THG 2018 Annual Report

3XUVXDQW WR 1HZ +DPSVKLUH¶ s statute, the maximum dividends and other distributions that an insurer may pay in any twelve month SHULRG ZLWKRXW SULRU DSSURYDO RI WKH 1HZ +DPSVKLUH ,QVXUDQFH &RPPLVVLRQHU LV OLPLWHG WR WKH OHVVHU RI RI VXFK LQVXUHU¶V statutory policyholder surplus as of the preceding December 31, or statutory net income less net realized gains. Hanover Insurance declared and paid dividends to its parent totaling $140.0 million, $296.8 million and $218.8 million in 2018, 2017 and 2016, respectively. In 2017, the $296.8 million dividend included $80.0 million of extra ordinary dividends. At January 1, 2019, the maximum dividend payable without prior approval is $76.7 million. In May 2019, the maximum dividend declared payable without prior approval will increase by $140.0 million to a total amount of $216.7 million. 3XUVXDQW WR 0LFKLJDQ¶V VWDWXWH WKH PD[LPXP GLYLGHQGV DQG RWKHU GLVWULEXWLRQV WKDW DQ LQVXUHU PD\ SD\ LQ DQ\ WZHOYH PRQWK SHU iod, without prior approval of the Michigan Insurance Commissioner, is limited WR WKH JUHDWHU RI RI SROLF\KROGHUV¶ VXUSOXV DV RI December 31 of the immediately preceding year or the statutory net income less net realized gains, for the immediately preceding calendar year. Citizens declared dividends to its parent, Hanover Insurance, totaling $87.9 million, $99.9 million and $70.0 million in 2018, 2017 and 2016, respectively. At January 1, 2019, the maximum dividend payable without prior approval is $19.2 million. In December 2019, the maximum dividend declared payable without prior approval will increase by $87.9 million to a total amount of $107.1 million. The statutes in both New Hampshire and Michigan require that prior notice to the respective Insurance Commissioner of any proposed dividend be provided and such Commissioner may, in certain circumstances, prohibit the payment of the proposed dividend. CHAUCER Dividend payments previously paid by Chaucer to THG were regulated by U.K. law, whereby advance notice was provided to the U. . ¶V Prudential Regulatory Authority. Dividend payments of $85.0 million and $79.5 million were made in 2018 and 2016, respectively. 14. SEGMENT INFORMATION 7KH &RPSDQ\¶V SULPDU\ EXVLQHVV RSHUDWLRQV LQFOXGH LQVXUDQFH SURGXFWV DQG VHUYLFHV SURYLGHG WKURXJK WKUHH RSHUDWLQJ VHJPHQWV Commercial Lines, 3HUVRQDO /LQHV DQG 2WKHU &RPPHUFLDO /LQHV LQFOXGHV FRPPHUFLDO PXOWLSOH SHULO FRPPHUFLDO DXWRPRELOH ZRUNHUV¶ compensation, and other commercial coverages, such as inland marine, specialty program business, management and professional liability, surety and specialty property. Personal Lines includes personal automobile, homeowners and other personal coverages. Included in the Other segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; holding company and other expenses, including certain FRVWV DVVRFLDWHG ZLWK UHWLUHPHQW EHQHILWV GXH WR WKH &RPSDQ\¶V IRUPHU OLIH LQVXUDQFH HPSOR\HHV DQG DJHQWV DQG D UXQ -off voluntary pools busines V 2Q 'HFHPEHU WKH &RPSDQ\ FRPSOHWHG WKH VDOH RI &KDXFHU WKH PDMRU SRUWLRQ RI RXU /OR\G¶V LQWHUQDWLRQDO specialty business, to China Re. The Chaucer-related Irish entity was subsequently sold on February 14, 2019. The sale of the Australian entities is pending, subject only to local regulatory approval, and is expected to close in the first quarter of 2019. Accordingly, as of 'HFHPEHU DQG IRU DOO SULRU SHULRGV &KDXFHU¶V UHVXOWV RI RSHUDWLRQV KDYH EHHQ FODVVLILHG DV 'LVFRQWLQXHG 2SHUDWL ons in the Consolidated Statements of Income and assets and liabilities related to the Chaucer business have been classified as held-for-sale in the Consolidated Balance Sheets (see Note 2 ± ³'LVFRQWLQXHG 2SHUDWLRQV´ &HUWDLQ RQJRLQJ H[SHQVHV KDYH EHHQ UH classified from Chaucer to the other three operating segments. The separate financial information 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. The Company reports interest expense related to debt separately from the earnings of its operating segments. For 2018, this consisted RI LQWHUHVW RQ WKH &RPSDQ\¶V VHQLRU GHEHQWXUHV VXERUGLQDWHG GHEHQWXUHV FROODWHUDOL]HG ERUURZLQJV ZLWK W he FHLB, and a letter of credit facility through the completion of the sale of Chaucer on December 28, 2018. Management evaluates the results of the aforementioned segments based on operating income before taxes, excluding interest expense on debt. Operating income before taxes excludes certain items which are included in net income, such as net realized and unrealized investment gains (losses). Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before taxes may be important components in XQGHUVWDQGLQJ DQG DVVHVVLQJ WKH &RPSDQ\¶V RYHUDOO ILQDQFLDO SHUIRUPDQFH PDQDJHPHQW EHOLHYHV WKDW WKH SUHVHQWDWLRQ RI operating LQFRPH EHIRUH WD[HV HQKDQFHV DQ LQYHVWRU¶V XQGHUVWDQGLQJ RI WKH &RPSDQ\¶V UHVXOWV RI RSHUDWLRQV E\ KLJKOLJKWLQJ QHW LQFRPH DW tributable to the core operations of the business. However, operating income before taxes should not be construed as a substitute for income before income taxes and operating income should not be construed as a substitute for net income. 118 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT