THG 2019 Proxy Statement

THE HANOVER INSURANCE GROUP 2019 PROXY STATEMENT 21 EXECUTIVE COMPENSATION Note Regarding Non-GAAP Financial Measures - The discussion of our results in this CD&A includes a discussion of our operating income before interest expense and income taxes (“ operating income ”) and ex-cat operating income, including and excluding the results of our Chaucer business line, which was sold in 2018. Each of these financial measures is a non-GAAP financial measure. Reconciliations to the most directly comparable GAAP measure and/or explanations of how we calculate these measures are contained in Appendix B to this Proxy Statement, which is incorporated herein by reference. Compensation Discussion and Analysis (“ CD&A ”) The Compensation Committee (the “ Committee ”), in consultation with the Board’s Committee of Independent Directors (the “ CID ”), is responsible for establishing and monitoring our executive compensation programs. More specifically, the Committee is responsible for approving the compensation for our executive officers, including those identified in the Summary Compensation Table on page 39 (our “ named executive officers ,” or “ NEOs ”), subject, in the case of our CEO, to ratification by the CID. Although this discussion and analysis refers principally to compensation of our NEOs, the same general compensation principles and practices apply to all our executive officers. Special Note Regarding Chaucer Sale and John Fowle On December 28, 2018, we completed the sale of Chaucer Holdings Limited (substantially all of our Chaucer business unit) (the “ Chaucer Sale ”) to China Reinsurance (Group) Corporation (“ China Re ”). The marketing, negotiation and ultimate sale of Chaucer were accomplished pursuant to a strategic review process that was conducted throughout all of 2018. In light of this process and its potential disruptive impact to our Chaucer employees, including John Fowle, Chaucer’s President and CEO, our primary focus with respect to Chaucer’s 2018 executive compensation programs was to foster their assistance with a transaction and encourage their retention through the closing of a potential transaction to ensure stability within the organization and to provide any potential buyer the opportunity to implement its own post-closing retention programs. Because the annual compensation programs for our senior Chaucer employees, including Mr. Fowle, were established with an expectation of the sale of Chaucer during 2018, the rationale and elements of compensation for each of these individuals were unique and not representative of the annual pay decisions for our other NEOs and senior officers. Accordingly, Mr. Fowle’s compensation will be discussed separately in the section entitled “Compensation for Chaucer CEO.” All other disclosure with respect to NEO compensation contained in this CD&A, including disclosures with respect to our NEOs as a group, expressly excludes Mr. Fowle. We believe this approach provides a more representative view of our annual pay programs with respect to our executive team. Executive Summary and Overview Fiscal 2018 Highlights Our 2018 performance was strong, with significant contributions from virtually every component of our business. Highlights include: • Net Income – net income of $391.0 million; • Operating Income – operating income of $406.5 million; • Ex-Cat Operating Income – ex-cat operating income of $625.7 million; • Sale of Chaucer and Execution of Other Strategic Objectives – executed on several major strategic priorities, including the Chaucer Sale, as discussed under “Short-Term Incentive Compensation” below; • Stock Price Appreciation – the price of our Common Stock increased by 8.0%; • Dividend Yield – declared a $4.75 special dividend and increased our ordinary quarterly dividend by 11.0% to $0.60 per share, or $2.40 annualized; • TSR – total shareholder return of 43.6% (assuming reinvestment of dividends) for the three-year period ending on December 31, 2018; • Net Premium Written – approximately 6.7% increase in net premium written; • Share Repurchases – repurchased approximately 497,200 shares of our Common Stock for $57.7 million during 2018, and on December 30, 2018, entered into an Accelerated Share Repurchase Agreement to acquire $250 million of our Common Stock during the first half of 2019; and • Company Recognition – recognized by Forbes as one of “America’s Best Mid-size Employers” for a fourth consecutive year, The Human Rights Campaign as a “Best Place to Work,” and by The Boston Business Journal as a “Corporate Citizenship Award” recipient.