THG 2018 Annual Report

YEAR ENDED DECEMBER 31, 2017 (in millions) Commercial Lines Personal Lines Other Total Underwriting profit (loss), excluding prior year reserve development and catastrophes $ 173.4 $ 174.0 $ (3.0) $ 344.4 Prior year favorable (unfavorable) loss and LAE reserve development on non-catastrophe losses 9.4 (9.4) (1.2) (1.2) Prior year favorable catastrophe development 1.4 ² ² 1.4 Current year catastrophe losses (172.0) (80.9) ² (252.9) Underwriting profit (loss) 12.2 83.7 (4.2) 91.7 Net investment income 165.8 70.1 8.0 243.9 Fees and other income 8.4 11.4 2.7 22.5 Other operating expenses (9.0) (6.5) (15.3) (30.8) Operating income (loss) before interest expense and income taxes $ 177.4 $ 158.7 $ (8.8) $ 327.3 YEAR ENDED DECEMBER 31, 2016 (in millions) Commercial Lines Personal Lines Other Total Underwriting profit (loss), excluding prior year reserve development and catastrophes $ 169.9 $ 154.4 $ (1.6) $ 322.7 Prior year (unfavorable) favorable loss and LAE reserve development on non-catastrophe losses (223.0) (4.3) (8.3) (235.6) Prior year favorable (unfavorable) catastrophe development 3.7 (6.3) ² (2.6) Current year catastrophe losses (73.8) (40.7) ² (114.5) Underwriting (loss) profit (123.2) 103.1 (9.9) (30.0) Net investment income 158.5 69.5 3.6 231.6 Fees and other income 8.5 11.4 2.7 22.6 Other operating expenses (9.1) (6.3) (15.9) (31.3) Operating income (loss) before interest expense and income taxes $ 34.7 $ 177.7 $ (19.5) $ 192.9 2018 Compared to 2017 Commercial Lines Commercial Lines net premiums written were $2,610.7 million for the year ended December 31, 2018, compared to $2,462.0 million for the year ended December 31, 2017. This $148.7 million increase was primarily driven by pricing increases, strong retention, and targeted new business expansion, in addition to reductions in reinstatement premiums. Reinsurance reinstatements were $0.5 million unfavorable in 2018 compared to $27.8 million unfavorable in 2017. The year over year favorable change was $27.3 million due to several 2017 large losses above our retention level in our surety, inland marine and commercial multiple peril lines. The reinstatement premiums represent the pro-rata reinsurance premium charged for reinstating the amount of reinsurance coverage utilized as a result of the incurred losses that are reimbursable under our reinsurance treaties. See the Glossary of Selected Insurance Terms ± ³5HLQVWDWH ment SUHPLXP´ Commercial Lines underwriting profit for the year ended December 31, 2018 was $85.0 million, compared to $12.2 million for the year ended December 31, 2017, a change of $72.8 million. Catastrophe-related losses for the year ended December 31, 2018 were $142.3 million, compared to $170.6 million for the year ended December 31, 2017, a decrease of $28.3 million. Favorable development on SULRU \HDUV¶ ORVV UHVHUYHV IRU WKH \HDU HQGHG 'HFHPEHU ZDV PLOOLRQ FRPSDUHG WR PLOOLRQ I or the year ended December 31, 2017, a favorable change of $24.7 million. Commercial Lines current accident year underwriting profit, excluding catastrophes, was $193.2 million for the year ended December 31, 2018, compared to $173.4 million for the year ended December 31, 2017. This $19.8 million improvement was primarily due to the reduction in large loss-related reinsurance reinstatement premiums, lower expenses and earned premium growth, partially offset by higher non-catastrophe current accident year losses. The reduction in reinsurance reinstatement premiums, net of ceding commissions, increased non-catastrophe current accident year underwriting profit by $21.5 million compared to the prior year. The higher non- catastrophe current accident year losses were driven by large property loss activity in our commercial multiple peril line and higher loss activity in our commercial automobile liability line, partially offset by lower loss activity in our other commercial lines. We are continuing our efforts to improve underwriting results through increased rates, pricing segmentation, specific underwriting actions and targeted new business growth. Our ability to achieve overall rate increases is affected by the current competitive pricing 44 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT