THG 2018 Annual Report

Catastrophe losses and prior ye DUV¶ UHVHUYH GHYHORSPHQW DUH VLJQLILFDQW FRPSRQHQWV LQ XQGHUVWDQGLQJ DQG DVVHVVLQJ WKH ILQDQFLDO SHUIRUPDQFH RI RXU EXVLQHVV 0DQDJHPHQW UHYLHZV DQG HYDOXDWHV FDWDVWURSKHV DQG SULRU \HDUV¶ UHVHUYH GHYHORSPHQW VHSDUDWHO\ IU om the other components of earning V 5HIHUHQFHV WR ³FXUUHQW DFFLGHQW \HDU XQGHUZULWLQJ UHVXOWV´ H[FOXGH SULRU DFFLGHQW \HDU UHVHUYH GHYHORSPHQW DQG PD\ DOVR EH SUHVHQWHG ³H[FOXGLQJ FDWDVWURSKHV´ 3ULRU \HDUV¶ UHVHUYH GHYHORSPHQW DQG FDWDVWURSKHV DUH QRW predictable as to timing or the am RXQW WKDW ZLOO DIIHFW WKH UHVXOWV RI RXU RSHUDWLRQV DQG KDYH DQ HIIHFW RQ HDFK \HDU¶V RSHUDWLQJ DQG QHW income. Management believes that providing certain financial metrics and trends excluding the effects of catastrophes and pri RU \HDUV¶ reserve development helps investors to understand the variability in periodic earnings and to evaluate the underlying performance of our RSHUDWLRQV 'LVFXVVLRQ RI FDWDVWURSKH ORVVHV LQ WKLV 0DQDJHPHQW¶V 'LVFXVVLRQ DQG $QDO\VLV RI )LQDQFLDO &RQGLWLRQ LQFOXGHV GHY elopment on SULRU \HDUV¶ FDWDVWURSKH UHVHUYHV DQG XQOHVV RWKHUZLVH LQGLFDWHG VXFK GHYHORSPHQW LV H[FOXGHG IURP GLVFXVVLRQV RI SULRU \HD r loss and LAE reserve development. RESULTS OF OPERATIONS - SEGMENTS The following is our discussion and analysis of the results of operations by business segment. The operating results are presented before interest expense, taxes and other items which management believes are not indicative of our core operations, including realized gains and losses and the results of discontinued operations. The following table summarizes the results of operations for the periods indicated: YEARS ENDED DECEMBER 31 2018 2017 2016 (in millions) Operating revenues Net premiums written $ 4,384.8 $ 4,109.1 $ 3,882.7 Net premiums earned $ 4,254.4 $ 3,980.4 $ 3,789.5 Net investment income 267.4 243.9 231.6 Other income 23.2 22.5 22.6 Total operating revenues 4,545.0 4,246.8 4,043.7 Losses and operating expenses Losses and LAE 2,724.6 2,574.9 2,546.0 Amortization of deferred acquisition costs 891.8 840.7 803.6 Other operating expenses 522.1 503.9 501.2 Total losses and operating expenses 4,138.5 3,919.5 3,850.8 Operating income before interest expense and income taxes $ 406.5 $ 327.3 $ 192.9 2018 Compared to 2017 Operating income before interest expense and income taxes was $406.5 million for the year ended December 31, 2018, compared to $327.3 million for the year ended December 31, 2017, an increase of $79.2 million. This increase was primarily due to lower catastrophe losses, higher net investment income, a favorable change in reinsurance reinstatement premiums driven by prior year large loss activity, earned premium growth and lower expenses, partially offset by higher non-catastrophe current accident year losses. Net premiums written increased by $275.7 million for the year ended December 31, 2018, compared to the year ended December 31, 2017, due to growth in both our Commercial and Personal Lines segments. 2017 Compared to 2016 Operating income before interest expense and income taxes was $327.3 million for the year ended December 31, 2017, compared to $192.9 million for the year ended December 31, 2016, an increase of $134.4 million. This increase was primarily due to a favorable change in development on prio U \HDUV¶ ORVV UHVHUYHV SDUWLDOO\ RIIVHW E\ KLJKHU FDWDVWURSKH ORVVHV Unfavorable development on prior \HDUV¶ ORVV UHVHUYHV ZDV PLOOLRQ for the year ended December 31, 2017, compared to unfavorable development of $235.6 million for the year ended December 31, 2016, a favorable change of $234.4 million. In 2016, we recognized a reserve charge of $174.1 million following the 2016 fourth quarter reserve review. Catastrophe-related activity for the year ended December 31, 2017 was $251.5 million, compared to $117.1 million for the year ended December 31, 2016, an increase of $134.4 million. This increase in catastrophe losses was primarily due to hurricanes Harvey, Irma and Maria that occurred in the third quarter of 2017, the California wildfires that occurred in the fourth quarter of 2017, and a Midwest wind event that occurred in the first quarter of 2017. Net premiums written increased by $226.4 million for the year ended December 31, 2017, compared to the year ended December 31, 2016, due to growth in both our Personal and Commercial Lines segments. 41 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP