THG 2018 Annual Report

ITEM 1A ± RISK FACTORS RISK FACTORS AND FORWARD LOOKING STATEMENTS We wish to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, our actual results and could cause our actual results to differ materially from historical results and from those expressed in any forward-looking statements made from time to time by us on the basis of our then-current expectations. The words “believes”, “anticipates”, “expects”, “projections”, “outlook”, “should”, “could”, “plan”, “guidance”, “likely”, “on track to”, “targeted” and similar expressions are intended to identify forward-looking statements. Our businesses are in rapidly changing and competitive markets and involve a high degree of risk and unpredictability. Forward-looking projections are subject to these risks and unpredictability. Our results may fluctuate as a result of cyclical or non-cyclical changes in the property and casualty insurance industry. The property and casualty insurance industry historically has been subject to significant fluctuations and uncertainties. Our profitability is affected significantly by the following items: x increases in costs, particularly increases occurring after the time our insurance products are priced, including construction, automobile repair, and medical and rehabilitation costs. This includes inflation, rises in the cost of products due to tariffs or RWKHU IDFWRUV DQG ³FRVW VKLIWLQJ´ IURP KHDOWK LQVXUHUV WR FDVXDOW\ DQG OLDELOLW\ LQVXUHUV ZKHWKHU DV D UHVXOW RI DQ LQFUHDVL ng number of injured parties without health insurance, coverage changes in health policies to make such coverage secondary to casualty policies, the further implementation or the repeal of national healthcare legislation, lower reimbursement rates for the same procedures by health insurers or government-sponsored insurance, or the implementation of the Medicare Secondary Payer Act, which imposes reporting and other requirements with respect to medical and related claims paid for Medicare eligible individuals). As it relates to construction, there are often temporary increases in the cost of building VXSSOLHV DQG FRQVWUXFWLRQ ODERU DIWHU D VLJQLILFDQW HYHQW IRU H[DPSOH VR FDOOHG ³GHPDQG VXUJH´ WKDW FDXVHV WKH FRVW RI ODER r, construction materials and other items to increase in a geographic area affected by a catastrophe). In addition, we are limited in our ability to negotiate and manage reimbursable expenses incurred by our policyholders; x competitive and regulatory pressures, which affect the prices of our products and the nature of the risks covered; x volatile and unpredictable developments, including severe weather, catastrophes, wildfires and terrorist actions; x legal, regulatory and socio-economic developments, such as new theories of insured and insurer liability and related claims and extra-contractual awards such as punitive damages, financed litigation, where a third party unrelated to a lawsuit provides capital to a plaintiff in return for a portion of any financial recovery from the lawsuit, and increases in the size of jury awards or changes in DSSOLFDEOH ODZV DQG UHJXODWLRQV VXFK DV FKDQJHV LQ WKH WKUHVKROGV DIIHFWLQJ ³QR IDXOW´ OLDELOLW\ RU when non-economic damages are recoverable for bodily injury claims or coverage requirements); x fluctuations in interest rates, as a result of a change in monetary policy or otherwise, inflationary pressures, default rates, commodity prices, foreign exchange rates and other factors that affect net income, including with respect to investment returns and operating results for certain of our lines of business; and x other general economic conditions and trends that may affect the adequacy of reserves. The demand for property and casualty insurance can also vary significantly based on general economic conditions (either nationally or regionally), rising as the overall level of economic activity increases and falling as such activity decreases. Loss patterns also tend to vary inversely with local economic conditions, increasing during difficult or unstable economic times and moderating during economic upswings or periods of stability. The fluctuations in demand and competition could produce unpredictable underwriting results. Actual losses from claims against our property and casualty insurance subsidiaries may exceed their reserves for claims. Our property and casualty insurance subsidiaries maintain reserves to cover their estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent estimates, involving actuarial projections and judgments at a given time, of what we expect the ultimate settlement and administration of incurred claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity and judicial theories of liability, costs of repair and replacement, legislative activity and myriad other factors. 17 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP