THG 2018 Annual Report

4 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT 2018 was an exceptional year for The Hanover Our 2018 financial performance is a testament to our success and the inherent strength of our company, our underwriting acumen, financial discipline and investment expertise. Investors continue to recognize our success and progress, as evidenced by our superior stock performance over the last five-year period. We generated an adjusted operating return on equity 3 of 12.6 percent, as our domestic business reported record revenue and operating income for the year. We delivered solid underwriting performance in spite of an active catastrophe season, sustaining a strong underlying underwriting profitability with a 91 percent combined ratio excluding catastrophes. We maintained capital discipline and expense rigor, reducing our expense ratio while continuing to invest in our businesses. The company committed to return approximately $600 million of capital to shareholders in 2018, including the special dividend and accelerated stock repurchase agreement announced at year-end. We also grew our book value by almost 6 percent during the year, adding back the impact of the special dividend. 5 To stay nimble in changing times, we recognize the need to continuously adjust our portfolio mix, directing our capital and other resources in the most effective way, while growing in areas where we have a sustainable, competitive advantage. To that end, the sale of our Lloyd’s international specialty business, Chaucer, marked an important step in our journey. After careful evaluation and analysis, we believe our interests are best served as a primary domestic insurance business, building business segments in which we have differentiated market positions, earn above target returns, and have significant prospects for profitable growth. Additionally, the sale of Chaucer reduces our volatility and exposure to global catastrophe events and provides us with additional capital flexibility moving forward. Chaucer had been an important contributor to our company since we acquired the business in 2011. It surpassed our earnings expectations and continues to successfully navigate CURRENT ACCIDENT YEAR COMBINED RATIO, EX-CAT 2 EXPENSE RATIO 4 90.9% 90.9% 91.1% 92.9% 93.6% 2014 2015 2016 2017 2018 97.3% 100.4% 98.1% 99.4% Total Combined Ratio 96.1% 32.1% 32.6% 33.2% 33.3% 33.6% 2014 2015 2016 2017 2018