THG 2018 Annual Report

Reserves for discontinued accident and health business of our insurance subsidiaries are included in liabilities of discontinued operations for GAAP and loss and loss adjustment expenses for Statutory reporting. DISCONTINUED OPERATIONS Discontinued operations primarily include our former Chaucer operations and our discontinued accident and health business. Chaucer The Chaucer business sold property and casualty insurance products internationally through a wholly-owned subsidiary, Chaucer +ROGLQJV /LPLWHG ³&KDXFHU´ ZKLFK RSHUDWHV WKURXJK WKH 6RFLHW\ DQG &RUSRUDWLRQ RI /OR\G¶V ³/OR\G¶V´ DQG LV GRPLFLOHG LQ W he United Kingdom. During the third quarter of 2018, all of our Chaucer business was classified as discontinued operations. On December ZH FRPSOHWHG WKH VDOH RI &KDXFHU WKH PDMRU SRUWLRQ RI RXU /OR\G¶V LQWHUQDWLRQDO VSHFLDOW\ EXVLQHVV WR &KLQD 5H $ s part of the sale, we entered into certain transition arrangements and agreed to indemnify China Re for litigation and other regulatory matters that existed as of the closing of the sale. 6HH DOVR ³5LVN )DFWRUV´ LQ 3DUW , ± Item 1A). We subsequently completed the sale of our Chaucer-related Irish entity 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. We received $28 million of additional consideration for the Irish entity, and we expect to receive $13 million of additional consideration related to the Australian entities. At December 31, 2018, assets and liabilities associated with the Chaucer-related Irish and Australian entities are reflected as assets and liabilities held-for-sale. The result of operations of the Chaucer business through December 28, 2018 is included in our results of discontinued operations. During 2018, the Chaucer business generated $850.0 million of net earned premium and $20.0 million RI LQFRPH 6HH WKH ³'LVFRQWLQXHG &KDXFHU %XVLQHVV´ VHFWLRQ LQ RXU 0DQDJHPHQW¶V Discussion and Analysis of Financial Condition and Note 2 ± ³'LVFRQWLQXHG 2SHUDWLRQV´ LQ WKH Notes to Consolidated Financial Statements. Prior to its sale to China Re, Chaucer, as a non-U.S. subsidiary of THG, was permitted to engage in certain transactions with Iran prior WR 3UHVLGHQW 'RQDOG 7UXPS¶V GHFLVLRQ WR ZLWKGUDZ IURP WKH -RLQW &RPSUHKHQVLYH 3ODQ RI $FWLRQ 5HJDUGLQJ ,UDQ¶V 1XFOHDU 3URJUDP WKH ³-&32$´ $V D UHVXOW RI VXFK DFWLYLW\ WKH IROORZLQJ GLVFORVXUH LV SURYLGHG SXUVXDQW WR 6HFWLRQ U RI the Securities Exchange Act of 1934, as amended: During the applicable reporting period, January 1 through December 31, 2018, and pursuant to General License H which was then in effect at all relevant times under the JCPOA, a Chaucer syndicate maintained a 5% participation in an aviation reinsurance arrangement WR UHLQVXUH %LPHK ,UDQ ³,UDQ ,QVXUDQFH &RPSDQ\´ DQ LQVXUHU ZKROO\ -owned by the Government of Iran. The arrangement reinsured the hull, liability and cargo risks incurred by the underlying insured, Iran Air. Bimeh Markazi, another insurer wholly-owned by the Government of Iran, was an additional reinsured. This reinsurance arrangement, which was in effect for the period June 22, 2017 through June 21, 2018, was compliant with General License H and FRQWDLQHG D ³VDQFWLRQV H[FOXVLRQ´ FODXVH ZKLFK WHUPLQDWH d coverage in the event Chaucer was no longer legally permitted to provide coverage under applicable law. Estimated total gross revenues from this arrangement were approximately $275,000, and total revenues, net of brokerage expenses and estimated retrocession costs, were approximately $179,500. It is not possible at this time to determine the net profit from the arrangement, although as of December 31, 2018, no claims were paid by the Chaucer syndicate to either of the reinsureds. The agreement expired on June 21, 2018 and was not renewed. Accident and Health and Life Businesses The discontinued accident and health business includes interests in 24 accident and health reinsurance pools and arrangements that we UHWDLQHG VXEVHTXHQW WR WKH VDOH RI )LUVW $OOPHULFD )LQDQFLDO /LIH ,QVXUDQFH &RPSDQ\ ³)$)/,&´ LQ :H FHDVHG ZULWLQJ new premiums in this business in 1999, subject to certain contractual obligations. The reinsurance pool business consists primarily of long- WHUP FDUH WKH PHGLFDO DQG GLVDELOLW\ SRUWLRQV RI ZRUNHUV¶ FRPSHQVDWLRQ ULVNV DVVXPHG SHUVRQDO DFFLGHQW LQGLYLGXDO medical, long-term disability, and special risk business. This business also includes residual health insurance policies. Total reserves for the assumed accident and health business were $113.2 million at December 31, 2018. The long-term care pool accounts for approximately 69% of our reserves as of December 31, 2018. Reserves for the long-term care pool, individual medical, and residual health insurance policies are discounted. Reserves for all other assumed accident and health business are undiscounted. Assets and liabilities related to the discontinued accident and health business are reflected as assets and liabilities of discontinued life business. Loss estimates associated with substantially all of the discontinued accident and health business are provided by managers of each pool. We adopt reserve estimates for this business that consider this information, expected returns on assets assigned to this business and other facts. We update these reserves as new information becomes available and further events occur that may affect the ultimate resolution of unsettled claims. Based on information provided to us by the pool managers, we believe that the reserves recorded related to this business are adequate. However, since reserve and claim cost estimates related to the discontinued accident and health business are dependent on several assumptions, including, but not limited to, morbidity, lapses, future premium rates, future health care costs, persistency of medical care inflation and investment performance, and these assumptions can be impacted by technical developments and advancements in the medical field and other factors, there can be no assurance that the reserves established for this business will prove sufficient. Revisions to these reserves could have a material adverse effect on our results of operations for a particular quarterly RU DQQXDO SHULRG RU RQ RXU ILQDQFLDO SRVLWLRQ 6HH DOVR ³5LVN )DFWRUV´ LQ 3DUW , ± Item 1A. 14 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT