THG 2018 Annual Report

FXVWRPHUV¶ EURDGHU REMHFWLYHV $SSUR[LPDWHO\ 84% of our policies in force are account business. We are focused on seeking profitable growth opportunities, building a distinctive position in the market, and diversifying geographically. Net premiums written grew by 7.7% in 2018, primarily due to higher renewal premium, driven by rate increases and strong retention, as well as new business growth. Underwriting results declined in 2018, as compared to 2017, primarily due to higher unfavorable GHYHORSPHQW RQ SULRU \HDUV¶ ORVV UHVHUYHV DQG KLJKHU QRQ -catastrophe current accident year losses, partially offset by earned premium growth, lower catastrophe losses, and lower expenses. We continue to seek rate increases that meet or exceed underlying loss cost trends, subject to regulatory and competitive considerations. DESCRIPTION OF OPERATING SEGMENTS Primary business operations include insurance products and services currently provided through three operating segments: Commercial Lines, Personal Lines, and Other. Commercial Lines includes commercial multiple 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, such as umbrella. ,QFOXGHG LQ WKH ³2WKHU´ VHJPHQW DUH 2SXV ,QYHVWPHQW 0DQDJHPHQW ,QF ZKLFK PDUNHWV LQYHVWPHQW PDQDJHPHQW VHUYLFHV to institutions, pension funds, and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to our former life insurance employees and agents; and a run-off voluntary pools business. Due to the sale of Chaucer on December 28, 2018, the operations of Chaucer have been classified as Discontinued Operations for the period ending December 31, 2018. Periods prior to 2018 have also been restated to present Chaucer as a discontinued operation. 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. We report interest expense on debt separately from the earnings of our operating segments. This consists of interest on our senior GHEHQWXUHV VXERUGLQDWHG GHEHQWXUHV DQG FROODWHUDOL]HG ERUURZLQJV ZLWK WKH )HGHUDO +RPH /RDQ %DQN ³)+/%´ RESULTS OF OPERATIONS ± CONSOLIDATED 2018 Compared to 2017 Consolidated net income was $391.0 million in 2018, compared to $186.2 million in 2017, an increase of $204.8 million. The year over year comparison of consolidated net income reflects a $131.9 million gain, net of taxes, on the sale of our Chaucer business. Additionally, operating income before interest expense and income taxes increased $79.2 million, primarily due to lower catastrophe losses and higher net investment income. Income increased from our discontinued operations, primarily Chaucer and, to a lesser extent, our discontinued life business, which incurred a 2017 reserve charge related to our participation in a long- WHUP FDUH SRRO 6HH DOVR ³'LVFRQWLQXHG 2SHUDWLRQV´ VHFWLRQ EHORZ $OVR LQFRPH WD[ H[SHQVH RQ RSHUDWLQJ LQFRPH GHFUHDVHG PLOOLRQ GULYHQ E\ D GHFUHDVH LQ WKH U.S. statutory tax rate from 35% to 21% effective January 1, 2018. These increases in net income were partially offset by net realized and unrealized investment losses, net of taxes, of $30.9 million in 2018, compared to net realized investment gains, net of taxes, of $26.2 million in 2017, principally related to reductions in fair value of equity securities. Effective January 1, 2018, we implemented ASU 2016-01, which requires that the changes in fair value of equity securities be presented in net income. Prior to then, these changes were recognized through accumulated other comprehensive income (see also Note 1 ± ³6XPPDU\ RI 6LJQLILFDQW $FFRXQWLQJ 3ROLFLHV´ LQ WKH Notes to Consolidated Financial Statements). Net income was also affected by $22.3 million in losses, net of taxes, associated with the repayment of debt in 2018. 39 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP