THG 2018 Annual Report

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions, as well as foreign jurisdictions. The Company and its subsidiaries are subject to U.S. federal and state income tax examinations and foreign examinations for years after 2014. U.S. Tax Reform 2Q 'HFHPEHU WKH 7D[ &XWV DQG -REV $FW ³7&-$´ ³8 6 7D[ 5HIRUP´ RU ³WKH $FW´ ZDV HQDFWHG LQ WKH 8 6 7KH $FW substantially changed many aspects of the U.S. Tax code, including a reduction in the U.S. corporate income tax rate from 35% to 21%. While the new corporate rate is effective on January 1, 2018, the Company has recognized the impact of the rate change on its deferred tax balances as of the enactment date. The effect of this re- PHDVXUHPHQW RI WKH &RPSDQ\¶V GHIHUUHG WD[ EDODQFHV ZDV D SURYLVLRQ RI $9.4 million for the year ended December 31, 2017. This provision was recorded as a component of income tax expense in continuing operations and as a component of the Chaucer business and reflected a tax benefit of $4.1 million and an expense of $13.5 million, respectively. This amount included the revaluation of deferred taxes initially recorded through other comprehensive income and recorded through discontinued operations, such as unrealized appreciation on investments, employee benefit plan-related items, foreign currency translation adjustments and reserve adjustments for discontinued business. Deferred taxes related to the re YDOXDWLRQ RI WKH &RPSDQ\¶V SHQVLRQ SODQV DW 'HFHPEHU DV ZHOO DV FKDQJHV LQ XQUHDOL]HG JDLQV DQG ORVVHV RFFXUULQJ DIWHU WKH $FW¶V HQDFWPHQW GDW e, were recorded at 21% in other comprehensive income. The Act also created a territorial tax system, which will generally allow companies to repatriate future non-U.S. sourced earnings without incurring additional U.S. taxes, by providing a 100% exemption on dividends received from certain non-U.S. subsidiaries. Although PRVW RI WKH &RPSDQ\¶V QRQ -U.S. income had been previously subject to U.S. taxes, a portion of its non-U.S. income had been indefinitely reinvested overseas and was not subject to U.S. tax until repatriated. These non-U.S. earnings were subject to a one-time mandatory toll charge totaling $12.7 million, which was recorded as a component of income tax expense in discontinued Chaucer business for the year ended December 31, 2017. In addition, the Act limited various existing deductions such as executive compensation and introduced new income taxes on certain low-taxed non-U.S. income. Under the Act, the exemption from the $1 million limitation on certain executive compensation has been eliminated. As a result, the Company recognized a provision of $0.2 million for the year ended December 31, 2017. The Act modified the provisions applicable to the determination of the tax basis of unpaid loss reserves. These modifications impact the payment pattern and applicable interest rate. The Act instructed the Treasury Department to provide discount factors and other guidance necessary to determine the appropriate transition adjustment. This information was released in November 2018 and the transition adjustment has been determined to total $126.2 million, resulting in a deferred tax liability of $26.5 million. This transitional amount will be taken into account ratably over eight years beginning in calendar year 2018. These provisions have no overall effect on the net deferred tax asset or income tax expense for the years ended December 31, 2017 and 2018. The cumulative effect of the enactment of TCJA was an expense of $22.3 million for the year ended December 31, 2017, comprising WKH DIRUHPHQWLRQHG WKUHH FRPSRQHQWV 7KH &RPSDQ\¶V HVWLPDWHV ZHUH QRW EDVHG XSRQ SURYLVLRQDO DPRXQWV DV GHILQHG LQ WKH 6(&¶ s Staff Accounting Bulletin No. 118. 8. PENSION PLANS DEFINED BENEFIT PLANS The Company recognizes the funded status of its defined benefit plans in its Consolidated Balance Sheets. The funded status is measured as the difference between the fair value RI SODQ DVVHWV DQG WKH SURMHFWHG EHQHILW REOLJDWLRQ RI WKH &RPSDQ\¶V GHILQHG EHQHILW SODQV 7KH Company is required to aggregate separately all overfunded plans from all underfunded plans. Prior to its sale of Chaucer on December WKH &RPSDQ\¶V SHQVLRQ REOLJDWLRQ LQFOXGHG GHILQHG EHQHILW SHQVLRQ UHWLUHPHQW EHQHILWV IRU &KDXFHU¶V HPSOR\HHV U.S. Defined Benefit Plans Prior to 2005, THG provided retirement benefits to substantially all of its employees under defined benefit pension plans. These plans were based on a defined benefit cash balance formula, whereby the Company annually provided an allocation to each covered employee EDVHG RQ D SHUFHQWDJH RI WKDW HPSOR\HH¶V HOLJLEOH VDODU\ VLPLODU WR D GHILQHG FRQWULEXWLRQ SODQ DUUDQJHPHQW ,Q DGGLWLRQ WR the cash balance allocation, certain transition group employees who had met specified age and service requirements as of December 31, 1994 ZHUH HOLJLEOH IRU D JUDQGIDWKHUHG EHQHILW EDVHG SULPDULO\ RQ WKH HPSOR\HHV¶ \HDUV RI VHUYLFH DQG FRPSHQVDWLRQ GXULQJ WKHLU KL ghest five FRQVHFXWLYH SODQ \HDUV RI HPSOR\PHQW 7KH &RPSDQ\¶V SROLF\ IRU WKH SODQV LV WR IXQG DW OHDVW WKH PLQLP um amount required by the (PSOR\HH 5HWLUHPHQW ,QFRPH 6HFXULW\ $FW RI ³(5,6$´ As of January 1, 2005, the defined benefit pension plans were frozen and since that date, no further cash balance allocations have been credited to participants. Particip DQWV¶ DFFRXQWV DUH FUHGLWHG ZLWK LQWHUHVW GDLO\ EDVHG XSRQ WKH *HQHUDO $JUHHPHQW RI 7UDGHV DQG 7DULIIV rate (the 30-year Treasury Bond interest rate). In addition, the grandfathered benefits for the transition group were also frozen at January 1, 2005 levels with an annual transition pension adjustment calculated at an interest rate equal to 5% per year up to 35 years of 105 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP