THG 2018 Annual Report

Our long-term care pool accounts for the majority of our remaining reinsurance pool business. The potential risk and exposure of our long-term care pool is based upon expected estimated claims and payment patterns, using assumptions for, among other things, morbidity, lapses, future premium rates, and the interest rate used for discounting the future projected cash flows. The long-term exposure of this pool depends upon how our actual experience compares with these future cash flow projection assumptions. Our former life insurance businesses, which are also included in discontinued operations, include activities that were not significant to our 2018, 2017 or 2016 results. INVESTMENT PORTFOLIO Our wholly-owned subsidiary, Opus, is responsible for managing our investment portfolio. Opus directly manages our entire fixed income portfolio and certain other assets which together constitute approximately 92% of our entire investment portfolio. Opus is also responsible for the selection and monitoring of external asset managers for our commercial mortgage loan participations and certain other investments. We select and monitor external managers based on investment style, performance and corporate governance. Our investments are generally of high quality and our fixed maturities and equities are broadly diversified across sectors of the fixed income and equity markets. Our overall investment strategy is intended to balance investment income with credit and interest rate risk, while maintaining sufficient liquidity and providing the opportunity for capital growth. The asset allocation process takes into consideration the types of business written and the level of surplus required to support our different businesses and the risk return profiles of the underlying asset classes. We look to balance the goals of capital preservation, net investment income stability, liquidity and total return. The majority of our assets are invested in the fixed income markets. Through fundamental research and credit analysis, with a focus on value investing, Opus seeks to identify a portfolio of stable income-producing higher quality U.S. government, foreign government, municipal, corporate, residential and commercial mortgage-backed securities and asset-backed securities. We have a general policy of diversifying investments both within and across major investment and industry sectors to mitigate credit and interest rate risk. We monitor the credit quality of our investments and our exposure to individual markets, borrowers, industries, sectors and, in the case of commercial mortgage-backed securities and commercial mortgage loan participations, property types and geographic locations. Investments held by our insurance subsidiaries are subject to diversification requirements under state insurance laws. Investment considerations include asset/liability profile, including duration, convexity and other characteristics within specified risk tolerances. The investment portfolio duration is approximately 4.5 years. We seek to maintain sufficient liquidity to support our cash flow requirements by monitoring the cash requirements associated with our insurance and corporate liabilities, laddering the maturities within the portfolio, closely monitoring our investment durations, holding high quality liquid public securities and managing the purchases and sales of assets. Reference LV PDGH WR ³,QYHVWPHQWV´ LQ 0DQDJHPHQW¶V 'LVFXVVLRQ DQG $QDO\VLV RI )LQDQFLDO &RQGLWLRQ RATING AGENCIES Insurance companies are rated by financial strength rating agencies to provide both industry participants and insurance consumers information on spe FLILF LQVXUDQFH FRPSDQLHV +LJKHU UDWLQJV JHQHUDOO\ LQGLFDWH WKH UDWLQJ DJHQFLHV¶ RSLQLRQ UHJDUGLQJ ILQDQFLDO VWDELOLW\ and a stronger ability to pay claims. Strong ratings are important factors in marketing our products to our agents and customers, since rating information is broadly GLVVHPLQDWHG DQG JHQHUDOO\ XVHG WKURXJKRXW WKH LQGXVWU\ :H EHOLHYH WKDW D UDWLQJ RI ³$ - ´ RU KLJKHU IURP $ 0 %HVW &R LV SDUWLFXODUO\ important for our business. Insurance company financial strength ratings are assigned to an insurer based upon factors deemed by the rating agencies to be relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security. EMPLOYEES As of December 31, 2018, we had approximately 4,200 employees, substantially all of whom are located in the United States. We believe our relations with employees are good. EXECUTIVE OFFICERS OF THE REGISTRANT 5HIHUHQFH LV PDGH WR ³'LUHFWRUV DQG ([HFXWLYH 2IILFHUV RI WKH 5HJLVWUDQW´ LQ 3DUW ,,, - Item 10. 15 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP