THG 2018 Annual Report

Income (Loss) from Operations of Chaucer Business The following table summarizes the results of operations for Chaucer for the periods indicated: (in millions) 2018 (1) 2017 2016 Revenues Net premiums earned $ 850.0 $ 853.0 $ 838.6 Net investment income 54.9 52.0 45.7 Other income 7.5 6.7 7.1 912.4 911.7 891.4 Losses and operating expenses Losses and LAE 515.5 549.5 419.3 Amortization of deferred acquisition costs 252.5 245.9 231.6 Other expenses 115.0 109.2 113.7 883.0 904.6 764.6 Income from Chaucer business before income taxes and other items (previously presented as Chaucer's operating income) 29.4 7.1 126.8 Other items: Interest expense (3.8) (3.3) (3.5) Net realized and unrealized investment gains (losses) (1.3) 2.6 (1.6) Other income 0.4 2.2 4.6 Income from Chaucer business before income taxes $ 24.7 $ 8.6 $ 126.3 Loss and LAE ratio: Current accident year, excluding catastrophe losses 54.8 % 53.0 % 60.4 % Prior accident year reserve development, excluding catastrophe losses (4.3) % (4.0) % (11.4) % Current accident year catastrophe losses 12.1 % 18.2 % 5.5 % Prior accident year favorable catastrophe loss development (2.0) % (2.8) % (4.5) % Total loss and LAE ratio 60.6 % 64.4 % 50.0 % Expense ratio 42.5 % 40.9 % 40.4 % Combined ratio 103.1 % 105.3 % 90.4 % (1) 2018 reflects the results of operations for the period in which we owned Chaucer, which concluded with the sale of the Chaucer business on December 28, 2018 . 2018 Compared to 2017 &KDXFHU¶V QH t premiums earned were $850.0 million for the year ended December 31, 2018, compared to $853.0 million for the year ended December 31, 2017, a decrease of $3.0 million, or 0.4%. This was primarily due to a planned increase in the use of ceded reinsurance, as a result of current market conditions, partially offset by new business growth in the casualty line. &KDXFHU¶V LQFRPH EHIRUH LQFRPH WD[HV IRU WKH \HDU HQGHG 'HFHPEHU ZDV PLOOLRQ FRPSDUHG WR PLOOLRQ IRU WKH year ended December 31, 2017, an improvement of $16.1 million. This increase is primarily due to lower catastrophe losses. Catastrophe losses for the year ended December 31, 2018 were $85.8 million, compared to $131.1 million for the year ended December 31, 2017, a decrease of $45 PLOOLRQ &KDXFHU¶V LQFRPH EHIRUH WD[HV H[FOXGLQJ FDWDVWURSKHV ZDV PLOOLRQ LQ WKH \HDU HQGHG 'HFHPEHU 2018, compared to $139.7 million for the year ended December 31, 2017. This $29.2 million decline was primarily due to higher non- catastrophe current accident year large losses and higher expenses, primarily driven by higher brokerage costs due to a change in business mix. 2017 Compared to 2016 &KDXFHU¶V QHW SUHPLXPV HDUQHG ZHUH PLOOLRQ IRU WKH \HDU HQGHG 'HFHPEHU FRPSDUHG W o $838.6 million for the year ended December 31, 2016, an increase of $14.4 million, or 1.7%. This was primarily due to new business growth in the treaty, property and casualty lines, partially offset by a planned increase in the use of ceded reinsurance, as a result of current market conditions. 62 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT