THG 2018 Annual Report

In addition to the reinsurance ceded to various residual market mechanisms, facilities, and pooling arrangements we have $655.9 million of reinsurance assets due from traditional reinsurers as of December 31, 2018. These amounts are due principally from highly-rated reinsurers, defined as rated A- or higher by A.M. Best or other equivalent rating agency. The following table displays balances recoverable from our ten largest reinsurance groups at December 31, 2018, along with the $ 0 %HVW UDWLQJ IRU HDFK JURXS¶V XOWLPDWH parent or lead rating unit. Reinsurance recoverables are comprised of paid losses recoverable, outstanding losses recoverable, incurred but not reported losses recoverable, and ceded unearned premium. REINSURERS A.M. Best Rating Reinsurance Recoverable (in millions) HDI Group (Hannover Ruckversicherungs AG) A $ 105.0 Lloyd's Syndicates A 79.4 Alleghany Corporation (Transatlantic Reinsurance Co.) A 61.9 Munich Reinsurance Companies A+ 56.5 Toa Reinsurance Company Ltd. A 55.1 Swiss Re Ltd. A+ 48.7 Axis Capital Holding Ltd. A+ 27.4 EXOR N.V. (Partner Reinsurance Company of the U.S.) A 19.8 Tokio Marine Holdings Inc. A+ 15.1 Berkshire Hathaway Inc. A++ 14.7 Subtotal 483.6 All other reinsurers 172.3 Residual markets, facilities, and pooling arrangements 990.9 Total $ 1,646.8 Reinsurance recoverable balances in the table above are shown before consideration of balances owed to reinsurers and any potential rights of offset, including collateral held by us, and are net of an allowance for uncollectible recoverables. Reinsurance treaties are generally purchased on an annual basis. Treaties typically contain provisions that allow us to demand that a reinsurer post letters of credit or assets as security if a reinsurer is an unauthorized reinsurer under applicable regulations or if its rating falls below a SUHGHWHUPLQHG FRQWUDFWXDO OHYHO ,Q UHJDUGV WR UHLQVXUDQFH UHFRYHUDEOHV GXH IURP /OR\G¶V 6\QGLFDWHV DV SDUW RI WKH /OR\G¶V ³ chain of VHFXULW\´ DIIRUGHG WR DOO RI LWV SROLF\KROGHUV UHFRXUVH LV DYDLODEOH WR WKH /OR\G¶V &HQWUDO )XQG in the event of the failure of an individual syndicate and its capital providers. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. In addition, from time to time insurers and reinsurers may disagree on the scope of the reinsurance or on the underlying insured risks. Any of these events would increase our costs and could have a material adverse effect on our business. We have established a reserve for uncollectible reinsurance of $3.9 million as of December 31, 2018, or 0.2% of the total reinsurance recoverable balance, which was determined by considering reinsurer specific default risk on paid and unpaid recoverables as indicated by their financial strength ratings, any ongoing solvency issues, any current risk of dispute on paid recoverables, and our past collection experience. There have been no significant balances determined to be uncollectible and thus no significant charges recorded during 2018 for uncollectible reinsurance recoverables. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. When reinsurance for our Commercial and Personal Lines segments is placed, our standards of acceptability generally require that a reinsurer must have a minimum policyholder surplus of $500 million, a UDWLQJ IURP $ 0 %HVW DQG RU 6 3 RI ³$´ or better, or an equivalent financial strength if not rated. In addition, for lower rated reinsurers, FHUWDLQ UHLQVXUHUV IRU RXU LQVXUDQFH RSHUDWLRQV WKDW KDYH QRW EHHQ JUDQWHG DXWKRUL]HG VWDWXV E\ DQ LQVXUDQFH FRPSDQ\¶V VWDWH of domicile, and in certain other circumstances, reinsurers must generally provide collateral equal to 100% of estimated reinsurance recoverables. The collateral can serve to mitigate credit risk. ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT Information regarding loss and LAE reserve development appears in Note 17 ± ³/LDELOLWLHV )RU 2XWVWDQGLQJ &ODLPV /RVVHV DQG /RVV $GMXVWPHQW ([SHQVHV´ LQ WKH 1RWHV WR &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV $GGLWLRQDOO\ VHH ³5HVHUYH IRU /RVVHV DQG /RVV $GMXVW ment ([SHQVHV´ LQ 0DQDJHPHQW¶V 'LVFXVVLRQ DQG $QDO\VLV RI )LQDQFLDO &RQGLWLRQ IRU GLVFXVVLRQ RI SULRU \HDU GHYHORSPHQW 11 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP