THG 2018 Annual Report

The inherent uncertainties of estimating reserves are greater for certain types of property and casualty insurance lines. These include DXWRPRELOH ERGLO\ LQMXU\ OLDELOLW\ DXWRPRELOH SHUVRQDO LQMXU\ SURWHFWLRQ JHQHUDO OLDELOLW\ DQG ZRUNHUV¶ FRPSHQVDWLRQ ZKHU e a longer period of time may elapse before a definitive determination of ultimate liability may be made, environmental liability, where the technological, judicial and political climates involving these types of claims are continuously evolving, and casualty coverages such as professional liability. There is also greater uncertainty in establishing reserves with respect to new business, particularly new business that is generated with respect to newer product lines, such as our management and professional liability, healthcare, and cyber-risk lines, by newly appointed agents, or in geographies where we have less experience in conducting business. In these cases, there is less historical experience or knowledge and less data that the actuaries can rely on. Estimating reserves is further complicated by unexpected claims or unintended coverages that emerge due to changing conditions. These emerging issues may increase the size or number of claims beyond our underwriting intent and may not become apparent for many years after a policy is issued, such as was the case for the industry with respect to environmental, asbestos, and certain product liability claims. These losses are reflected as prior year reserve development. Although we undertake underwriting actions designed to limit losses once emerging issues are identified, we remain subject to losses on policies issued during those years preceding the underwriting actions. Additionally, the introduction of new Commercial Lines products and the development of new niche and specialty lines present new risks. Certain specialty products, such as the human services program, non-profit directors and officers liability and employment practices liability policies, lawyers and other professional liability policies, healthcare lines and directors and officers coverage may also require a longer period of time (the so- FDOOHG ³WDLO´ WR GHWHUPLQH WKH XOWLPDWH OLDELOLW\ DVVRFLDWHG ZLWK WKH FODLPV DQG PD\ SURGXFH PRUH volatility in our results and less certainty in our accident year reserves. Some lines of business, such as surety, are less susceptible to establishing reserves based on actuarial or historical experience and losses may be episodic, depending on economic and other factors. Changes in laws, such as so- FDOOHG ³UHYLYHU´ VWDWXWHV that retrospectively change the statutes of limitations for certain claims, such as sexual molestation claims, add further uncertainty to the adequacy of prior estimates. We regularly review our reserving techniques, reinsurance and the overall adequacy of our reserves based upon, among other things: x our review of historical data, legislative enactments, judicial decisions, legal developments in imposition of damages, changes in political attitudes and trends in general economic conditions; x our review of per claim information; x historical loss experience of our property and casualty insurance subsidiaries and the industry as a whole; and x the terms of our property and casualty insurance policies. Underwriting results and operating income could be adversely affected by further changes in our net loss and LAE estimates related to significant events or emerging risks, such as risks related to attacks on or breaches of cloud-based data information storage or computer QHWZRUN V\VWHPV ³F\EHU -risks ´ SULYDF\ UHJXODWLRQV RU GLVUXSWLRQV FDXVHG E\ PDMRU SRZHU JULG IDLOXUHV RU ZLGHVSUHDG HOHFWULFDO DQG electronic equipment failure due to aging infrastructure, natural factors like hurricanes, earthquakes, wildfires, solar flares and pandemic or man-made factors like terrorism. Estimating losses following any major catastrophe or with respect to emerging claims is an inherently uncertain process. Factors that add to the complexity of estimating losses from these events include the legal and regulatory uncertainty, the complexity of factors contributing to the losses, delays in claim reporting, and with respect to areas with significant property damage, the impact RI ³GHPDQG VXUJH´ DQG D VORZHU SDFH RI UHFRYHU\ UHVXOWLQJ IURP WKH H[WHQW RI GDPDJH VXVWDLQHG in the affected areas due, in part, to the availability and cost of resources to effect repairs. Emerging claims issues may involve complex coverage, liability and other costs which could significantly affect LAE. As a result, there can be no assurance that our ultimate costs associated with these events or issues will not be substantially different from current estimates (for example, actual losses arising from an event could have varied widely depending on the interpretation of various policy provisions). Investors should consider the risks and uncertainties in our business that may affect net loss and LAE reserve estimates and future performance, including the difficulties in arriving at such estimates. Anticipated losses associated with business interruption exposure, the impact of wind versus water as the cause of loss, disputes over the extent of damage caused by hail storms (particularly with respect to roof damage claims), supplemental payments on previously closed claims caused by the development of latent damages or new theories of liability and inflationary pressures leading to claims cost escalation could also have a negative impact on future loss reserve development. Many states permit insureds to simply sign-over their claims to contractors or others (so- FDOOHG ³DVVLJQPHQW RI EHQHILWV´ ZKLFK IUHTXHQWO\ JHQHUDWH KLJKHU FODLP GHPDQGV 2WKHU VWDWHV SHUPLW filing of suits without prior discussions, which has a similar effect and also increases loss adjustment costs. Because of the inherent uncertainties involved in setting reserves and establishing current and prior- \HDU ³ORVV SLFNV ´ LQFOXGLQJ WKRVH related to catastrophes, we cannot provide assurance that the existing reserves or future reserves established by our property and casualty insurance subsidiaries will prove adequate in light of subsequent events. Our results of operations and financial condition have in the past been, and in the future could be, materially affected by adverse loss development for events that we insured in prior periods. 18 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT