THG 2018 Annual Report

generally short-term in nature and are reported net of an allowance for estimated uncollectible premium accounts. The Company reviews its receivables for collectability at the balance sheet date. The allowance for uncollectible accounts was not material as of December 31, 2018 and 2017. Ceded premiums are charged to income over the applicable term of the various reinsurance contracts with third-party reinsurers. Reinsurance reinstatement premiums, when required, are recognized in the same period as the loss event that gave rise to the reinstatement premiums. Losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through estimated and unpaid losses and amortization of deferred acquisition costs. L. INCOME TAXES The Company is subject to the tax laws and regulations of the U.S. and foreign countries in which it operates. The Company files a consolidated U.S. federal income tax return that includes the holding company and its U.S. subsidiaries. Generally, taxes are accrued at WKH 8 6 VWDWXWRU\ WD[ UDWH IRU LQFRPH IURP WKH 8 6 RSHUDWLRQV ,Q 'HFHPEHU WKH 7D[ &XWV DQG -REV $FW ³7&-$´ ZDV HQD cted, which reduced the U.S. statutory rate from 35% to 21%, effective January 1, 2018. See Note 7 ± ³,QFRPH 7D[HV´ IRU D GLVFXVVLRQ RI WKLV new law. The Company accrues 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. 7KH &RPSDQ\¶V DFFRXQWLQJ IRU LQFRPH WD[HV UHSUHVHQWV LWV EHVW HVWLPDWH RI YDULRXV HYHQWV DQG WUDQVDFWLRQV Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by ASC 740, Income Taxes ³$6& ´ 7KHVH temporary differences are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. These differences result primarily from insurance reserves, deferred acquisition costs, investments, and employee benefit plans. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Consideration is given to all available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Valuation allowances are established if, based on available information, it is determined that it is more likely than not that all or some portion of the deferred tax assets will not be realized. Changes in valuation allowances are generally reflected in income tax expense or as an adjustment to other comprehensive income (loss) depending on the nature of the item for which the valuation allowance is being recorded. M. STOCK-BASED COMPENSATION The Company recognizes the fair value of compensation costs for all share-based payments, including employee stock options, in the financial statements. Unvested awards are generally expensed on a straight line basis, by tranche, over the vesting period of the award. 7KH &RPSDQ\¶V VWRFN -based compensation plans are discussed further in Note 11 ± ³6WRFN - %DVHG &RPSHQVDWLRQ 3ODQV´ N. EARNINGS PER SHARE (DUQLQJV SHU VKDUH ³(36´ IRU WKH \HDUV HQGHG 'HFHP ber 31, 2018, 2017 and 2016 is based on a weighted average of the number of shares outstanding during each year. Basic and diluted EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. The weighted average shares outstanding used to calculate basic EPS differ from the weighted average shares outstanding used in the calculation of diluted EPS due to the effect of dilutive employee stock options, nonvested stock grants and other contingently issuable shares. If the effect of such items is antidilutive, the weighted average shares outstanding used to calculate diluted EPS are equal to those used to calculate basic EPS. Options to purchase shares of common stock whose exercise prices are greater than the average market price of the common shares are not included in the computation of diluted earnings per share because the effect would be antidilutive. O. NEW ACCOUNTING PRONOUNCEMENTS Recently Implemented Standards ,Q )HEUXDU\ WKH )LQDQFLDO $FFRXQWLQJ 6WDQGDUGV %RDUG ³)$6%´ LVVXHG $6& 8SGDWH 1R -02 (Topic 220) Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . This ASC update allows for a reclassification into retained earnings of the stranded tax effects in AOCI resulting from the enactment of the TCJA. Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of the enactment of the TCJA related to items in AOCI. The updated guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company early adopted this guidance effective January 1, 2018 with a cumulative effect adjustment, which reclassified $6.5 million of EHQHILWV IURP $2&, WR UHWDLQHG HDUQLQJV ZLWK QR RYHUDOO LPSDFW RQ WKH &RPSDQ\¶V ILQDQFLDO SRV ition. 84 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT