THG 2018 Annual Report

Letter of Credit 3ULRU WR WKH VDOH RI &KDXFHU ZH KDG D 6WDQGE\ /HWWHU RI &UHGLW )DFLOLW\ $JUHHPHQW WKH ³)DFLOLW\ $JUHHPHQW´ ZKLFK Z as not to exceed £220.0 million outstanding at any one time, and included an option to increase the amount available for issuances of letters of credit to £300.0 million. 7KH )DFLOLW\ $JUHHPHQW SURYLGHG UHJXODWRU\ FDSLWDO VXSSRUWLQJ &KDXFHU¶V XQGHUZULWLQJ DFWLYLWLHV IRU WKH DQG years of account and each prior open year of account. Supporting the Facility Agreement, we had entered into a Guaranty Agreement WKH ³*XDUDQW\ $JUHHPHQW´ ZLWK /OR\GV %DQN SOF DV )DFLOLW\ $JHQW DQG 6HFXULW\ $JHQW SXUVXDQW WR ZKLFK ZH XQFRQGLWLRQDOO\ guaranteed the obligations of Chaucer under the Facility Agreement. On December 28, 2018, in connection with the completion of the Chaucer sale, this Facility Agreement and the related Guaranty Agreement were terminated. Foreign Exchange 0RVW RI &KDXFHU¶V WUDQVDFWLRQV DUH GHQRPLQDWHG LQ WKH FXUUHQFLHV WKDW ZH XVH WR VHWWOH WUDQVDFWLRQV ZLWK /OR\G¶V VSHFLILFDOO\ WKH 8 6 'ROODU WKH 8 . 3RXQG 6WHUOLQJ ³*%3´ DQG WKH &DQDGLDQ 'ROODU 7KHVH DUH &KDXFHU¶V IXQFWLRQDO FXUUHQFLHV XQGHU 8 6 *$$3 $ SRUWLRQ RI &KDXFHU¶V WUDQVDFWLRQV DQG LWV DVV ets and liabilities are denominated in other currencies, such as the Euro, the Swiss Franc, the Australian Dollar, and the Japanese Yen. Changes in the value of these currencies versus the functional currencies, particularly versus the GBP, cause transactional gains and losses during each reporting period. During 2018 and 2017, the GBP was relatively stable against most currencies. In contrast, the GPB weakened meaningfully against most currencies in 2016. We believe that this was due, in large part, to the HIIHFW RI WKH 8 .¶V UHIHUHQGXP YRWH WR GLVFRQWLQXH LWV PHPEHUVKLS LQ WKH (XURSHDQ 8QLRQ ³%UH[LW 5HIHUHQGXP´ 7KH IROORZLQJ WDEOH VXPPDUL]HV WKH WRWDO HIIHFW RI &KDXFHU¶V IRUHLJQ H[FKDQJH WUDQVDFWLRQDO JDLQV DQG ORVVHV RQ FRPSUHKHQVLYH LQF ome: YEARS ENDED DECEMBER 31 2018 2017 2016 in millions Effect of revaluing loss and LAE reserves $ 0.3 $ (2.7) $ (36.9) Effect of revaluing overseas deposits and cash (2.1) (0.8) 11.5 Effect of revaluing premium receivables 1.1 0.4 3.4 Total FX effect on operating income before interest expense and income taxes (0.7) (3.1) (22.0) FX gains (losses) reflected in net realized investment gains (losses) 0.4 1.7 (0.7) Total FX effect on income before income taxes (0.3) (1.4) (22.7) Unrealized FX gains from investment securities 0.5 0.6 8.3 Total pre-tax effect of transactional FX gains (losses) on comprehensive income 0.2 (0.8) (14.4) Income tax benefit ² 0.3 5.0 Total effect of transactional FX gains (losses) on comprehensive income $ 0.2 $ (0.5) $ (9.4) During 2018, foreign exchange losses, on a net basis, reduced pre-tax income by approximately $0.3 million, compared to approximately $1.4 million in 2017 and $22.7 million in 2016. For 2018, this impact primarily resulted from the revaluation of investments in overseas deposits. For 2017 and 2016, this impact primarily resulted from the revaluation of loss and LAE reserves. In addition, during 2018, pre-tax unrealized foreign exchange gains from investment securities were approximately $0.5 million, which was reflected as an increase to accumulated other comprehensive income, compared to $0.6 million in 2017 and $8.3 million in 2016. INCOME TAXES We are subject to the tax laws and regulations of the U.S. and foreign countries in which we operate. We file a consolidated U.S. federal income tax return that includes our holding company and its U.S. subsidiaries. Generally, taxes are accrued at the U.S. statutory tax rate for income from the U.S. operations. In December 2017, the U.S. statutory rate decreased from 35% to 21%, effective January 1, 2018. Our primary non-U.S. jurisdiction was the U.K., until the sale of our U.K. subsidiaries, largely completed December 28, 2018. The U.K. statutory tax rate ranged between 20% and 19% during the period 2016 through 2018. We accrue taxes on certain non-U.S. income that is subject to U.S. tax at the enacted U.S. tax rate. Foreign tax credits, where available, are utilized to offset U.S. tax as permitted. 64 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT