THG 2018 Annual Report

insurers pay the insurance claims of insolvent insurers. These guaranty associations generally pay these claims by assessing solvent LQVXUHUV SURSRUWLRQDWHO\ EDVHG RQ HDFK LQVXUHU¶V VKDUH RI YROXQWDU\ SUHPLXPV ZULWWHQ LQ WKH VWDWH :KLOH P ost guaranty associations provide for recovery of assessments through subsequent rate increases, surcharges or premium tax credits, there is no assurance that insurers will ultimately recover these assessments, which could be material, particularly following a large catastrophe or in markets which become disrupted. We are subject to periodic financial and market conduct examinations conducted by state insurance departments. We are also required to file annual and other reports with state insurance departments relating to the financial condition of our insurance subsidiaries and RWKHU PDWWHUV 7KH 1DWLRQDO $VVRFLDWLRQ RI ,QVXUDQFH &RPPLVVLRQHUV ³1$,&´ DQG WKH )HGHUDO ,QVXUDQFH 2IILFH DUH HDFK DFWLYHO y engaged in reviewing and considering proposed insurer risk-based capital standards, risk analysis, solvency assessments and other regulatory initiatives. INVOLUNTARY RESIDUAL MARKETS As noted above, as a condition of our license to write business in various states, we are required to participate in mandatory property and casualty residual market mechanisms which provide insurance coverages where such coverage may not otherwise be available at rates deemed reasonable. Such mechanisms provide coverage primarily for personal and commercial property, personal and commercial DXWRPRELOH DQG ZRUNHUV¶ FRPSHQVDWLRQ DQG LQFOXGH DVVLJQHG ULVN SODQV UHLQVXUDQFH IDFLOLWLHV DQG LQYROXQWDU\ SRROV MRLQW X nderwriting DVVRFLDWLRQV IDLU DFFHVV WR LQVXUDQFH UHTXLUHPHQWV ³)$,5´ SODQV DQG FRPPHUFLDO DXWRPRELOH LQVXUDQFH SODQ s. For example, since most states compel the purchase of a minimal level of automobile liability insurance, states have developed shared market mechanisms to provide the required coverages and in many cases, optional coverages, to those drivers who, because of their driving records or other factors, cannot find insurers who will insure them voluntarily. Also, FAIR plans and other similar property insurance shared market mechanisms increase the availability of property insurance in circumstances where homeowners are unable to obtain insurance at rates deemed reasonable, such as in coastal areas or in areas subject to other hazards. Licensed insurers writing business in such states are often required to pay assessments to cover reserve deficiencies generated by such plans. With respect to FAIR plans and other similar property insurance shared market mechanisms that have significant exposures, it is difficult to accurately estimate our potential financial exposure for future events. Assessments following a large coastal event, particularly one affecting Massachusetts, Texas, New York, or North Carolina, or a large wildfire event affecting California, could be material to our results of operations. Our participation in such shared markets or pooling mechanisms is generally proportional to our direct writings for the type of coverage written by the specific pooling mechanism in the applicable state or other jurisdiction. For example, we are VXEMHFW WR PDQGDWRU\ SDUWLFLSDWLRQ LQ WKH 0LFKLJDQ $VVLJQHG &ODLPV ³0$&´ facility. MAC is an assigned claim plan covering people injured in uninsured motor vehicle accidents. Our participation in the MAC facility is based on our share of personal and commercial automobile direct written premium in the state and resulted in underwriting losses of $14.3 million in 2018. There were no other mandatory residual market mechanisms that were significant to our 2018. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES 5HIHUHQFH LV PDGH WR ³5HVXOWV RI 2SHUDWLRQV - Segments ± Reserve IRU /RVVHV DQG /RVV $GMXVWPHQW ([SHQVHV´ RI 0DQDJHPHQW¶V Discussion and Analysis of Financial Condition. See also Note 17 ± ³/LDELOLWLHV IRU 2XWVWDQGLQJ &ODLPV /RVVHV DQG /RVV $GMXVWPHQW ([SHQVHV´ LQ WKH 1RWHV WR &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV The following table reconciles reserves determined in accordance with accounting practices prescribed or permitted by insurance VWDWXWRU\ DXWKRULWLHV ³6WDWXWRU\´ WR UHVHUYHV GHWHUPLQHG LQ DFFRUGDQFH ZLWK JHQHUDOO\ DFFHSWHG DFFRXQWLQJ SULQFLSOHV ³*$$3´ 7KH primary difference between the Statutory reserves and our GAAP reserves is the requirement, on a GAAP basis, to present reinsurance recoverables as an asset, whereas Statutory guidance provides that reserves are reflected net of the corresponding reinsurance recoverables. We do not use discounting techniques in establishing GAAP reserves for property and casualty losses and LAE, nor have we participated in any loss portfolio transfers or other similar transactions. DECEMBER 31 2018 2017 2016 (in millions) Statutory reserve for losses and LAE $ 3,935.6 $ 3,717.8 $ 3,402.1 GAAP adjustments: Reinsurance recoverables on unpaid losses of our insurance subsidiaries 1,472.6 1,455.0 1,349.2 Statutory reserves for discontinued accident and health business (112.4) (122.4) (97.8) Other 8.3 8.1 6.5 GAAP reserve for losses and LAE $ 5,304.1 $ 5,058.5 $ 4,660.0 13 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP