THG 2018 Annual Report

$2 million to $10 million layers, subject to a maximum umbrella limit of $5 million. There is also separate umbrella and excess liability only coverage that provides protection for the $5 million to $25 million layer. The casualty program provides coverage for management liability and healthcare lines in a $1 million to $2 million layer, with co-participations ranging from 45% to 65%. x For 2018 and 2019, Commercial Lines segments are further protected by excess of loss treaty agreements for specific lines of business. For example, the surety and fidelity bond excess of loss treaty provides coverage, on a per principal basis, up to $40 million, less a $5 million retention, with co-participations of 50% for the $5 million to $10 million layer and no co- participation for the $10 million to $40 million layer. x In addition to certain layers of coverage from our Commercial and Personal Lines segment reinsurance program as described DERYH WKH &RPPHUFLDO /LQHV $,; +ROGLQJV ,QF ³$,;´ SURJUDP EXVLQHVV DOVR LQFOXGHV VXUSOXV VKDUH TXRWD VKDUH H[FHVV of loss, stop loss, facultative and other forms of reinsurance that cover the writings from AIX specialty and proprietary programs. There are approximately 55 different AIX programs, and the reinsurance structure is customized to fit the exposure profile for each program. Our intention is to renew the surety and fidelity bond treaty, the property per risk excess of loss treaty and the property catastrophe treaty in July 2019 with the same or similar terms and conditions, but there can be no assurance that we will be able to maintain our current levels of reinsurance, pricing and terms and conditions. Our 2019 casualty excess of loss treaty is effective January 1, 2019 for a twelve month period. Reinsurance Recoverables We share insurance risk of the primary underlying contracts with various insurance entities through the use of reinsurance contracts. As a result, when we experience loss events that are subject to a reinsurance contract, reinsurance recoveries are recorded. The amount of the reinsurance recoverable can vary based on the size of the individual loss or the aggregate amount of all losses in a particular line, book of business or an aggregate amount associated with a particular accident year. The valuation of losses recoverable depends on whether the underlying loss is a reported loss, or an incurred but not reported loss. For reported losses, we value reinsurance recoverables at the time the underlying loss is recognized, in accordance with contract terms. For incurred but not reported losses, we estimate the amount of reinsurance recoverable based on the terms of the reinsurance contracts and historical reinsurance recovery information and apply that information to the gross loss reserve estimates. The most significant assumption we use is the average size of the individual losses that will exceed our reinsurance retentions for those claims that have occurred but have not yet been reported to us. The reinsurance recoverable is based on what we believe are reasonable estimates and is disclosed separately on the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses are settled. Other than our investment portfolio, the single largest asset class is our reinsurance receivables, which consist of our estimate of amounts recoverable from reinsurers with respect to losses incurred to date (including losses incurred but not reported) and unearned premiums, net of amounts estimated to be uncollectible. These estimates are expected to be revised at each reporting period and such revisions, which could be material, affect our results of operations and financial position. Reinsurance recoverables include amounts due from state mandatory reinsurance or other involuntary risk sharing mechanisms, and private reinsurers to whom we have voluntarily ceded business. We are subject to concentration of risk with respect to reinsurance ceded to various mandatory residual markets, facilities and pooling mechanisms. As a condition to conduct business in various states, we are required to participate in residual market mechanisms, facilities and pooling arrangements which usually are designed to provide insurance coverages to individuals or other entities that are otherwise unable to purchase such coverage voluntarily or at rates deemed reasonable. These market mechanisms, facilities and pooling arrangements comprise $990.9 million of our total reinsurance recoverables on paid and unpaid losses and unearned premiums at December 31, 2018, $977.1 million of which is attributable to WKH 0LFKLJDQ &DWDVWURSKLF &ODLPV $VVRFLDWLRQ ³0&&$´ 7KH 0&&$ LV D PDQGDWRU\ UHLQVXUDQFH DVVRFLDWLRQ ZKLFK UHLQVXUHV FODLPV XQGHU 0LFKLJDQ¶V XQOLPLWHG SHUVRQDO LQMXU\ SURWHFWLRQ coverage which is required under all Michigan automobile insurance policies. The MCCA reinsures all such claims in excess of a statutorily established company retention, currently $555,000. Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders. This recoverable accounted for 64% and 63% of our total personal automobile gross reserves at December 31, 2018 and 2017, respectively. Reinsurance recoverables related to MCCA were $977.1 million and $930.6 million at December 31, 2018 and 2017, respectively. Because the MCCA is supported by assessments permitted by statute, and there have been no significant uncollectible balances from MCCA identified during the three years ending December 31, 2018, we believe that we have no significant exposure to uncollectible reinsurance balances from this entity. 10 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT