THG 2018 Annual Report

overseas and was not subject to U.S. tax until repatriated. These non-U.S. earnings are now subject to a one-time mandatory toll charge totaling $12.7 million, which is recorded within discontinued operations as a component of income tax expense related to the Chaucer business for the year ended December 31, 2017. In addition, the Act limited various existing deductions such as executive compensation and introduced new income taxes on certain low-taxed non-U.S. income. Under the Act, the exemption from the $1 million limitation on certain executive compensation has been eliminated. As a result, we have recognized a provision of $0.2 million for the year ended December 31, 2017. The cumulative effect of the enactment of TCJA is an expense of $22.3 million for the year ended December 31, 2017, comprising the DIRUHPHQWLRQHG WKUHH FRPSRQHQWV 2XU HVWLPDWHV DUH QRW EDVHG XSRQ SURYLVLRQDO DPRXQWV DV GHILQHG LQ WKH 6(&¶V 6WDII $FFRXQW ing Bulletin No. 118. CRITICAL ACCOUNTING ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements. These statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting estimates are those which we believe affect the more significant judgments and estimates used in the preparation of our financial statements. Additional information about other significant accounting policies and estimates may be found in Note 1 ²³6XPPDU\ RI 6LJQLILFDQW $FFRXQWLQJ 3ROLFLHV´ LQ WKH 1RWHV WR &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV RESERVE FOR LOSSES AND LOSS EXPENSES 6HH ³5HVHUYH IRU /RVVHV DQG /RVV $GMXVWPHQW ([SHQVHV´ ZLWKLQ ³5HVXOWV RI 2SHU ations ± 6HJPHQWV´ IRU D GLVFXVVLRQ RI RXU FULWLFDO accounting estimates for loss reserves. REINSURANCE RECOVERABLE BALANCES 6HH ³5HLQVXUDQFH 5HFRYHUDEOHV´ LQ 3DUW , ± Item 1 for information on our reinsurance recoverable balances. PENSION BENEFIT OBLIGATIONS We currently have a U.S. qualified defined benefit plan and several smaller non ± qualified benefit plans. Additionally, we held a defined benefit pension plan for our international subsidiary, Chaucer, until its sale on December 28, 2018. Accordingly, this discussion focuses on our domestic plans only. In order to measure the liabilities and expense associated with these plans, we must make various estimates and key assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates. These estimates and assumptions are reviewed at least annually and are based on our historical experience, as well as current facts and circumstances. In addition, we use outside actuaries to assist in measuring the expenses and liabilities associated with our defined benefit pension plan. Two significant assumptions used in the determination of benefit plan obligations and expenses that are dependent on market factors, which have been subject to a greater level of volatility in recent years, are the discount rate and the return on plan asset assumptions. The discount rate enables us to state expected future benefit payments as a present value on the measurement date. We also use this discount rate in the determination of our pre-tax pension expense or benefit. A lower discount rate increases the present value of benefit obligations and increases pension expense. We determined our discount rate for the domestic plan utilizing independent yield curves which provide for a portfolio of high quality bonds that are expected to match the cash flows of our pension plans. Bond information used in the yield curve included only those rated Aa or better as of December 31, 2018 and 2017, respectively, and had been rated by at least two well-known rating agencies. The following provides the discount rates for our qualified pension plan. U.S. Qualified Discount Rate Assumptions: Plan 2018 4.50% 2017 3.875% To determine the expected long-term return on plan assets, we generally consider historical mean returns by asset class for passive indexed strategies, as well as current and expected asset allocations, and adjust for certain factors that we believe will have an impact on future returns. Actual returns on plan assets in any given year seldom result in the achievement of the expected rate of return on assets. Actual returns on plan assets in excess of these expected returns will generally reduce our net actuarial losses (or increase actuarial JDLQV WKDW DUH UHIOHFWHG LQ WKH DFFXPXODWHG RWKHU FRPSUHKHQVLYH LQFRPH EDODQFH LQ VKDUHKROGHUV¶ HTXLW\ ZKHUHDV DFWXDO UHWXU ns on plan assets that are less than expected returns will generally increase our net actuarial losses (or decrease actuarial gains) that are reflected in accumulated other comprehensive income. These gains or losses are amortized into expense in future years. The U.S. qualified plan held assets consisting of approximately 85% fixed maturities and 15% equities at December 31, 2018. 66 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT