THG 2019 Proxy Statement

THE HANOVER INSURANCE GROUP 2019 PROXY STATEMENT B-1 Appendix B Non-GAAP Financial Measures The discussion of our results in the CD&A includes a discussion our operating income before interest expense and income taxes and ex-cat operating income, each of which are non-GAAP financial measures. Operating Income Operating income before interest expense and income taxes is a non-GAAP financial measure because it excludes from net income certain items of expense or income that management does not consider representative of the results attributable to the core operations of our business. The items excluded were primarily realized investment gains, losses on the repayment of debt and from the settlement of pension obligations, interest expense on debt and income taxes. A reconciliation of operating income before interest expense and income taxes to income from continuing operations is presented below and on page 40 of our Annual Report on Form 10-K filed with the SEC on February 22, 2019. Ex-Cat Operating Income Ex-cat operating income is a non-GAAP financial measure because it excludes from net income certain items of expense or income that management does not consider representative of the results attributable to the core operations of our business, including those items noted above, as well as the impact of catastrophe losses on our results. Although catastrophe losses are a significant component in understanding and assessing our financial performance, management has metrics that evaluate results excluding catastrophes due to the fact that they are not predictable as to the timing or the amount that will affect our operations. A reconciliation of 2018 operating income before interest expense and income taxes and ex-cat operating income to income from continuing operations, the most directly comparable GAAP financial measure, is set forth below. The presentation below excludes all of our Chaucer business because the Chaucer segment was classified as discontinued operations during the third quarter of 2018. (in millions) 2018 Income from continuing operations, net of tax $ 239.0 Adjustment for certain non-operating items 53.1 Operating income, net of interest expense and income taxes 292.1 Income tax expense on operating income 69.3 Interest expense on debt 45.1 Operating income before interest expense and income taxes 406.5 Pre-tax catastrophe effect 219.2 Ex-cat operating income $ 625.7 A reconciliation of 2017 and 2016 operating income before interest expense and income taxes and ex-cat operating income to income from continuing operations is set forth below. These figures have not been restated to exclude the results of the Chaucer segment because compensation metrics in prior years included Chaucer results. (in millions) 2017 2016 Income from continuing operations, net of tax $ 203.0 $ 156.1 Adjustment for certain non-operating items 0.8 28.3 Operating income, net of interest expense and income taxes 203.8 184.4 Income tax expense on operating income 84.0 83.5 Interest expense on debt 48.5 54.9 Operating income before interest expense and income taxes 336.3 322.8 Pre-tax catastrophe effect 382.6 125.1 Ex-cat operating income $ 718.9 $ 447.9