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by reference thereto.

20.05 Plan Does Not Create Nor Modify Employment Rights. The Plan and Trust shall not be construed as creating or modifying any contracts of employment between the Employer and any Participant. All Employees of the Employer shall be subject to discharge to the same extent that they would have been if the Plan and Trust had never been adopted.

20.06 Massachusetts Law Controls. This Plan shall be governed by the laws of the Commonwealth of Massachusetts to the extent that they are not pre-empted by the laws of the United States of America.

20.07 Payments to Come from Trust Fund. All benefits and amounts payable under the Plan or Trust Indenture shall be paid or provided for solely from the Trust Fund, and neither the Employer nor the Retirement Plan Committee assumes any liability or responsibility therefor.

20.08 Receipt and Release for Payments. Any payment to any Participant, his or her legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of this Plan and Trust, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee, the Employer and the Insurer, any of whom may require such Participant, legal representative, Beneficiary, guardian, custodian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee, Employer or Insurer.

EXECUTED, this 29^th day of December, 2005

First Allmerica Financial Life Insurance Company
By:	/s/ Susan Korthase
Name:	Susan Korthase
Title:	Vice President, Chief HR Officer

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FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY

ACTION BY UNANIMOUS CONSENT OF DIRECTORS

March 5, 2007

In accordance with Section 3.8 of the Bylaws of First Allmerica Financial Life Insurance Company (the “Company”), a Massachusetts insurance company, we the undersigned, being all of the members of the Board of Directors of the aforesaid Company, hereby unanimously adopt the following resolution:

VOTE: That for the 2006 Plan Year only, Section 4.03 of The Hanover Insurance Group Retirement Savings Plan (the “Plan”) is hereby amended to read as follows:

4.03 Non-Elective Employer Contributions. Notwithstanding anything in the Plan to the contrary, for the 2006 Plan Year only, and subject to compliance with applicable Code discrimination laws, rules and regulations, all Employees, other than First Allmerica Operating Committee Members, employed by the Employer on December 31, 2006, shall receive an extra Employer paid contribution of $500, whether or not the Employee has elected to participate in the Plan. Such extra contribution shall be in addition to 3% of eligible Compensation, which shall be paid as an Employer contribution to all eligible Employees employed by the Employer on December 31, 2006.

Provided, however that employees who voluntarily terminated between January 1, 2007 and March 5, 2007, or employees who were terminated between such dates for cause, are not eligible for the extra company paid $500 award.

The contribution and extra contribution shall be made in cash. Such contribution and extra contribution shall be made to the Non-Elective Employer Contribution Account established for each eligible Employee and shall be invested per the direction of the Participant in accordance with Section 16.02 of the Plan.

/s/ Bryan D. Allen	/s/ Edward J. Parry III
Bryan D. Allen	Edward J. Parry III
/s/ Frederick H. Eppinger	/s/ Marilyn T. Smith
Frederick H. Eppinger	Marilyn T. Smith
/s/ J. Kendall Huber	/s/ Gregory D. Tranter
J. Kendall Huber	Gregory D. Tranter
/s/ Mark C. McGivney	/s/ Ann K. Tripp
Mark C. McGivney	Ann K. Tripp

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THE HANOVER INSURANCE GROUP

RETIREMENT SAVINGS PLAN

SECOND AMENDMENT

to the Restatement Generally Effective January 1, 2005

This Second Amendment is executed by First Allmerica Financial Life Insurance Company, a Massachusetts life insurance company (the “Company”).

WHEREAS, the Company established The Hanover Insurance Group Retirement Savings Plan, formerly known as the “The Allmerica Financial Retirement Savings Plan” and before that “The Allmerica Financial Employees’ 401(k) Matched Savings Plan”, (the “Plan”) effective November 22, 1961 and has amended and restated the Plan in certain respects subsequent to its effective date, including the most recent restatement of the Plan generally effective January 1, 2005 and the first amendment thereto adopted on March 5, 2007; and

WHEREAS, the Company has reserved the right to amend the Plan any time under Section 19.01 of the Plan; and

WHEREAS, the Company now desires to further amend the Plan;

NOW, THEREFORE, the Plan is amended effective as of the date hereof unless otherwise specified, as follows:

1. For Plan Years beginning on or after January 1, 2006, the words “separation from service” in Section 1.03 and in the sixth paragraph of Section 13.05 are deleted and the words “severance from employment” are inserted in lieu thereof and the words “separates from service” in the third paragraph of Section 13.03 and the fourth paragraph of Section 13.11 are deleted and the words “severs employment” are inserted in lieu thereof.

2. The following new definition is added to Article II:

“Plan Administrator” shall mean the Benefits Committee, which shall have fiduciary responsibility for the interpretation and administration of the Plan, as provided for in Article XIV. Members of the Benefits Committee shall be appointed as provided for in Section 15.01 hereof.

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3. Section 2.39 is deleted in its entirety.

4. Each of the references to “Retirement Plan Committee” throughout the Plan, including those contained in Sections 2.06(a), 12.01, 14.01, 14.06, 15.01, 15.02, 15.03, 18.01, 18.04, 18.05, and 20.07 is changed to “Plan Administrator”, except as otherwise provided for in this Amendment.

5. For Plan Years beginning on or after January 1, 2006, the following new sentence is added to first paragraph of Section 3.01(b):

Except for occasional, bona fide administrative considerations, Salary Reduction Contributions made pursuant to a salary reduction agreement cannot precede the earlier of (1) the performance of services relating to the contribution and (2) when the compensation that is subject to the election would be currently available to the Participant in the absence of an election to defer.

6. The second sentence of the third paragraph of Section 4.02 is deleted in its entirety and the following new sentence is inserted in lieu thereof:

Such contributions shall be made in cash and shall be allocated in accordance with the Plan current match formula to the Match Contribution Account of each eligible Participant.

7. The second sentence of Section 4.03 is deleted in its entirety and the following new sentence is inserted in lieu thereof:

The contribution shall be made in cash.

8. For Plan Years beginning on or after January 1, 2006, the second paragraph of Section 9.01(a) is deleted in its entirety and the following new paragraphs are inserted in lieu thereof:

Additionally, if one or more other plans allowing contributions under Code Section 401(k) are considered with this Plan as one for purposes of Code Section 401(a)(4) or 410(b), the Actual Deferral Percentages for all Eligible Participants under all such plans shall be determined as if this Plan and all such other plans were one; provided that for Plan Years beginning on and after January 1, 2006 the requirements of Treasury Regulation section 1.401(k)-1(b)(4)(iii)(B) are met.

If any Highly Compensated Employee is an Eligible Participant in one or more other plans maintained by the same employer, which allow contributions under Code Section 401(k), the Actual Deferral Percentage for that Employee shall be determined as if this Plan and all such other plans were one; if such plans have different plan years, all contributions that are made under all such plans during the plan year being tested shall be aggregated, without regard to the plan years of the other plans. However, for Plan Years beginning before January 1, 2006, if the plans have different Plan Years, then all such cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be separate if mandatorily disaggregated under the regulations of Code Section 401(k).

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9. For Plan Years beginning on or after January 1, 2006, Section 9.03 is deleted in its entirety and the following new Section 9.03 is inserted in lieu thereof:

9.03 Refund of Excess 401(k) Contributions. Notwithstanding any other provision of this Plan except Section 9.05, Excess 401(k) Contributions, adjusted for allocable income (gain or loss), including an adjustment for income for the period between the end of the Plan Year and the date of the distribution (the “gap period”), shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess 401(k) Contributions were allocated for the preceding Plan Year. The Plan Administrator has the discretion to determine and allocate income using any of the methods set forth below:

(A) Reasonable method of allocating income. The Plan Administrator may use any reasonable method for computing the income allocable to Excess 401(k) Contributions, provided that the method does not violate Code section 401(a)(4), is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and is used by the Plan for allocating income to Participant’s Accounts. A Plan will not fail to use a reasonable method for computing the income allocable to Excess 401(k) Contributions merely because the income allocable to Excess 401(k) Contributions is determined on a date that is no more than seven (7) days before the distribution.

(B) Alternative method of allocating income. The Plan Administrator may allocate income to Excess 401(k) Contributions for the Plan Year by multiplying the income for the Plan Year allocable to the Salary Reduction Contributions and other amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02) including contributions made for the Plan Year, by a fraction, the numerator of which is the Excess 401(k) Contributions for the Participant for the Plan Year, and the denominator of which is the sum of the:

(i) Account balance attributable to Salary Reduction Contributions and other amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02) as of the beginning of the Plan Year, and

(ii) Any additional amount of such contributions made for the Plan Year.

(C) Safe harbor method of allocating gap period income. The Plan Administrator may use the safe harbor method in this paragraph to determine income on excess contributions for the gap period. Under this

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safe harbor method, income on Excess 401(k) Contributions for the gap period is equal to ten percent (10%) of the income allocable to Excess 401(k) Contributions for the Plan Year that would be determined under paragraph (b) above, multiplied by the number of calendar months that have elapsed since the end of the Plan Year. For purposes of calculating the number of calendar months that have elapsed under the safe harbor method, a corrective distribution that is made on or before the fifteenth (15th) day of a month is treated as made on the last day of the preceding month and a distribution made after the fifteenth day of a month is treated as made on the last day of the month.

(D) Alternative method for allocating Plan Year and gap period income. The Plan Administrator may determine the income for the aggregate of the Plan Year and the gap period, by applying the alternative method provided by paragraph (b) above to this aggregate period. This is accomplished by (1) substituting the income for the Plan Year and the gap period, for the income for the Plan Year, and (2) substituting the amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02) for the Plan Year and the gap period, for the amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02) for the Plan Year in determining the fraction that is multiplied by that income.

Excess 401(k) Contributions are allocated to the Highly Compensated Employees with the largest dollar amounts of Employer contributions taken into account in calculating the Actual Deferral Percentage test for the year in which the excess arose, beginning with the Highly Compensated Employee with the largest dollar amount of such Employer contributions and continuing in descending order until all the Excess 401(k) Contributions have been allocated. For purposes of the preceding sentence, the “largest amount” is determined after distribution of any Excess 401(k) Contributions.

The Plan Administrator shall make every effort to make all required distributions and forfeitures within 2 ¹/2 months of the end of the affected Plan Year; however, in no event shall such distributions be made later than the end of the following Plan Year. Distributions and forfeitures made later than 2 ¹/2 months after the end of the affected Plan Year will be subject to tax under Code Section 4979.

All forfeitures arising under this Section shall be applied as specified in Section 4.05 of the Plan and treated as arising in the Plan Year after that in which the Excess 401(k) Contributions were made; however, no forfeitures arising under this Section shall be allocated to the Account of any affected Highly Compensated Employee.

Excess 401(k) Contributions shall be treated as Annual Additions under the Plan.

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For a period of four 12-month periods beginning from the given Plan Year, or such other period as the Secretary of the Treasury may designate, the Employer shall maintain records showing what contributions and Compensation were used to satisfy this Section and Section 9.02.

10. For Plan Years beginning on or after January 1, 2006, Section 9.05 is deleted in its entirety and the following new Section 9.05 is inserted in lieu thereof:

9.05 Special Contributions.

(a) Correction by Employer Contribution. Notwithstanding any other provisions of this Plan except Section 9.09, in lieu of distributing Excess 401(k) Contributions as provided in Section 9.03, the Employer may make 401(k) Employer Contributions on behalf of Non-Highly Compensated Employees that are sufficient to satisfy either of the Average Actual Deferral Percentage Tests. If a failed Average Actual Deferral Percentage Test is to be corrected by making such contributions, then any such corrective contribution made on behalf of any Non-Highly Compensated Employees shall not exceed the targeted contribution limits of set forth below, or in the case of a corrective contribution that is a Qualified Matching Contribution, the targeted contribution limit of Section 10.05.

(b) Targeted Contribution Limit. Qualified Nonelective Contributions (as defined in Treasury Regulation section 1.401(k)-6) cannot be taken into account in determining the “actual deferral ratio” (ADR) for a Plan Year for a Non-Highly Compensated Employee (NHCE) to the extent such contributions exceed the product of that NHCE’s Code section 414(s) compensation and the greater of five percent (5%) or two (2) times the Plan’s “representative contribution rate.” Any Qualified Nonelective Contribution taken into account under an Average Contribution Percentage Test under Treasury Regulation Section 1.40l(m)-2(a)(6) (including the determination of the representative contribution rate for purposes of Treasury Regulation section 1.401(m)-2(a)(6)(v)(B)), is not permitted to be taken into account for purposes of this Section (including the determination of the “representative contribution rate” under this Section). For purposes of this Section:

(i) The Plan’s “representative contribution rate” is the lowest “applicable contribution rate” of any eligible NHCE among a group of eligible NHCEs that consists of half of all eligible NHCEs for the Plan Year (or, if greater, the lowest “applicable contribution rate” of any eligible NHCE who is in the group of all eligible NHCEs for the Plan Year and who is employed by the Employer on the last day of the Plan Year), and

(ii) The “applicable contribution rate” for an eligible NHCE is the sum of the Qualified Matching Contributions (as defined in Treasury Regulation section 1.401(k)-6) taken into account in determining

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the ADR for the eligible NHCE for the Plan Year and the Qualified Nonelective Contributions made for the eligible NHCE for the Plan Year, divided by the eligible NHCE’s Code section 414(s) compensation for the same period.

Qualified Matching Contributions may only be used to calculate an ADR to the extent that such Qualified Matching Contributions are matching contributions that are not precluded from being taken into account under the Average Contribution Percentage Test for the Plan Year under the rules of Treasury Regulation section 1.401(m)-2(a)(5)(ii) and as set forth in Section 10.02 of this Plan.

(c) Limitation on QNEC’s and QMAC’s. Qualified Nonelective Contributions (as defined in Treasury Regulation section 1.401(k)-6) and Qualified Matching Contributions (as defined in Treasury Regulation section 1.401(k)-6) cannot be taken into account to determine an Actual Deferral Percentage to the extent such contributions are taken into account for purposes of satisfying any other Average Actual Deferral Percentage Test, any Average Contribution Percentage Test, or the requirements of Treasury Regulation section 1.401(k)-3, 1.401(m)-3, or 1.401(k)-4.

11. For Plan Years beginning on or after January 1, 2006, Section 9.08 is deleted in its entirety and the following new Section 9.08 is inserted in lieu thereof:

9.08 Distribution of Excess Elective Deferrals. Notwithstanding any other provision of this Plan, Excess Elective Deferrals adjusted for allocable income (gain or loss), including an adjustment for income for the period between the end of the Plan Year and the date of the distribution (the “gap period”) shall be distributed to the affected Participant no later than the April 15 following the calendar year in which such Excess Elective Deferrals were made.

For the purpose of this section, “income” shall be determined and allocated in accordance with the provisions of Section 9.03 of this Plan, except that such section shall be applied (i) by substituting the term “Excess Elective Deferrals” for “Excess 401(k) Contributions” therein, (ii) by ignoring references to “and other amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02)”, (iii) by substituting “Excess Elective Deferrals for the taxable year” for “the amounts taken into account under the Average Actual Deferral Percentage Tests for the Plan Year” and (iv) by ignoring the reference to the “Alternative method for allocating Plan Year and gap period income”.

No distribution of an Excess Elective Deferral shall be made unless the correcting distribution is made after the date on which the Plan received the Excess Elective Deferral and both the Participant and the Plan designates the distribution as a distribution of an Excess Elective Deferral.

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Notwithstanding any provision of this Plan to the contrary, any Match Contributions plus earnings that are attributable to any Excess Elective Deferrals that have been refunded shall be forfeited. All such forfeitures shall be treated as arising in the Plan Year after that in which the refunded Excess Deferrals were made and shall be used to reduce future Employer Match Contributions.

12. For Plan Years beginning on or after January 1, 2006, the second sentence of Section 10.01(a) is deleted in its entirety and the following new second sentence is inserted in lieu thereof:

Salary Reduction Contributions (other than Catch-up Contributions) made on behalf of Participants who are Non-Highly Compensated Employees which could be used to satisfy the Code section 401(k)(3) limits (set forth in section 9.02 hereof) but are not necessary to be taken into account in order to satisfy such limits, may instead be in included the above described numerator, to the extent permitted by Treasury Regulation section 1.401(m)-2(a)(6).

13. For Plan Years beginning on or after January 1, 2006, the second and third paragraphs paragraph of Section 10.01(b) are deleted in their entirety and the following new paragraphs are inserted in lieu thereof:

Additionally, if one or more other Plans allowing contributions under Code Section 401(k), voluntary after tax contributions or employer match Contributions are considered with this Plan as one for purposes of Code Section 401(a)(4) or 410(b), the Contribution Percentages for all eligible participants under all such plans shall be determined as if this Plan and all such others were one; provided that for Plan Years beginning on and after January 1, 2006 the requirements of Treasury Regulation section 1.401(m)-1(b)(4)(iii)(B) are met.

If any Highly Compensated Employee is an Eligible Participant in one or more other plans maintained by the same employer, which allow contributions under Code Section 401(k), voluntary after tax contributions or employer match Contributions, the Contribution Percentage for that Employee shall be determined as if this Plan and all such other plans were one; if such plans have different plan years, all contributions that are made under all such plans during the Plan Year being tested shall be aggregated, without regard to the plan years of the other plans. However, for Plan Years beginning before January 1, 2006, if the plans have different plan years, then all such plans having plan years ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be separate if mandatorily disaggregated under the regulations of Code Section 401(m).

14. For Plan Years beginning on or after January 1, 2006, Section 10.03 is deleted in its entirety and the following new Section 10.03 is inserted in lieu thereof:

10.03 Refund and Forfeiture of Excess 401(m) Contributions. Notwithstanding any other provision of this Plan except Sections 10.05 and 10.06, Excess 401(m)

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Contributions adjusted for allocable income (gain or loss), including an adjustment for income for the period between the end of the Plan Year and the date of the distribution (the “gap period”) shall be distributed to affected Highly Compensated Employees.

For the purpose of this section, “income” shall be determined and allocated in accordance with the provisions of Section 9.03 of this Plan, except that such section shall be applied (i) by substituting the term “Excess 401(m) Contributions” for “Excess 401(k) Contributions” therein, and (ii) by substituting amounts taken into account for the purposes of the Average Contribution Percentage Tests for amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests.

The Plan Administrator shall make every effort to refund all Excess 401(m) Contributions within 2 ¹/2 months of the end of the affected Plan Year; however, in no event shall Excess 401(m) Contributions be refunded later than the end of the following Plan Year. Distributions made later than 2 ¹/2 months after the end of the affected Plan Year will be subject to tax under Code Section 4979.

Notwithstanding any provision of this Plan to the contrary, any Match Contributions plus earnings that are attributable to any Excess 401(m) Contributions that have been refunded shall be forfeited. All such forfeitures shall be treated as arising in the Plan Year after that in which the refunded Excess 401(m) Contributions were made and shall be used to reduce future Employer Match Contributions.

For a period of four 12-month periods beginning from the given Plan Year, or such other period as the Secretary of the Treasury may designate, the Employer shall maintain records showing what contributions and compensation were used to satisfy this Section and Section 10.02.

15. For Plan Years beginning on or after January 1, 2006, Section 10.05 is deleted in its entirety and the following new Section 10.05 is inserted in lieu thereof:

10.05 Special 401(k) Employer Contributions.

(a) Correction by Employer Contribution. Notwithstanding any other provisions of this Plan except Section 10.07, in lieu of refunding Excess 401(m) Contributions as provided in Section 10.03, the Employer may make 401(k) Employer Contributions on behalf of Non-Highly Compensated Employees that are sufficient to satisfy the Average Contribution Percentage test. If a failed Average Contribution Percentage Test is to be corrected by making such contributions, then any such corrective contribution made on behalf of any Non-Highly Compensated Employees shall not exceed the targeted contribution limits of set forth below,

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(b) Targeted Matching Contribution Limit. A matching contribution with respect to an Salary Reduction Contribution for a Plan Year is not taken into account under the Actual Contribution Percentage Test for an NHCE to the extent it exceeds the greatest of:

(i) five percent (5%) of the NHCE’s Code Section 414(s) compensation for the Plan Year;

(ii) the NHCE’s Salary Reduction Contributions for the Plan Year; and

(iii) the product of two (2) times the Plan’s “representative matching rate” and the NHCE’s Salary Reduction Contributions for the Plan Year.

For purposes of this Section, the Plan’s “representative matching rate” is the lowest “matching rate” for any eligible NHCE among a group of NHCEs that consists of half of all eligible NHCEs in the Plan for the Plan Year who make Salary Reduction Contributions for the Plan Year (or, if greater, the lowest “matching rate” for all eligible NHCEs in the Plan who are employed by the Employer on the last day of the Plan Year and who make Salary Reduction Contributions for the Plan Year).

For purposes of this Section, the “matching rate” for an Employee generally is the matching contributions made for such Employee divided by the Employee’s Salary Reduction Contributions for the Plan Year. If the matching rate is not the same for all levels of Salary Reduction Contributions for an Employee, then the Employee’s “matching rate” is determined assuming that an Employee’s Salary Reduction Contributions are equal to six percent (6%) of Code Section 414(s) compensation.

(c) Targeted QNEC limit. Qualified Nonelective Contributions (as defined in Treasury Regulation section 1.40l(k)-6) cannot be taken into account under the Actual Contribution Percentage Test for a Plan Year for an NHCE to the extent such contributions exceed the product of that NHCE’s Code Section 414(s) compensation and the greater of five percent (5%) or two (2) times the Plan’s “representative contribution rate.” Any Qualified Nonelective Contribution taken into account under an Actual Deferral Percentage Test under Treasury Regulation section 1.401 (k)-2(a)(6) (including the determination of the “representative contribution rate” for purposes of Treasury Regulation section 1.401(k)-2(a)(6)(iv)(B)) is not permitted to be taken into account for purposes of this Section (including the determination of the “representative contribution rate” for purposes of subsection (a) below). For purposes of this Section:

(i) The Plan’s “representative contribution rate” is the lowest “applicable contribution rate” of any eligible NHCE among a

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group of eligible NHCEs that consists of half of all eligible NHCEs for the Plan Year (or, if greater, the lowest “applicable contribution rate” of any eligible NHCE who is in the group of all eligible NHCEs for the Plan Year and who is employed by the Employer on the last day of the Plan Year), and

(ii) The “applicable contribution rate” for an eligible NHCE is the sum of the matching contributions (as defined in Treasury Regulation section 1.401 (m)-l(a)(2)) taken into account in determining the “actual contribution ratio” for the eligible NHCE for the Plan Year and the Qualified Nonelective Contributions made for that NHCE for the Plan Year, divided by that NHCE’s Code section 414(s) compensation for the Plan Year.

16. For Plan Years beginning on or after January 1, 2006, Section 13.01 is amended by the addition of the following new paragraph:

A Participant whose employment status changes from that of a common law employee to that of a “leased employee” within the meaning of Code section 414(n) shall not be considered to have a severance from employment for the purposes of this section and this Article of the Plan (unless the safe harbor plan requirements described in Code section 414(n)(5) are met).

17. For Plan Years beginning on or after January 1, 2007, the words “no more than 90 days” in the second paragraph of Section 13.11(a) shall be deleted and the words “no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter)” shall be inserted in lieu thereof and the words “90-day period” in the fourth paragraph of Section 12.01, “ in the first paragraph of Section 13.07, and the second paragraph of and Section 13.11(a) shall be deleted and the words “90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter)” shall be inserted in lieu thereof.

18. The last sentence of the second paragraph and the third paragraph of Section 7.07(c)(ii) is deleted in their entirety and the following new sentence and paragraph are inserted in lieu thereof:

However, distribution may commence less than 30 days after the notice described in the preceding sentence is given, provided the distribution is not one to which Code Section 417 applies, the Participant is clearly informed of his or her right to take 30 days after receiving the notice to decide whether or not to elect a distribution (and, if applicable, a particular distribution option), and the Participant, after receiving the notice, affirmatively elects to receive the distribution prior to the expiration of the 30-day minimum period.

For Plan Years beginning January 1, 1998, and thereafter, if a distribution is one to which Code Sections 411(a)(11)(A) and 417 applies, a Participant may commence receiving a distribution in a form other than a Qualified Joint and Survivor Annuity less than 30 days after receipt of the written explanation described in the preceding paragraph provided: (1)

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the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent) a form of distribution other than a Qualified Joint and Survivor Annuity; (2) the Participant is permitted to revoke any affirmative distribution election at least until the Distribution Commencement Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant; and (3) the Distribution Commencement Date is after the date the written explanation was provided to the Participant. For distributions on or after December 31, 1996, the Distribution Commencement Date may be a date prior to the date the written explanation is provided to the Participant if the distribution does not commence until at least 30 days after such written explanation is provided, subject to the waiver of the 30-day period. For the purposes of this paragraph, the Distribution Commencement Date is the date a Participant commences distributions from the Plan. If a Participant commences distribution with respect to a portion of his/her Account Balance, a separate Distribution Commencement Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Distribution Commencement Date is the first day of the first period for which annuity payments are made.

19. For Plan Years beginning on or after January 1, 2006, the following sentences are added to Section 13.12(b)(2)(ii):

Eligible Retirement Plan also means an annuity contract described in Code section 403(b) and an eligible plan under Code section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan.

20. The following sentences are added to Section 13.13:

Except as specifically provided in a Qualified Domestic Relations Order, amounts distributed under this section shall be taken pro rata from the investment options in which each of the Participant’s Accounts is invested. The Plan Administrator shall establish reasonable procedures to determine whether an order or other decree is a Qualified Domestic Relations Order, and to administer distributions under such orders.

21. Article XIV is deleted in its entirety and the following new Article XIV is inserted in lieu thereof:

PLAN FIDUCIARY RESPONSIBILITIES

14.01 Plan Fiduciaries. The Plan Fiduciaries shall be:

(i) the Trustee(s) of the Plan;

(ii) the Plan Administrator;

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(v) such other person or persons as may be designated by the Plan Administrator in accordance with the provisions of this Article XIV.

14.02 General Fiduciary Duties. Each Plan Fiduciary shall discharge his or her duties solely in the interest of the Participants and their Beneficiaries and act:

(i) for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan;

(ii) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(iii) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so, if the Fiduciary has the responsibility to invest plan assets; and

(iv) in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with the provisions of current laws and regulations.

Each Plan Fiduciary shall perform the duties specifically assigned to him or her. No Plan Fiduciary shall have any responsibility for the performance or non-performance of any duties not specifically allocated to him or her.

14.03 Duties of the Trustee(s). The specific responsibilities and duties of the Trustee(s) are set forth in the Trust Indenture between First Allmerica and the Trustee(s). In general the Trustee(s) shall:

(i) invest Plan assets, subject to directions from the Plan Administrator or from any duly appointed investment manager;

(ii) maintain adequate records of receipts, disbursements, and other transactions involving the Plan; and

(iii) prepare such reports, statements, tax returns and other forms as may be required under the Trust Indenture or applicable laws and regulations.

14.04 Powers and Duties of the Plan Administrator. The Plan Administrator is the Benefits Committee. The Plan Administrator shall have the power, discretionary authority, and duty to interpret the provisions of the Plan and to make all decisions and take all actions and that shall be necessary or proper in order to carry out the provisions of the Plan. Without limiting the generality of the foregoing, the Plan Administrator shall:

(i) monitor compliance with the provisions of ERISA and other applicable laws with respect to the Plan;

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(ii) establish an investment policy and funding method consistent with objectives of the Plan and with the requirements of applicable laws and regulations;

(iii) invest Plan assets except to the extent that the Plan Administrator has delegated such investment duties to an investment manager;

(iv) evaluate from time to time investment policy and the performance of any investment manager or investment advisor appointed by it;

(v) interpret and construe the Plan in order to resolve any ambiguities therein;

(vi) determine all questions concerning the eligibility of any person to participate in the Plan, the right to and the amount of any benefit payable under the Plan to or on behalf of an individual and the date on which any individual ceases to be a Participant, with any such determination to be conclusively binding and final, to the extent permitted by applicable law, upon all persons interested or claiming an interest in the Plan;

(vii) establish guidelines as required for the orderly and uniform administration of the Plan;

(viii) exercise overall control of the operation and administration of the Plan in matters not allocated to some other Fiduciary by the terms of this Plan.

(ix) administer the Plan on a day-to-day basis in accordance with the provisions of this Plan and all other pertinent documents;

(x) retain and maintain Plan records, including Participant census data, participation dates, compensation records, and such other records necessary or desirable for proper Plan administration;

(xi) prepare and arrange for delivery to Participants of such summaries, descriptions, announcements and reports as are required to be given to participants under applicable laws and regulations;

(xii) file with the U.S. Department of Labor, the Internal Revenue Service and other regulatory agencies on a timely basis all required reports, forms and other documents;

(xiii) prepare and furnish to the Trustee(s) sufficient records and data to enable the Trustee(s) to properly perform its obligations under the Trust Indenture; and

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(xiv) to take appropriate actions required to correct any errors made in determining the eligibility of any employee for benefits under the Plan or the amount of benefits payable under the Plan and in correcting any error made in computing the benefits of any participant or beneficiary, the Plan Administrator may make equitable adjustments (an increase or decrease) in the amount of any future benefits payable under the Plan, including the recovery of any overpayment of benefits paid from the Plan as provided in Treas. Reg. § 1.401(a)-13(c)(2)(iii).

The Plan Administrator may appoint or employ such advisers or assistants as the Plan Administrator deems necessary and may delegate to any one or more of its members any responsibility it may have under the Plan or designate any other person or persons to carry out any responsibility it may have under the Plan.

Notwithstanding any provisions elsewhere to the contrary, the Plan Administrator shall have total discretion to fulfill the above responsibilities as the Plan Administrator sees fit on a uniform and consistent basis and as the Plan Administrator believes a prudent person acting in a like capacity and familiar with such matters would do.

14.05 Designation of Fiduciaries. The Plan Administrator shall have the authority to appoint and remove Trustee(s) in accordance with the Trust Indenture. The Plan Administrator may appoint and remove an investment manager and delegate to said investment manager power to manage, acquire or dispose of any assets of the Plan.

While there is an investment manager, the Plan Administrator shall have no obligation under this Plan with regard to the performance or non-performance of the duties delegated to the investment manager.

The Plan Administrator shall appoint all other Fiduciaries of this Plan. In making its appointment or delegation of authority, the Plan Administrator may designate all of the responsibilities to one person or it may allocate the responsibilities, on a continuing basis or on an ad hoc basis, to one or more individuals either jointly or severally. No individual named a Fiduciary shall have any responsibility for the performance or non-performance of any responsibilities or duties not allocated to him or her.

The appointing authority of a Fiduciary shall periodically, but not less frequently than annually, review the performance of each fiduciary appointed in order to carry out the general fiduciary duties specified in Section 14.02 and, where appropriate, take or recommend remedial action.

14.06 Delegation of Duties by a Fiduciary. Except as provided in this Plan or in the appointment as a Fiduciary, no Plan Fiduciary may delegate his or her fiduciary responsibilities. If authorized by the appointing authority, a Fiduciary may

14

appoint such agents as may be deemed necessary and delegate to such agents any non-fiduciary powers or duties, whether ministerial or discretionary. No Fiduciary or agent of a Fiduciary who is a full-time employee of the Employer will receive any compensation from the Plan for his or her services, but the Employer or the Plan shall pay all expenses that such employee reasonably incurs in the discharge of his or her duties.

22. Article XV is renamed “BENEFITS COMMITTEE”.

23. Sections 15.01, 15.02 and 15.03 shall be deleted in their entirety and the following new Sections 15.01, 15.02 and 15.03 is inserted in lieu thereof:

15.01 Appointment of Benefits Committee. The Benefits Committee shall consist of three or more members appointed from time to time by the President of the Employer (the “President”), who shall also designate one of the members as chairman. Each member of the Benefits Committee and its chairman shall serve at the pleasure of the President.

15.02 Benefits Committee to Act by Majority Vote, etc. The Benefits Committee shall act by majority vote of all members. All actions, determinations, interpretations and decisions of the Benefits Committee with respect to any matter within their jurisdiction will be conclusive and binding on all persons. Any person may rely conclusively upon any action if certified by the Benefits Committee.

Notwithstanding the above, a member of the Benefits Committee who is also a Participant shall not vote or act upon any matter relating solely or primarily to him or herself.

15.03 Records and Reports of the Benefits Committee. The Benefits Committee shall keep a record of all of its proceedings and acts, and shall keep such books of account, records and other data as may be necessary for the proper administration of the Plan and file or deliver to Participants and their Beneficiaries whatever reports are required by any regulatory authority.

24. The following new Section 15.05 is added to Article XV immediately following Section 15.04:

15.05 Indemnification of the Plan Administrator and Assistants. The Employer shall indemnify and defend to the extent permitted under the By-Laws of the Employer any Employee or former Employee (i) who serves or has served as a member of the Benefits Committee, (ii) who has been appointed to assist the Benefits Committee in administering the Plan, or (iii) to whom the Benefits Committee has delegated any of its duties or responsibilities against any liabilities, damages, costs and expenses (including attorneys’ fees and amounts paid in settlement of any claims approved by the Employer) occasioned by any act or omission to act in connection with the Plan, if such act or omission to act is in good faith and

15

without gross negligence; provided that such Employee or former Employee is not otherwise indemnified or saved harmless under any liability insurance or other indemnification arrangement.

25. Section 16.01 is deleted in its entirety and the following new Section 16.01 is inserted in lieu thereof:

16.01 In General. Subject to the direction of the Plan Administrator or any duly appointed investment manager in accordance with Section 14.05 (or subject to the direction of the Plan Administrator if a Participant has requested that an individual life insurance or annuity Policy be issued on his or her life in accordance with Article XVII), the Trustee shall receive all contributions to the Trust and shall hold, invest and control the whole or any part of the assets in accordance with the provisions of the annexed Trust Indenture.

26. The first sentence of Section 16.02 is deleted in its entirety and the following new sentence is inserted in lieu thereof:

In order to provide retirement and other benefits for Plan Participants and their Beneficiaries, the Trustee shall invest Plan assets in one or more permissible investments specified in the Trust Indenture (“Permissible Investments”) and in such collective investment trusts or group trusts that may be established for the primary objective of investing in securities issued by The Hanover Group Insurance, Inc., which investments shall be considered as investments in qualifying employer securities as defined in Section 407(d) of the Employee Retirement Income Security Act of 1974, as amended. Such permissible investments shall include The Hanover Insurance Group Company Stock Fund, a group trust established for the purposes of investing in the common stock of The Hanover Insurance Group (“The Employer Stock Fund”).

27. The second paragraph of Section 16.02 is deleted in its entirety and the following new paragraph is inserted in lieu thereof:

This Plan is intended to comply with the requirements of Section 404(c) of ERISA. Each Participant is responsible and has sole discretion to give directions to the Trustee in such form as the Trustee may require concerning the investment of his or her Accrued Benefit in one or more of the Permissible Investments subject to the restrictions on life insurance premiums described in Article XVII. The designation by a Participant of the allocation of his Accrued Benefit among the Permissible Investments may be made from time to time, with such frequency and in accordance with such procedures as established and set forth in the Trust Indenture and applied in a uniform nondiscriminatory manner. Any such procedure shall be communicated to the Participants and designed with the intention of permitting the Participants to exercise control over the assets in their respective accounts within the meaning of Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder. If and to the extent that a Participant fails to designate an allocation of his Accrued Benefit, in whole or in part, the Trustee shall allocate and invest such assets in the default investment fund selected by the

16

Plan Administrator. Otherwise, the Trustee shall allocate and invest the assets of the Trust in accordance with the Participant’s selections subject to the restrictions on life insurance premiums described in Article XVII. All voting rights with respect to a Participant’s investment in the Employer Stock Fund shall be the responsibility of that Participant, and the Trustee shall receive direction from the Participant for such voting rights. Neither the Plan Administrator, the Trustee, the Employer nor any other person shall be under any duty to question any investment, voting or other direction of the Participant or make any suggestions to the Participant in connection therewith, and the Trustee shall comply as promptly as practicable with directions given by the Participant hereunder. All such directions may be of continuing nature or otherwise and may be revoked by the Participant at any time in such form as the Trustee may require. Neither the Plan Administrator, the Trustee, the Employer nor any other person shall be responsible or liable for any costs, losses or expenses which may arise or result from or be related to the compliance or refusal or failure to comply with any directions from the Participant. The Trustee may refuse to comply with any direction from the Participant in the event the Trustee, in its sole or absolute discretion, deems such direction improper by virtue of applicable law or regulations. For purposes of this section, all references to “Participant” shall include all Beneficiaries of Participants who are deceased and any Alternate Payees under a Qualified Domestic Relations Order, as provided for in Section 20.01.

28. The first sentence of Section 18.01 is deleted in its entirety and the following new sentence is inserted in lieu thereof:

The Plan Administrator will act as Claims Fiduciary except to the extent that the Plan Administrator has delegated the function to some other person or persons, committee or entity.

29. For Plan Years beginning on or after January 1, 2006, Section 20.02 is deleted in its entirety and the following new Section 20.02 is inserted in lieu thereof:

20.02 Notwithstanding any provisions of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with the rules and requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994 and Section 414(u) of the Code. “Make-up” Salary Reduction Contributions made by reason of an eligible Employee’s qualified military service under Code section 414(u) shall not be taken into account for any year when calculating an employee’s Actual Deferral Percentage (under Section 9.1(a)) as provided for in Treasury Regulation section 1.401(k)-2(a)(5)(v) and matching contributions thereon shall not be taken into account for any year when calculating an employee’s Average Contribution Percentage (under Section 10.1(a)) as provided for in Treasury Regulation section 1.401(m)-2(a)(5)(vi).

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30. This Amendment is intended, in part, as a good faith compliance with the requirements of the Final Regulations issued under Section 401(k) and 401(m) of the Internal Revenue Code that were published on December 29, 2004.

31. This Amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this Amendment.

IN WITNESS WHEREOF, this Second Amendment has been executed this 26th day of June 2007.

FIRST ALLMERICA FINANCIAL LIFE INSURANCE
By:	/s/ Lorna Stearns
	Authorized Representative

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THE HANOVER INSURANCE GROUP

RETIREMENT SAVINGS PLAN

THIRD AMENDMENT

to the Restatement Generally Effective January 1, 2005

This Third Amendment is executed by The Hanover Insurance Company, a New Hampshire company (the “Company”).

WHEREAS, Immediately prior to January 1, 2008, First Allmerica Financial Life Insurance Company (“FAFLIC”) sponsored The Hanover Insurance Group Retirement Savings Plan, formerly known as the “The Allmerica Financial Retirement Savings Plan” and before that “The Allmerica Financial Employees’ 401(k) Matched Savings Plan”, (the “Plan”);

WHEREAS, FAFLIC transferred sponsorship of, and the liabilities and obligations associated with the Plan to The Hanover Insurance Company (the “Company”) effective as of January 1, 2008 and the Company agreed to assume sponsorship of, and the liabilities and obligations associated with the Plan as of such date;

WHEREAS, The Plan was established effective as of November 22, 1961 and was amended and restated in certain respects subsequent to its effective date,

WHEREAS, The most recent restatement of the Plan was adopted on December 29, 2005 and was generally effective January 1, 2005, and such restatement was amended by the adoption of the First Amendment on March 5, 2007, and the Second Amendment on June 26, 2007;

WHEREAS, the Company (and the Company as successor in interest to FAFLIC) has reserved the right to amend the Plan any time under Section 19.01 of the Plan; and

WHEREAS, the Company desires to amend the Plan to reflect the votes adopted by the Board of Directors of the Company at its December 19, 2007 meeting;

NOW, THEREFORE, the Plan is amended effective as of January 1, 2008 as follows:

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1. Section 2.09 of the Plan is deleted in its entirety and the following new Section 2.09 inserted in lieu thereof:

2.09 “Employer” shall mean The Hanover Insurance Company provided that prior to January 1, 2008 “Employer” shall mean First Allmerica Financial Life Insurance Company.

2. The following new Section 2.11A is added to Article II:

2.11A “First Allmerica” shall mean First Allmerica Financial Life Insurance Company.

3. Paragraph (v) of Section 2.17(f) of the Plan is deleted in its entirety and the following new paragraphs (v) and (vi) are inserted in lieu thereof:

(v) for periods prior to January 1, 2008 with First Allmerica; or

(vi) with an Affiliate.

4. References to “First Allmerica” in Sections 2.24, 2.33, and 14.03 shall be deleted and replaced by references to “the Employer” in such sections.

5. This Amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this Amendment.

IN WITNESS WHEREOF, this Third Amendment has been executed this 30^th day of April 2008.

THE HANOVER INSURANCE COMPANY
By:	/s/ Lorna Stearns
	Authorized Representative

2

EX-10.2

EXHIBIT 10.2

THE HANOVER INSURANCE GROUP

AMENDED AND RESTATED

NON-QUALIFIED RETIREMENT SAVINGS PLAN

ARTICLE I

NAME, PURPOSE AND EFFECTIVE DATE OF PLAN

1.01 Name and Purpose of Plan. This Plan shall be known as The Hanover Insurance Group Amended and Restated Non-Qualified Retirement Savings Plan (the “Plan”).

This Plan was initially adopted by First Allmerica Financial Life Insurance Company (“First Allmerica”). First Allmerica, formerly known as State Mutual Life Assurance Company of America, had adopted this deferred compensation plan for the benefit of certain highly compensated employees to ensure that the overall effectiveness of First Allmerica’s compensation and benefits programs for top management will attract, retain and motivate qualified personnel. This Plan is intended to be a non-qualified and unfunded plan, maintained by First Allmerica solely for the purpose of providing deferred compensation benefits to a select group of management or highly compensated employees.

As of January 1, 2008, The Hanover Insurance Company (“Hanover”) agreed to assume (i) the sponsorship, and (ii) all liabilities and obligations, of the Plan.

1.02 Plan Effective Date. The effective date of this Plan is January 1, 2005. The Plan has been amended and restated to reflect all amendments indicated on Schedule A.

ARTICLE II

DEFINITIONS

As used in this Plan, the following words and phrases shall have the meanings set forth herein unless a different meaning is clearly required by the context.

2.01 “401(a)(17) Limit” means the compensation limit in effect for the Defined Contribution Plan established pursuant to Section 401(a)(17) of the Code ($230,000 for 2008).

2.02 “Accrued Benefit” means the sum of the balances in a Participant’s Employee Contribution Account, Employer Contribution Account and Additional Employer Contribution Account.

2.03 “Annualized Base Salary” means the total Base Salary anticipated to be paid by the Company to an Employee during a twelve-month period, excluding, without limitation, any anticipated compensation increases and any anticipated bonuses and non-cash compensation; provided, however, that Annualized Base Salary shall be determined without reduction for (i) any anticipated Code Section 401(k) salary reduction contributions to be contributed on the Employee’s behalf for the Plan Year to the Defined Contribution Plan, (ii) the amount of any anticipated salary reduction contributions to be contributed on the Employee’s behalf for the Plan Year to any Code Section 125 plan sponsored by the Company, (iii) the amount of any anticipated Base Salary to be deferred pursuant to the terms of this Plan, and (iv) at the Plan Administrator’s discretion, any anticipated amount of such other compensation deferrals by an Employee during a given Plan Year pursuant to any other Company-sponsored deferral plan.

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For an Employee employed by the Company on a December 1, the Employee’s Annualized Base Salary shall be determined by the Plan Administrator for the immediately succeeding Plan Year. For an Employee who first completes an Hour of Service after a December 1, the Employee’s initial Annualized Base Salary shall be determined by the Plan Administrator as of the date the Employee first completes an Hour of Service, with subsequent Annualized Base Salary amounts being determined by the Plan Administrator for each such Employee employed by the Company on a December 1 as of such date for the immediately succeeding Plan Year.

2.04 “Base Salary” means the total base salary paid to an Employee by the Company during a Plan Year, excluding, without limitation, bonuses and non-cash compensation; provided, however, that Base Salary shall be determined without reduction for (i) any Code Section 401(k) salary reduction contributions contributed on the Employee’s behalf for the Plan Year to the Defined Contribution Plan, (ii) the amount of any salary reduction contributions contributed on the Employee’s behalf for the Plan Year to any Code Section 125 plan sponsored by the Company, (iii) the amount of any Base Salary deferred pursuant to the terms of this Plan, and (iv) at the Plan Administrator’s discretion, the amount of such other compensation as may be deferred by an Employee during a given Plan Year pursuant to any other Company-sponsored deferral plan.

2.05 “Base Salary Deferrals” means deferrals of Base Salary made by an Employee pursuant to Section 4.01(a).

2.06 “Beneficiary” means the person, trust, organization or estate designated to receive Plan benefits payable on or after the death of a Participant.

2.07 “Code” means the Internal Revenue Code of 1986, as amended from time to time.

2.08 “Company” means The Hanover Insurance Company (herein sometimes referred to as the “Employer” or “Hanover”). Any reference to the Company or the Employer prior to January 1, 2008 shall mean First Allmerica, subject, however, to the fact that as of January 1, 2008 Hanover assumed all obligations and liabilities (both pre and post-January 1, 2008) of the Plan.

2.09 “Defined Contribution Plan” means The Hanover Insurance Group Retirement Savings Plan, a qualified retirement plan, as in effect from time to time.

2.10 “Eligible Compensation”

(a) For Plan Years prior to January 1, 2008, “Eligible Compensation” shall equal (subject to Sections 2.10(d) and 2.10(e) below): the total salary, bonuses and other taxable remuneration paid to an Employee by the Company during a Plan Year (as reported on the Employee’s W-2 for the Plan Year) minus the 401(a)(17) Limit; provided, however, with respect to the President and Chief Executive Officer of The Hanover Insurance Group, Inc., commencing on and after January 1, 2007, in no event shall Eligible Compensation (subject to Sections 2.10(d) and 2.10(e) below) exceed, in the aggregate, the Eligible Compensation Cap.

(b) For Plan Years commencing on or after January 1, 2008, “Eligible Compensation” shall equal (subject to Sections 2.10(d) and 2.10(e) below): Base Salary plus Incentive Compensation (not to exceed target), if any, minus the 401(a)(17) Limit, but in no event to exceed the Eligible Compensation Cap.

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(c) “Eligible Compensation” shall also include any such other compensation earned or paid during a Plan Year as determined, from time to time, by the Plan Administrator.

(d) Notwithstanding the foregoing, Eligible Compensation shall be determined without reduction for (i) any Code Section 401(k) salary reduction contributions contributed on the Employee’s behalf for the Plan Year to the Defined Contribution Plan, (ii) the amount of any salary reduction contributions contributed on the Employee’s behalf for the Plan Year to any Code Section 125 plan sponsored by the Company, (iii) the amount of any Base Salary deferred pursuant to the terms of this Plan, (iv) Incentive Compensation deferred and converted pursuant to The Hanover Insurance Group, Inc. IC Deferral and Conversion Program, and (v) at the Plan Administrator’s discretion, the amount of such other compensation as may be deferred by an Employee during a given Plan Year pursuant to any other Company-sponsored deferral plan.

(e) Notwithstanding the above, Eligible Compensation shall not include:

(i) unless otherwise determined by the Plan Administrator, compensation paid to Employees pursuant to The Hanover Insurance Group, Inc. Amended Long-Term Stock Incentive Plan and/or The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan or pursuant to any similar or successor executive incentive compensation plan;

(ii) Employer contributions to a deferred compensation plan or arrangement (other than salary reduction contributions to a Section 401(k) or 125 plan or amounts deferred pursuant to the terms of this Plan, or otherwise, as described above) either for the Plan Year of deferral or for the Year included in the Employee’s gross income;

(iii) unless otherwise determined by the Plan Administrator, any income which is received by or on behalf of an Employee in connection with the grant, receipt, settlement, exercise, lapse of risk of forfeiture or restriction on transferability, or disposition of any stock option, stock award, stock grant, stock appreciation right or similar right or award granted under any plan, now or hereafter in effect, of the Company or any successor to the Company, its parent, any such successor’s parent, its subsidiaries or affiliates, or any stock or securities underlying any such option, award, grant or right;

(iv) severance payments paid in a lump sum;

(v) Code Section 79 imputed income, long term disability payments and workers’ compensation payments;

(vi) taxable moving expense allowances or taxable tuition or other educational reimbursements;

(vii) non-cash taxable benefits provided to executives, including the taxable value of Company-paid club memberships, chauffeur services and Company-provided automobiles; and

(viii) other taxable amounts received other than cash compensation for services rendered, as determined by the Plan Administrator.

2.11 “Eligible Compensation Cap” means $1,000,000.00 minus the 401(a)(17) Limit.

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2.12 “Employee” means a full-time salaried employee of the Company.

2.13 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

2.14 “Hour of Service” means:

(a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Company. For purposes of the Plan an Employee shall be credited with 45 Hours of Service for each complete or partial week he or she would be credited with at least one Hour of Service under this Section 2.14.

(b) Each hour for which an Employee is paid, or entitled to payment, by the Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence:

(i) No more than 1000 hours shall be credited to an Employee under this Subsection (b) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period);

(ii) No hours shall be credited under this Subsection (b) for any payments made or due under a plan maintained solely for the purpose of complying with any applicable worker’s compensation, unemployment compensation or disability insurance laws; and

(iii) No hours shall be credited under this Subsection (b) for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee.

For purposes of this Subsection (b) a payment shall be deemed to be made by or due from the Company regardless of whether such payment is made by or due from the Company directly, or indirectly, through, among others, a trust fund or insurer, to which the Company contributes or pays premiums.

(c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Company. The same Hours of Service shall not be both credited under Subsections (a) or (b), as the case may be, and under this Subsection. No more than 501 Hours of Service shall be credited under this Subsection for a period of time during which an Employee did not or would not have performed duties.

(d) Special rules for determining Hours of Service under Subsection (b) or (c) for reasons other than the performance of duties.

In the case of a payment which is made or due which results in the crediting of Hours of Service under Subsection (b) or in the case of an award or agreement for back pay, to the extent that such an award or agreement is made with respect to a period during which an Employee performs no duties, the number of Hours of Service to be credited shall be determined as follows:

(i) In the case of a payment made or due which is calculated on the basis of units of time (such as days or weeks), the number of Hours of Service to be credited to Employees shall be determined as provided in Subsection (a).

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(ii) Except as provided in Paragraph (d)(iii), in the case of a payment made or due which is not calculated on the basis of units of time, the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employee’s most recent hourly rate of compensation (as determined below) before the period during which no duties are performed.

A. In the case of Employees whose compensation is determined on the basis of a fixed rate for specified periods of time (other than hours) such as days or weeks, the hourly rate of compensation shall be the Employee’s most recent rate of compensation for a specified period of time (other than an hour), divided by the number of hours regularly scheduled for the performance of duties during such period of time.

B. In the case of Employees whose compensation is not determined on the basis of a fixed rate for specified periods of time, the Employee’s hourly rate of compensation shall be the lowest hourly rate of compensation paid to Employees in the same job classification as that of the Employee or, if no Employees in the same job classification have an hourly rate, the minimum wage as established from time to time under Section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended.

(iii) Rule against double credit. An Employee shall not be credited on account of a period during which no duties are performed with more hours than such Employee would have been credited but for such absence.

(e) Crediting of Hours of Service to computation periods.

(i) Hours of Service described in Subsection (a) shall be credited to the Employee for the computation period or periods in which the duties are performed.

(ii) Hours of Service described in Subsection (b) shall be credited as follows:

A. Hours of Service credited to an Employee on account of a payment which is calculated on the basis of units of time (such as days or weeks) shall be credited to the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates.

B. Hours of Service credited to an Employee by reason of a payment which is not calculated on the basis of units of time shall be credited

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to the computation period in which the period during which no duties are performed occurs, or if the period during which no duties are performed extends beyond one computation period, such Hours of Service shall be allocated between not more than the first two computation periods in accordance with reasonable rules established by the Company, which rules shall be consistently applied with respect to all Employees within the same job classification, reasonably defined.

(iii) Hours of Service described in Subsection (c) shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement or payment is made.

(f) Rules for Non-Paid Leaves of Absence. For purposes of the Plan, an Employee will also be credited with Hours of Service during any non-paid leave of absence granted by the Company. The number of Hours of Service to be credited under this Subsection (f) shall be determined as provided in Subsection (a); provided, however, that no more than the number of Hours of Service in one regularly scheduled work year of the Company will be credited for each non-paid leave of absence. Hours of Service described in this Subsection (f) shall be credited to the Employee for the computation period or periods during which the leave of absence occurs.

2.15 “Incentive Compensation” means the compensation paid to an Employee (not to exceed target) by the Company during a Plan Year pursuant to the Company’s annual non-equity short-term incentive compensation program which is established pursuant to the Company’s shareholder approved Short-Term Incentive Compensation Plan or pursuant to any similar or successor non-equity short-term incentive compensation plan. A Participant’s “target” Incentive Compensation means the percentage of annual salary that the program establishes for each Participant as a bonus target.

2.16 “Normal Retirement Age” means age 65.

2.17 “Participant” means an Employee who satisfies the conditions for participation set forth in Subsections 3.01(a), 3.01(b) or 3.01(c).

2.18 “Plan Year” means a calendar year.

2.19 “Year of Service” means each computation period during which an Employee completes at least 1,000 Hours of Service with the Company, commencing on the date an Employee first completes an Hour of Service and each twelve-month period commencing on the anniversary of such date.

ARTICLE III

ELIGIBILITY AND PARTICIPATION

3.01 (a) Eligibility to Make Base Salary Deferrals. To be eligible to make Base Salary Deferrals for a Plan Year to be credited to his or her Employee Contribution Account, an employee of the Company must meet the following requirements:

(i) be an Employee who is not on a leave of absence from the Company (paid or unpaid) on December 1 of the immediately preceding Plan Year;

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(ii) have an Annualized Base Salary for the Plan Year (calculated as described in Section 2.03 of the Plan) equal to or in excess of the 401(a)(17) Limit; and

(iii) for eligible Employees who are employed on a December 1, have executed a Salary Reduction Agreement satisfactory to the Plan Administrator prior to the commencement of the Plan Year for which Base Salary Deferrals shall be effective (or, for eligible Employees who first complete an Hour of Service after a December 1, have executed such a Salary Reduction Agreement within 30 days of the date they first complete an Hour of Service).

Notwithstanding (iii) above, for the 2005 Plan Year only, an otherwise eligible Employee employed by the Company on December 1, 2004, may execute a Salary Reduction Agreement satisfactory to the Plan Administrator on or prior to January 31, 2005 in order to be eligible to make deferrals of Base Salary paid on or after the effective date of the election.

In addition to the eligibility requirements set forth in this Section 3.01(a), for Plan Years commencing on or after January 1, 2008, Base Salary Deferrals may only be made to the extent expressly permitted by the Plan Administrator.

(b) Eligibility for Company-Paid Contribution. To be eligible to receive a Company-paid contribution on Eligible Compensation for a Plan Year, to be credited to an Employer Contribution Account to be established for each such eligible Employee, an employee must meet the following requirements:

(i) be an Employee;

(ii) have Eligible Compensation for the Plan Year (as described in Section 2.10 of the Plan); and

(iii) be employed by the Company on the last day of the Plan Year or have retired from the Company during the Plan Year or died during the Plan Year while actively employed by the Company.

(c) Eligibility for Company-Paid Non-Qualified Additional Employer Contribution. To be eligible to receive a Company-paid non-qualified additional employer contribution on Eligible Compensation for a Plan Year, to be credited to an Additional Employer Contribution Account to be established for each such eligible Employee, an employee must meet the following requirements;

(i) be an Employee;

(ii) have Eligible Compensation for the Plan Year (as described in Section 2.10 of the Plan);

(iii) have contributed to the Defined Contribution Plan for the Plan Year the maximum amount permitted to be deferred as a non-catch up salary reduction contribution for such Plan Year; and

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(iv) for Plan Years commencing on and after January 1, 2008, be employed by the Company on the last day of the Plan Year or have retired from the Company during the Plan Year or died during the Plan Year while actively employed by the Company.

Notwithstanding (iii) above, otherwise eligible Employees who first complete an Hour of Service during a Plan Year who have contributed during the Plan Year to a qualified 401(k) plan sponsored by their former employer(s) may furnish evidence satisfactory to the Plan Administrator of their contributions to such prior plan(s). So long as the amount contributed by the Employee to such prior plan(s) plus the amount contributed by the Company as a salary reduction contribution on behalf of the Employee to the Defined Contribution Plan equals the maximum amount permitted to be deferred as a non-catchup salary reduction contribution for such Plan Year, as described in Code Section 402(g), such Employee shall be deemed to have satisfied requirement (iii) above for such initial Plan Year.

3.02 If permitted by the Company, an eligible Employee may elect to make Base Salary Deferrals for a Plan Year by executing a Salary Reduction Agreement satisfactory to the Plan Administrator, as provided in Paragraph 3.01(a)(iii) above. As provided in such Paragraph, and if permitted by the Company, eligible Employees who are employed by the Company on a December 1 must execute such Salary Reduction Agreement prior to the commencement of the Plan Year for which Base Salary Deferrals shall be effective. Notwithstanding the foregoing, as provided in such Paragraph, eligible Employees who first complete an Hour of Service after a December 1 must execute such a Salary Reduction Agreement within 30 days of the date they first complete an Hour of Service.

An otherwise eligible Employee shall automatically be eligible to receive a Company-paid employer contribution and a Company-paid additional employer contribution for a Plan Year provided the Employee satisfies the requirements of Subsections 3.01(b) and (c) above for the applicable Plan Year.

Subject to Section 3.03, once an eligible Employee becomes a Participant in the Plan, he or she shall remain a Participant until all benefits to which he or she is entitled under the Plan have been paid.

3.03 Loss of Employee’s Select Status. Notwithstanding any other provision of this Plan, if at any time the Plan Administrator determines that any Participant may not be considered by the Department of Labor or a court of competent jurisdiction to be a member of a select group of the Company’s management or highly compensated employees (as those terms are used in Section 201(2) of ERISA and related provisions), or that a Participant or Beneficiary will recognize income for state or federal income tax purposes with respect to Plan benefits not then payable, the Plan Administrator shall communicate such belief to the Company and shall follow the Company’s direction regarding any ongoing participation or future benefit eligibility of that individual. The Company shall then consider what measures are appropriate to preserve the exempt status of the Plan under ERISA as its principal objective in rectifying the situation.

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ARTICLE IV

PARTICIPANT ACCOUNTS, SALARY REDUCTION ELECTIONS AND

PLAN BENEFITS

4.01 Establishment of Accounts. The Plan Administrator shall establish and maintain a memorandum Employee Contribution Account, an Employer Contribution Account and an Additional Employer Contribution Account, when appropriate, to account for each Participant’s Accrued Benefit. Amounts shall be credited to Participant Accounts in accordance with this Section 4.01 for each Plan Year. Additionally, investment earnings shall be credited to Participant Accounts pursuant to Section 4.03. The following amounts shall be credited to a Participant’s Accounts for each Plan Year:

(a) Employee Contribution Account. If permitted by the Company, that amount, if any, which an eligible Employee elects to defer for a Plan Year from his or her Base Salary as an eligible salary reduction deferral pursuant to Subsection 3.01(a) of the Plan; provided, however, that:

(i) Base Salary Deferrals for a Plan Year must be equal to a percentage of Base Salary otherwise payable to a Participant (e.g., 1%, 2% or 12 ¹/2% of Base Salary otherwise payable);

(ii) An eligible Employee may not elect to defer more than 12 ¹/2% of Base Salary otherwise payable to the Employee during the Plan Year, or such larger percentage as may be approved by the Commissioner of Insurance for the Commonwealth of Massachusetts pursuant to Section 35 of Chapter 175 of the Massachusetts General Laws; and

(iii) Except as provided in Paragraph 3.01(a)(iii) above in the case of a new hire, Base Salary Deferral elections must be made prior to the commencement of the Plan Year for which the deferral shall be effective (or by January 31, 2005 in the case of the 2005 Plan Year) and, in any event, shall be irrevocable for the Plan Year for which the Deferral is effective and may not be increased, decreased or stopped during such Plan Year. Base Salary Deferrals shall be credited to a Participant’s Employee Contribution Account within 31 days of the date such amounts would have been paid to the Participant in the absence of the Participant’s Salary Reduction Deferral election.

(b) Employer Contribution Account. That amount, if any, which an eligible Employee is entitled to receive for each Plan Year pursuant to Subsection 3.01(b) of the Plan.

Until otherwise voted by the Company’s Board of Directors, for Plan Years commencing on or after January 1, 2005, eligible Employees employed on the last day of a Plan Year shall be entitled to receive a Company-paid contribution equal to 3% of Eligible Compensation for the Plan Year (as described in Section 2.10 of the Plan).

Contributions shall be credited to a Participant’s Employer Contribution Account on or before March 15 of the calendar year following the Plan Year for which the contribution is to be credited.

(c) Additional Employer Contribution Account. That amount, if any, which an eligible Employee is eligible to receive for each Plan Year pursuant to Subsection 3.01(c) of the Plan.

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Until otherwise voted by the Company’s Board of Directors, for Plan Years commencing on or after January 1, 2005, eligible Employees employed on the last day of a Plan Year shall be entitled to receive a Company-paid contribution equal to 5% of Eligible Compensation for the Plan Year (as described in Section 2.10 of the Plan).

Contributions shall be credited to a Participant’s Additional Employer Contribution Account on or before March 15 of the calendar year following the Plan Year for which the contribution is to be credited.

4.02 Base Salary Deferral Elections. For new hires, during the first 30 days of an eligible Employee’s initial eligibility to participate, and thereafter for all eligible Employees, on any date which is prior to the beginning of the Plan Year for which the election is to be effective, if permitted by the Company, an eligible Employee may file a signed, written salary reduction election with the Plan Administrator designating what percentage of his or her Base Salary, as described in Section 2.04 and in Subsection 3.01(a) shall be withheld from his or her Base Salary for the Plan Year (in substantially equal amounts per pay period, or on such other basis as shall be agreed to by the Plan Administrator) and credited instead to his or her Employee Contribution Account under this Plan. In the case of a new hire, an eligible Employee’s election to participate made within 30 days of an Employee’s initial eligibility date shall take effect as of the start of the first payroll period which begins no later than 30 days after an appropriate signed election form is received by the Plan Administrator. In the case of a new hire, an election to participate made after the first 30 days of an Employee’s initial eligibility shall be effective on the first day of the next succeeding Plan Year. A separate election must be made for each Plan Year an eligible Employee desires to make a Base Salary Deferral. Each salary reduction election shall be irrevocable after its effective date for the remainder of the Plan Year for which it was initially effective.

4.03 Investment of Participant Accounts. The Company may from time to time designate one or more investments in which each Participant’s Accounts shall be deemed to be invested. Initially, and until changed by the Company, Participant Accounts established under this Plan shall be credited with interest at the Plan GATT Interest Rate in effect for each Plan Year. For purposes, of this Plan, the Plan GATT Interest Rate for a Plan Year means the annual rate of interest in effect under Code Section 417(e)(3) for the second month immediately preceding the first day of the Plan Year (e.g., November 2004 for the 2005 Plan Year). The deemed investment return shall be credited to a Participant’s Accounts no later than the close of each calendar month, until his or her entire vested Accrued Benefit has been distributed. Any amount(s) withdrawn from a Participant’s Accounts before the close of a given calendar month shall be credited with the deemed investment return for the amount of time during the calendar month that said amounts were credited to the Participant’s Accounts. Nothing in this Section shall be construed to require the Company to acquire or provide any of the investments selected by the Company. Any investments made by the Company shall be made solely in the name of the Company and shall remain the property of the Company.

ARTICLE V

VESTING AND PAYMENT OF PLAN BENEFITS

5.01 Vesting of Accrued Benefit. Each Participant’s Employee Contribution Account shall be 100% vested and nonforfeitable at all times.

Each Participant who first completed an Hour of Service prior to January 1, 2005 shall also have a 100% vested and nonforfeitable interest in his or her Employer Contribution and Additional Employer Contribution Accounts.

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Each Participant who first completes an Hour of Service on or after January 1, 2005 shall have a vested and nonforfeitable interest in his or her Employer Contribution and Additional Employer Contribution Accounts, to be determined from the following vesting schedule:

Completed Years of Service		Vesting Percentage
Less than	1	0	%
	1	50	%
	2	100	%

Notwithstanding the foregoing, a Participant’s Accrued Benefit shall become 100% vested and nonforfeitable if a Participant dies while actively employed by the Company or, if earlier, upon attainment of a Participant’s Normal Retirement Age while actively employed by the Company.

5.02 Eligibility for Plan Benefits. Any Participant (or the Beneficiary of any deceased Participant) who terminates employment with the Company or who retires or dies while actively employed by the Company shall be entitled to receive a benefit from this Plan according and subject to the provisions of this Article.

5.03 Benefit Amount. The benefit payable to any Participant or his Beneficiary who becomes entitled to a benefit from this Plan shall constitute the balance of the vested portion of the Participant’s Accrued Benefit, determined as of the close of the last calendar month before his or her benefit is due to commence, subject to adjustment for contributions and investment experience credited thereafter until all Plan benefits have been paid.

5.04 Distribution of Benefits. Except as provided in Section 5.05, a Participant’s Accrued Benefit shall be payable to him or her or to his or her Beneficiary, or such benefits shall commence to be paid, within 60 days following the earliest of the following events:

(A) his or her retirement from the Company;

(B) his or her termination of his employment from the Company; or

(C) his or her death.

Except as provided in Section 5.05, payment shall be made or shall commence within 60 days after the event described above occurs. If payment is to be made in installments, the second installment shall be paid on the first business day of the calendar year following the calendar year in which payment of the first installment occurs and subsequent installments shall be paid on the first business day of each succeeding calendar year until the entire benefit amount has been paid. No Participant or Beneficiary shall be entitled to any benefit under this Plan other than payment of the Participant’s vested Accrued Benefit in accordance with this Plan as in effect as of the date of the event described above.

5.05 A Participant’s vested Accrued Benefit shall be paid in any of the following ways:

(A) in a single sum payment;

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(B) in installments over a period of not more than 10 years; or

(C) under any other payment method agreeable to the Plan Administrator which is permissible under Code Section 409A and any guidance issued by Internal Revenue Service (the “IRS”) thereunder.

Notwithstanding the foregoing, if termination of employment occurs as a result of a change in control (as defined by the IRS), or if a distribution is to be paid to a “key employee” of a publicly traded company (as defined by Code Section 409A and in any guidance issued by the IRS), the Plan Administrator shall delay any distributions to the Participant or to his or her Beneficiary, if necessary to comply with Code Section 409A and any guidance issued by the IRS thereunder.

Within 30 days of the date an Employee first becomes a Participant in this Plan, the Participant shall file a written election with the Plan Administrator, on a form that is furnished by or satisfactory to the Plan Administrator, specifying the benefit option that shall be effective for him or her and for his or her Beneficiary. Any such election form must provide that the first scheduled payment (including any lump sum payment) cannot be made until at least one year from the date of the election. The Participant, may, by written notice, elect to change his or her or his or her Beneficiary’s benefit option at any time, but any such change shall not be effective until the date that is one year from the date the written notice is received by the Plan Administrator. Any such change that is intended to delay the payment of benefits payable hereunder must delay the initial payment by at least five years (except in the case of death). Any benefit election shall become irrevocable as of the scheduled distribution commencement date. A Participant’s initial election form or a subsequent election form that has been executed one year prior to its effective date shall govern the distribution of the Participant’s Accrued Benefit and such election shall be interpreted in accordance with the provisions of Code Section 409A and any guidance issued by the Internal Revenue Service thereunder.

Unless a Participant has elected otherwise, if a Participant dies after Plan benefits have commenced but before they have concluded under options (B) or (C) above, then the scheduled payment(s) shall continue thereafter to the Participant’s designated Beneficiary. If no Beneficiary has been designated or if no Beneficiary survives the Participant, then any remaining Plan benefits shall be paid instead in a lump sum to the Participant’s estate.

Notwithstanding the foregoing, if a Participant does not make a valid election as to how vested Plan benefits are to be paid, a Participant’s vested Accrued Benefit shall be paid in a lump sum, subject to the timing restrictions set forth in this Article V.

Additionally, notwithstanding the foregoing, upon termination of employment for reasons other than death or retirement, a single lump sum payment shall be made of a Participant’s Accrued Benefit in accordance with and subject to the timing restrictions set forth in the Article V.

5.06 Designation of Beneficiary. Each Participant shall designate a Beneficiary on a form provided by or satisfactory to the Plan Administrator, and such designation may include primary and contingent Beneficiaries. Such designation shall remain in force until revoked by the Participant by filing a new Beneficiary designation with the Plan Administrator. If a Participant does not designate a Beneficiary or if his or her Beneficiary or any contingent Beneficiaries do not survive the Participant, the estate of the Participant shall be deemed to be his or her designated Beneficiary.

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ARTICLE VI

PLAN ADMINISTRATION

6.01 Plan Administrator. The Plan Administrator shall be responsible for the general operation and administration of the Plan and for carrying out its provisions. The Plan Administrator shall consist of one or more persons appointed from time to time by the Company’s President, provided, however, that no person who is a Plan Participant may be appointed or remain as a Plan Administrator. Each such person who is appointed shall serve at the pleasure of the Company’s President.

In the administration of this Plan, the Plan Administrator may, from time to time, employ agents and delegate to them such administrative duties he/she/they deem(s) fit and from time to time consult with counsel who may be counsel to the Company.

6.02 Powers of Administration. In addition to duties and powers conferred on him, her or they elsewhere in the Plan, the Plan Administrator shall have full authority to interpret the Plan, to decide all questions of eligibility to participate and to receive benefits under the Plan, to direct the Company to pay benefits and Plan administration expenses, to retain clerical, legal, actuarial and other professional assistance as needed, to adopt rules for operating the Plan, to notify eligible individuals of their rights under the Plan, to keep records of each Participant’s interest under the Plan, and to adopt a benefit claim and review procedure consistent with that required by ERISA. The Plan Administrator shall be entitled to rely conclusively upon all calculations, opinions, reports and data furnished with respect to the Plan by the Company or by any actuary, accountant, counsel or other person employed or engaged by the Company. The Plan Administrator’s actions and decisions shall be final and binding, unless arbitrary or capricious.

Notwithstanding any provision of the Plan to the contrary, the Plan Administrator shall have total discretion to fulfill his, her or their duties and responsibilities as he, she or they see(s) fit on a uniform and consistent basis and as he/she/they believe(s) a prudent person acting in a like capacity and familiar with such matters would do.

6.03 Books and Records. The Plan Administrator shall keep such books of account, records and other data as may be necessary for the proper administration of the Plan.

6.04 Costs and Expenses of Administration. All expenses and costs of administering the Plan shall be paid by the Company.

ARTICLE VII

AMENDMENT AND TERMINATION

7.01 Amendment and Termination. The Company reserves the right to amend the Plan in any respect, retroactively or prospectively, at any time and from time to time by a written instrument stating such intent and adopted by the Company’s Board of Directors. The Company also reserves the right to terminate the Plan at any time pursuant to a resolution of the Company’s Board of Directors.

7.02 Effect of Amendment or Termination. No amendment or termination of the Plan shall deprive any Participant or Beneficiary of any portion of a Plan benefit to which he or she was entitled when payment of such benefit commenced, if payment commenced prior to the effective date of such Plan amendment or termination, nor shall any Participant or Beneficiary be deprived of his or her right to

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receive any benefit to which he or she would be entitled if the Participant had terminated employment on the day before the effective date of such amendment or termination, subject to the conditions of Section 3.03.

ARTICLE VIII

MISCELLANEOUS

8.01 Protection of Employee Interest. To the extent permitted by law, the rights of any Participant or Beneficiary to any benefit or payment under this Plan shall not be subject to attachment or other legal process for the debts of such Participant or Beneficiary; and any such benefit or payment shall not be subject to anticipation, alienation, sale, transfer, assignment or encumbrance.

8.02 Unfunded Plan; No Fiduciary Relationship Created. This Plan is intended to be an unfunded plan. Nothing contained in this Plan, and no action taken pursuant to the provisions of this Plan, shall create or be construed to create a fiduciary relationship between the Company and any Plan Participant, Beneficiary or any other person. Plan benefits shall be paid from the general assets of the Company. The Company may establish a grantor trust to provide a source for benefit payments under this Plan. Any such grantor trust shall conform to the terms of the Internal Revenue Service model Rabbi Trust set forth in Revenue Procedure 92-64 (and as modified or superseded in the future), or shall otherwise be designed so as to preserve the Plan’s exempt status as an unfunded plan for the purposes of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. Any funds which may be invested by the Company to make provision for its obligations hereunder shall continue for all purposes to be a part of the general funds of the Company and no person other than the Company shall by virtue of the provisions of this Plan have any interest in such funds. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the rights of any unsecured general creditor of the Company.

8.03 No Enlargement of Employee Rights. No Participant shall have any right to receive a distribution of any amounts credited or earned under the Plan except in accordance with the terms of the Plan. Establishment or maintenance of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company for any period of time.

8.04 Incapacity of Recipient. If any person entitled to a distribution under the Plan is deemed by the Plan Administrator to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Plan Administrator may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor.

8.05 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate, subject to the provisions of Section 7.02.

8.06 Unclaimed Benefit. Each Participant shall keep the Company informed of his or her current address and the current address of his or her designated Beneficiary. The Company shall not be obligated to

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search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three years after the date on which payment of the Participant’s benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any designated Beneficiary of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or designated Beneficiary and such benefit shall be irrevocably forfeited.

8.07 Governing Law. All rights under this Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, to the extent they are not pre-empted by the laws of the United States of America.

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Schedule A

Register of Approvals/Amendments

Adopted by FAFLIC Board:	December 22, 2004 (effective January 1, 2005)
Amended by FAFLIC Board:	December 16, 2005
Amended by FAFLIC Board:	December 21, 2006 (effective January 1, 2006)
Amended by FAFLIC Board:	June 27, 2007; (certain amendments effective January 1, 2007; other amendments effective January 1, 2008)
Amended by FAFLIC and Hanover Boards:	December 19, 2007 (effective January 1, 2008)

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EX-31.1

Exhibit 31.1

CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Frederick H. Eppinger, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Hanover Insurance Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2008

/s/ Frederick H. Eppinger, Jr.

Frederick H. Eppinger, Jr.

President, Chief Executive Officer and Director

EX-31.2

Exhibit 31.2

CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Eugene M. Bullis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Hanover Insurance Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2008

/s/ Eugene M. Bullis

Eugene M. Bullis

Executive Vice President, Chief Financial Officer and Principal Accounting Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as President, Chief Executive Officer and Director of The Hanover Insurance Group, Inc. (the “Company”), does hereby certify that to the undersigned’s knowledge:

1) the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Company’s Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Frederick H. Eppinger, Jr.

Frederick H. Eppinger, Jr.

President, Chief Executive Officer and Director

Dated: May 7, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Executive Vice President, Chief Financial Officer and Principal Accounting Officer of The Hanover Insurance Group, Inc. (the “Company”), does hereby certify that to the undersigned’s knowledge:

1) the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Company’s Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Eugene M. Bullis

Eugene M. Bullis

Executive Vice President, Chief Financial Officer and Principal Accounting Officer

Dated: May 7, 2008