THG 2018 Annual Report

INTRODUCTION 7KH IROORZLQJ 0DQDJHPHQW¶V 'LVFXVVLRQ DQG $QDO\VLV RI )LQDQFLDO &RQGLWLRQ DQG 5HVXOWV RI 2SHUDWLRQV LV LQWHQGHG WR DVVLVW UHD ders in understanding the consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and its subsidiaries ³7+*´ &RQVROLGDWHG UHVXOWV RI RSHUDWLRQV DQG ILQDQFLDO FRQGLWLRQ DUH SUHSDUHG LQ DFFRUGDQFH ZLWK JHQHUDOO\ DFFHSWHG DFFRXQ ting SULQFLSOHV LQ WKH 8QLWHG 6WDWHV RI $PHULFD ³8 6 *$$3´ 7KLV GLVFXVVLRQ VKRXOG EH UHDG LQ FRQMXQFWLRQ ZLWK WKH & onsolidated Financial Statements and related footnotes included elsewhere herein. 5HVXOWV RI RSHUDWLRQV LQFOXGH WKH DFFRXQWV RI 7KH +DQRYHU ,QVXUDQFH &RPSDQ\ ³+DQRYHU ,QVXUDQFH´ DQG &LWL]HQV ,QVXUDQFH &RPS any RI $PHULFD ³&LWL]HQV´ RXU SULQFLSDO SURSH rty and casualty companies; and certain other insurance and non-insurance subsidiaries. Our results of operations also include the results of our discontinued operations, consisting primarily of our former Chaucer international business, Chaucer Holdings L LPLWHG ³&KDXFHU´ D 8QLWHG .LQJGRP ³8 . ´ GRPLFLOHG VSHFLDOLVW LQVXUDQFH XQGHUZULWLQJ JURXS ZKLFK RSHUDWHV WKURXJK WKH 6RFLHW\ DQG &RUSRUDWLRQ RI /OR\G¶V ³/OR\G¶V´ DQG WKH LQWHUQDWLRQDO LQVXUDQFH DQG QRQ -insurance subsidiaries, which collectively constituted our former Chaucer segment. On December 28, 2018, we completed the sale of Chaucer Holdings Limited, the major portion of our Lloyd's international specialty business. As of December 31, 2018 and for all prior periods presented in this Annual Report on Form 10-K, operations from Chaucer and the related assets and liabilities are presented as discontinued operations. Results of operations also include the discontinued operations of our accident and health and former life insurance businesses. EXECUTIVE OVERVIEW Business operations consist of three operating segments: Commercial Lines, Personal Lines and Other. Net income was $391.0 million in 2018, compared to $186.2 million in 2017, an increase of $204.8 million, primarily due to the gain from the sale of our former Chaucer business and an increase in operating income. Operating income before interest expense and income taxes (a non- *$$3 ILQDQFLDO PHDVXUH VHH DOVR ³5HVXOWV RI 2SHUDWLRQV ± Consolidated ± Non- *$$3 )LQDQFLDO 0HDVXUHV´ ZDV million in 2018 compared to $327.3 million in 2017, an increase of $79.2 million. This increase is primarily due to lower catastrophe losses, higher net investment income, a reduction in reinsurance reinstatement premiums, earned premium growth and lower expenses, partially offset by higher non-catastrophe current accident year losses. Pre-tax catastrophe losses were $219.2 million in 2018, compared to $251.5 million in 2017, a decrease of $32.3 million. Reinsurance reinstatement premium, net of ceding commissions, was a favorable change of $21.5 million. Net unfavorable development on prior \HDUV¶ ORVV DQG ORVV DGMXVWPHQW H[SHQVH ³/$(´ UHVHUYHV ³SULRU \HDUV¶ ORVV UHVHUYHV´ ZDV PLOOLRQ LQ FRPSDUHG WR $1.2 million in 2017. As discussed further LQ ³'LVFRQWLQXHG 2SHUDWLRQV´ EHORZ RQ 'HFHPEHU ZH FRPSOHWHG WKH VDOH RI &KDXFHU WR &KLQD 5H :H 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. Commercial Lines Our account-focused approach to the small commercial market, distinctiveness in the middle market, and continued development of specialty lines provides us with a diversified portfolio of products and delivers significant value to agents and policyholders. Each of these businesses is expected to contribute to premium growth in Commercial Lines over the next several years as we continue to pursue our core strategy of developing strong partnerships with agents, enhanced franchise value through limited distribution, distinctive products and coverages, and continued investment in industry segmentation. These efforts have driven, and we believe they will continue to drive, improvement in our overall mix of business and our underwriting profitability. Commercial Lines net premiums written grew by 6.0% in 2018, due to growth in small commercial, middle market, and the professional lines within our specialty business. Approximately 4.9% of this growth was due to rate and exposure increases, strong retention and targeted new business expansion, with the balance being attributable to improved reinsurance reinstatement activity. Underwriting results improved in 2018, as compared to 2017, primarily due to lower catastrophe losses, higher favorable development RQ SULRU \HDUV¶ ORVV UHVHUYHV D UHGXFWLRQ LQ UHLQVXUDQFH UHLQVWDWHPHQW SUHPLXPV GULYHQ E\ SULRU \HDU ODUJH ORVV DFWLYLW\ DQ d lower expenses, partially offset by higher non-catastrophe current accident year losses. Catastrophe losses were $142.3 million in 2018, a GHFUHDVH RI PLOOLRQ ZKHQ FRPSDUHG WR )DYRUDEOH GHYHORSPHQW RQ SULRU \HDUV¶ ORVV UHVHUYH LQ ZDV PLOOLRQ , compared to $9.4 million in 2017, an increase of $24.7 million. Reinsurance reinstatement premium, net of ceding commissions, had an unfavorable impact of $0.9 million in 2018, compared to $22.4 million in 2017, a favorable change of $21.5 million. The competitive nature of the Commercial Lines market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins, and we continue to seek rate increases across our lines of business. Personal Lines Personal Lines focuses on partnering with high quality, value-oriented agencies that deliver consultative selling and stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and additional coverages, to address 38 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT