THG 2018 Annual Report

15. LEASE COMMITMENTS Rental expenses for operating leases from continuing operations amounted to $16.7 million, $14.8 million and $15.6 million in 2018, 2017 and 2016, respectively. These expenses relate primarily to building leases of the Company. At December 31, 2018, future minimum rental payments under non-cancelable operating leases were $41.1 million, payable as follows: 2019 - $13.5 million; 2020 - $11.0 million; 2021 - $8.3 million and 2022 - $4.5 million and 2023 and thereafter - $3.8 million. It is expected that in the normal course of business, leases that expire will generally be renewed or replaced by leases on similar property and equipment. Rental expenses for operating leases related to the former Chaucer business amounted to $3.8 million, $3.3 million and $2.9 million in 2018, 2017 and 2016, respectively. These expenses relate primarily to building leases of Chaucer and are included in discontinued operations. 16. REINSURANCE In the normal course of business, the Company seeks to reduce the losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance transactions are accounted for in accordance with the provisions of ASC 944. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company determines the appropriate amount of reinsurance based on evaluations of the risks accepted and analyses prepared by consultants and on market conditions (including the availability and pricing of reinsurance). The Company also believes that the terms of its reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. The Company believes that its reinsurers are financially sound, based upon an ongoing review of financial strength ratings assigned to them by rating agencies, their reputations in the reinsurance marketplace, collections history, advice IURP WKLUG SDUWLHV DQG WKH DQDO\VLV DQG JXLGDQFH RI 7+*¶V UHLQVXUDQFH DGYLVRUV As a condition to conduct certain business in various states, the Company is required to participate in residual market mechanisms, facilities and pool LQJ DUUDQJHPHQWV VXFK DV WKH 0LFKLJDQ &DWDVWURSKLF &ODLPV $VVRFLDWLRQ ³0&&$´ 7KH &RPSDQ\ LV VXEMHFW WR concentration of risk with respect to reinsurance ceded to the MCCA. 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. The Company ceded to the MCCA premiums earned and losses and LAE incurred of $70.9 million and $108.8 million in 2018, $62.8 million and $81.4 million in 2017, and $58.6 million and $75.0 million in 2016. The MCCA represented 59.3% of the total reinsurance receivable balance at December 31, 2018. 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, the Company believes that it has no significant exposure to uncollectible reinsurance balances from this entity. The following table provides the effects of reinsurance. YEARS ENDED DECEMBER 31 2018 2017 2016 (in millions) Premiums written: Direct $ 4,816.0 $ 4,540.0 $ 4,265.7 Assumed 27.6 23.6 25.1 Ceded (458.8) (454.5) (408.1) Net premiums written $ 4,384.8 $ 4,109.1 $ 3,882.7 Premiums earned: Direct $ 4,673.6 $ 4,399.9 $ 4,162.6 Assumed 26.6 23.6 24.4 Ceded (445.8) (443.1) (397.5) Net premiums earned $ 4,254.4 $ 3,980.4 $ 3,789.5 Percentage of assumed to net premiums earned 0.6 % 0.6 % 0.6 % Losses and LAE: Direct $ 2,986.2 $ 2,934.6 $ 2,785.1 Assumed 25.2 20.5 30.6 Ceded (1) (286.8) (375.5) (269.7) Net losses and LAE $ 2,724.6 $ 2,579.6 $ 2,546.0 (1) The higher level of ceded losses and LAE in 2017 as compared to 2016 and 2018 is primarily due to higher non-catastrophe large loss activity occurring in certain domestic lines. 120 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT