On December 28, 2018, the Company completed the sale of Chaucer Holdings Limited to China Re. Total cash proceeds payable by China Re for this portion of the transaction is expected to total approximately $793.7 million⁽¹⁾ and is subject to adjustment based upon 2018 accident year catastrophe losses in excess of 10% of 2018 net earned premium. The pre-tax gain on the sale is estimated to be $174.4 million. THG paid customary transaction costs along with providing certain representations and warranties and agreeing to indemnify China Re for certain pre-sale contingent liabilities.

The following table summarizes the components of the estimated gain related to the sale of the Chaucer business as of December 28, 2018. This gain below excludes an expected gain on the Irish and Australian entities associated with the Chaucer business. The Company subsequently completed the sale of its Chaucer-related Irish entity on February 14, 2019. The sale of the Australian entities is pending, subject only to local regulatory approval, and is expected to close in the first quarter of 2019. The Company received $28 million of additional consideration for the Irish entity, and it expects to receive $13 million of additional consideration related to the Australian entities.

YEAR ENDED DECEMBER 31	2018
(in millions)
Initial consideration received from sale ⁽¹⁾	$	779.0
Adjustment⁽¹⁾		(17.0	)
Contingent proceeds ^{(1) (2)}		31.7
Total cash proceeds expected from sale of Chaucer Holdings Limited⁽¹⁾		793.7
Less:
Carrying value of Chaucer business ⁽³⁾		530.0
Transaction and other sale related costs ⁽⁴⁾		30.6
Net realized losses on securities, pension and currency translation obligations related to Chaucer business ⁽⁵⁾		58.7
Total pre-tax reductions		619.3
Pre-tax gain on sale		174.4
Income tax expense ⁽⁶⁾		42.5
Gain on sale	$	131.9

(1)

Initial consideration for Chaucer Holdings Limited as determined in the sales and purchase agreement was $779 million. This amount, along with $28 million in cash proceeds received for the sale of the Irish entity on February 14, 2019, $13 million in cash proceeds to be received upon the closing of the sale of the Australian entities, estimated contingent consideration of $31.7 million, and an $85 million pre-signing dividend from Chaucer that was received in the second quarter of 2018, results in expected total proceeds from the entire transaction of $936.7 million. These amounts were partially offset by $17.0 million paid to China Re to adjust the purchase price for amounts received by the Company from Chaucer prior to December 28, 2018.

(2)	Contingent proceeds, as reflected in the sales and purchase agreement, may be up to $45 million and is determined based upon 2018 catastrophe losses. Based upon the Company’s best estimate of Chaucer’s 2018 catastrophe losses, expected contingent consideration is $31.7 million.

(3)	The carrying value of the Chaucer business reflects its U.S. GAAP book value at December 28, 2018, excluding $7.9 million of U.S.-related deferred tax assets that are no longer likely to be realized and therefore are reflected in the income tax expense category.

(4)

Transaction and other sale related costs primarily include brokerage, legal, actuarial, tax and other professional fees, employee retention costs, costs for the purchase of aggregate excess of loss catastrophe coverage in consideration of the contingent proceeds provision, along with certain other miscellaneous charges related to the execution of the transaction.

(5)

As part of the transaction, investments held by Chaucer were transferred to China Re resulting in the recognition of net realized investment losses that were previously reflected in accumulated other comprehensive income. Additionally, Chaucer’s deferred pension obligations and currency translation obligations previously recognized in accumulated other comprehensive income were recognized as losses associated with the transaction.

(6)	The income tax expense represents the current tax obligation on the sale and the derecognition of deferred tax assets that are no longer likely to be realized.

YEARS ENDED DECEMBER 31	2018 ⁽¹⁾			2017			2016
(in millions)
Revenues
Net premiums earned	$	850.0		$	853.0		$	838.6
Net investment income		54.9			52.0			45.7
Other income		7.5			6.7			7.1
		912.4			911.7			891.4
Losses and operating expenses
Losses and LAE		515.5			549.5			419.3
Amortization of deferred acquisition costs		252.5			245.9			231.6
Other expenses		115.0			109.2			113.7
		883.0			904.6			764.6
Income from Chaucer business before income taxes and other items (previously presented as Chaucer's operating income)		29.4			7.1			126.8
Other items:
Interest expense		(3.8	)		(3.3	)		(3.5	)
Net realized and unrealized investment gains (losses)		(1.3	)		2.6			(1.6	)
Other income		0.4			2.2			4.6
Income from Chaucer business before income taxes		24.7			8.6			126.3
Income tax expense		(4.7	)		(21.7	)		(37.2	)
Income (loss) from Chaucer business, net of taxes	$	20.0		$	(13.1	)	$	89.1

(1)

2018 reflects the results of operations for the period in which THG owned Chaucer, which concluded with the sale of the Chaucer business on December 28, 2018.

The Company recognized $0.8 million, $1.1 million and $22.3 million in foreign currency transaction losses in net income in 2018, 2017 and 2016, respectively.

The following table details the carrying amounts of major assets and liabilities reflected in the Consolidated Balance Sheets under the caption “Assets held-for-sale” and “Liabilities held-for-sale”, respectively.

DECEMBER 31	2018		2017
(in millions)
Assets:
Investments	$	24.5	$	2,153.5
Cash and cash equivalents		3.3		78.5
Premiums and accounts receivable, net		2.8		471.9
Deferred acquisition costs		1.4		120.2
Reinsurance recoverable on paid and unpaid losses and unearned premiums		2.3		1,431.5
Goodwill		6.5		13.8
Other assets		16.6		197.2
Total assets	$	57.4	$	4,466.6
Liabilities:
Loss and loss adjustment expense reserves	$	2.0	$	2,686.5
Unearned premiums		7.1		631.9
Reinsurance premium payable		1.5		293.3
Other liabilities		11.6		95.5
Total liabilities	$	22.2	$	3,707.2

In accordance with Lloyd’s operating guidelines, the Company deposited funds at Lloyd’s to support Chaucer underwriting operations. These funds are available only to fund claim obligations. At December 31 2017, fixed maturities with a fair value of $528.1 million and cash of $7.1 million, respectively, were on deposit with Lloyd’s.

The following table details the cash flows associated with the Chaucer business:

Prior to the sale, the Company was subject to concentration of risk with respect to reinsurance ceded with respect to the Lloyd’s syndicates. The Lloyd’s Syndicates total reinsurance receivable balance for the Chaucer business was $443.0 million as of December 31, 2017.

YEARS ENDED DECEMBER 31	2018			2017			2016
(in millions)
Premiums written:
Direct	$	625.3		$	597.6		$	560.3
Assumed		685.3			646.9			546.3
Ceded ⁽¹⁾		(459.9	)		(395.4	)		(290.5	)
Net premiums written	$	850.7		$	849.1		$	816.1
Premiums earned:
Direct	$	611.9		$	568.7		$	584.0
Assumed		667.2			628.3			577.3
Ceded ⁽¹⁾		(429.1	)		(344.0	)		(322.7	)
Net premiums earned	$	850.0		$	853.0		$	838.6
Losses and LAE:
Direct	$	362.2		$	365.2		$	403.1
Assumed		568.7			570.7			258.8
Ceded ⁽²⁾		(415.4	)		(386.8	)		(243.2	)
Net losses and LAE	$	515.5		$	549.1		$	418.7

For Chaucer’s 2016 U.S. casualty treaty lines, the Company entered into a whole account aggregate excess of loss contract. The contract covers the U.S. casualty treaty lines exposures, except specialty risks and workers’ compensation clash. This contract does not meet the risk transfer requirements of GAAP and was accounted for using the deposit accounting method. The impact of reinsurance contracts subject to deposit accounting were recognized through net investment income rather than losses. Net investment income for this contract of approximately $8 million was recognized for each of the years ended December 31, 2018 and December 31, 2017 and $3 million was recognized for the year ended December 31, 2016.

During 1999, the Company exited its accident and health insurance business, consisting of its Employee Benefit Services business, its Affinity Group Underwriters business and its accident and health assumed reinsurance pool business. Prior to 1999, these businesses comprised substantially all of the former Corporate Risk Management Services segment. Accordingly, the operating results of the discontinued segment have been reported in accordance with Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB Opinion No. 30”). On January 2, 2009, Hanover Insurance directly assumed a portion of the accident and health business; and therefore continues to apply APB Opinion No. 30 to this business. In addition, the remainder of the Discontinued First Allmerica Financial Life Insurance Company (“FAFLIC”) accident and health business was reinsured by Hanover Insurance in connection with the sale of FAFLIC to Commonwealth Annuity.

At December 31, 2018 and 2017, the portion of the discontinued accident and health business that was directly assumed had assets of $81.6 million and $76.9 million, respectively, consisting primarily of invested assets, and liabilities of $81.4 million and $83.1 million, respectively, consisting primarily of policy liabilities. At December 31, 2018 and 2017, the assets and liabilities of this business, as well as those of the reinsured portion of the accident and health business are classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.

The Company’s former life insurance businesses include indemnity obligations and other activities.

Discontinued operations for the years ended December 31, 2018, 2017 and 2016 resulted in gains of $0.1 million, losses of $16.8 million and losses of $1.0 million, respectively, net of income tax benefits of $9.3 million and $2.8 million in 2017 and 2016, respectively. The increased losses in 2017 primarily relate to additional losses in the Company’s long-term care pool, which is included in the portion of the discontinued accident and health business that was directly assumed.