THG 2018 Annual Report

2017 Compared to 2016 Consolidated net income was $186.2 million in 2017, compared to $155.1 million in 2016, an increase of $31.1 million. Operating income before interest expense and income taxes increased $134.4 million, primarily attributable to the year-over-year changes in GHYHORSPHQW RQ SULRU \HDUV¶ ORVV UHVHUYHV 8QIDYRUDEOH GHYHORSPHQW RQ SULRU \HDUV¶ ORVV UHVHUYHV ZDV PLOOLRQ LQ FR mpared to $235.6 million in 2016. Additionally, our results in 2017 benefitted from improved non-catastrophe current accident year underwriting results and higher investment income. These increases were partially offset by a $134.4 million increase in current year catastrophe losses. The year over year comparison of consolidated net income was also affected by a $102.2 million decrease in earnings from the Chaucer business, now reclassified as discontinued operations, from income of $89.1 million in 2016 to losses of $13.1 million in 2017, primarily resulting from higher catastrophe losses. Also, consolidated net income in 2016 included a $57.4 million loss, after taxes, associated with the repayment of debt that did not recur in 2017. These increases in net income were partially offset by increases in 2017 of $15.8 million of after-tax losses from discontinued life operations, primarily due to an increase in our long-term care pool reserves. The following table reflects operating income before interest expense and income taxes for each operating segment and a reconciliation to consolidated net income from operating income before interest expense and income taxes (a non-GAAP measure). YEARS ENDED DECEMBER 31 2018 2017 2016 (in millions) Operating income (loss) before interest expense and income taxes: Commercial Lines $ 265.7 $ 177.4 $ 34.7 Personal Lines 146.2 158.7 177.7 Other (5.4) (8.8) (19.5) Operating income before interest expense and income taxes 406.5 327.3 192.9 Interest expense on debt (45.1) (45.2) (51.4) Operating income before income taxes 361.4 282.1 141.5 Income tax expense on operating income (69.3) (89.5) (46.3) Operating income 292.1 192.6 95.2 Non-operating items: Net realized investment gains (losses) (50.7) 21.1 10.2 Net loss from repayment of debt (28.2) ² (88.3) Other ² (10.3) 2.6 Income tax benefit on non-operating items 25.8 12.7 47.3 Income from continuing operations, net of taxes 239.0 216.1 67.0 Discontinued operations: Gain from sale of Chaucer business, net of taxes 131.9 ² ² Income (loss) from Chaucer business, net of taxes 20.0 (13.1) 89.1 Income (loss) from discontinued life business, net of taxes 0.1 (16.8) (1.0) Net income $ 391.0 $ 186.2 $ 155.1 Non-GAAP Financial Measures In addition to consolidated net income, discussed above, we assess our financial performance based upon pre- WD[ ³RSHUDWLQJ LQFRPH ´ and we assess the operating performance of each of our three operating segments based upon the pre-tax operating income (loss) generated by each segment. As reflected in the table above, operating income before taxes excludes interest expense on debt and certain other items which we believe are not indicative of our core operations, such as net realized investment gains and 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 are important components in understanding and assessing our overall financial SHUIRUPDQFH ZH EHOLHYH D GLVFXVVLRQ RI RSHUDWLQJ LQFRPH EHIRUH WD[HV HQKDQFHV DQ LQYHVWRU¶V XQGHUVWDQGLQJ RI RXU UHVXOWV RI operations by highlighting net income attributable to the core operations of the business. However, operating income before taxes, which is a non- GAAP measure, 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. 40 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT