THG 2018 Annual Report

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION 7KH FRQVROLGDWHG ILQDQFLDO VWDWHPHQWV RI 7KH +DQRYHU ,QVXUDQFH *URXS ,QF ³7+*´ RU WKH ³&RPSDQ\´ LQFOXGH WKH DFFRXQWV RI The Hanover Insurance Comp DQ\ ³+DQRYHU ,QVXUDQFH´ DQG &LWL]HQV ,QVXUDQFH &RPSDQ\ RI $PHULFD ³&LWL]HQV´ 7+*¶V SULQFLSDO property and casualty companies; and other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 14 ± ³6HJPHQW ,QIRUPDWLRQ´ 7KH FRQVROLGDWHG ILQDQFLDO VWDWHPHQWV DOVR LQFOXGH WKH &RPSDQ\¶V GLVFRQWLQXHG RSHUDWLRQV FRQVLVWLQJ SULPDULO\ RI &KDXFHU +ROGLQJV /LPLWHG ³&KDXFHU´ D VSHFLDOLVW LQVXUDQFH underwriting group which ope UDWHV WKURXJK WKH 6RFLHW\ DQG &RUSRUDWLRQ RI /OR\G¶V ³/OR\G¶V´ DQG WKH &RPSDQ\¶V DFFLGHQW DQG KHDOWK and former life insurance businesses. All intercompany accounts and transactions have been eliminated. On December 28, 2018, the Company completed the s DOH RI &KDXFHU WR &KLQD 5HLQVXUDQFH *URXS &RUSRUDWLRQ ³&KLQD 5H´ 7KH VDOH RI WKH &KDXFHU -related Irish entity was completed on February 14, 2019 for proceeds of $28 million. The sale of the Australian entities for proceeds of $13 million is pending, subject only to local regulatory approval, and is expected to close in the first quarter of 2019. Accordingly, as of December 31, 2018 and for all prior periods presented in this Annual Report on Form 10- . &KDXFHU¶V DFFRXQWV KDYH EHHQ FODVVLILHG DV GLVFRQW inued operations in the Consolidated Statements of Income and as held-for-sale in the Consolidated Balance Sheets (See Note 2 ± ³'LVFRQWLQXHG 2SHUDWLRQV´ The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ³8 6 *$$3´ UHTXLUHV WKH &RPSDQ\ WR PDNH HVWLPDWHV DQG DVVXPSWLRQV WKDW DIIHFW WKH UHSRUWHG DPRXQWV RI DVVHWV DQG OLDELOLWL es and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses GXULQJ WKH UHSRUWLQJ SHULRG $FWXDO UHVXOWV FRXOG GLIIHU IURP WKRVH HVWLPDWHV ,Q WKH RSLQLRQ RI WKH &RPSDQ\¶V PDQDJHPHQW WKH se financial statements reflect all adjustments, consisting of normal recurring items necessary for a fair presentation of the financial position and results of operations. B. INVESTMENTS Fixed maturities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses, net of taxes, reported in accumul DWHG RWKHU FRPSUHKHQVLYH LQFRPH ³$2&,´ D VHSDUDWH FRPSRQHQW RI VKDUHKROGHUV¶ HTXLW\ 7KH DPRUWL]HG FRVW RI IL[HG maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Equity securities are carried at fair value. Effective January 1, 2018, in accordance with the provisions of Accounting Standards &RGLILFDWLRQ ³$6&´ 8SGDWH 1R -01, (Subtopic 825-10) Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ³$68 1 o. 2016- ´ , increases and decreases in fair value are reported in net income. Previously, equity securities were classified as available-for-sale and unrealized gains and losses, net of taxes, were reported in AOCI. See Section O ± ³1HZ Accounting Prono XQFHPHQWV´ EHORZ Other investments consist primarily of mortgage participations and limited partnerships. Mortgage participations represent interests in commercial mortgage loans originated and serviced by a third-party of which the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgage loans. Prior to May 2018, certain reacquisition rights, which are no longer in effect, and which were previously retained by the third-party in the loan participations required that these investments be accounted for as secured borrowings under ASC 860, Transfers and Servicing ³$6& ´ Mortgage participations are stated at unpaid principal balances adjusted for deferred fees or expenses, net of reserves. Reserves on mortgages are established and are collectively evaluated based on losses expected by the Company for loans that may not be collectible in full. In establishing reserves, the Company considers, among other things, the estimated fair value of the underlying collateral. Investments in limited partnerships include interests in private equity funds. Effective January 1, 2018, in accordance with the provisions of ASC Update No. 2016-01 ZKHQ WKH &RPSDQ\¶V LQWHUHVW LQ WKH SDUWQHUVKLS is so minor that it exercises virtually no influence over operating and financial policies, the limited partnership investment is accounted for at fair value with unrealized gains and losses reported in net income. Previously, such investments were accounted for under the cost method. All other investments in limited partnership interests are accounted for in accordance with the equity method of accounting. Net investment income includes interest, dividends, and income from limited partnership interests. Interest income is recognized based on the effective yield method which includes the amortization of premiums and accretion of discounts. The effective yield used to determine the amortization for fixed maturities subject to prepayment risk, such as mortgage-backed and asset-backed securities, is recalculated and adjusted periodically based upon actual historical and projected future cash flows. The adjustment to yields for highly rated prepayable fixed maturities is accounted for using the retrospective method. The adjustment to yields for all other prepayable fixed maturities is accounted for using the prospective method. Fixed maturities and mortgage participations that are delinquent are placed on non-accrual status, and thereafter interest income is recognized only when cash payments are received. 81 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP