THG 2018 Annual Report

x requirements to write certain classes of business or in certain geographies; x restrictions on underwriting, on methods of compensating independent producers, or on our ability to cancel or renew certain business (which negatively affects our ability to reduce concentrations of property risks); x higher liability exposures for our insureds; x increased assessments or higher premium or other taxes; and x HQKDQFHG DELOLW\ WR SLHUFH ³QR IDXOW´ WKUHVKROGV UHFRYHU QRQ - HFRQRPLF GDPDJHV VXFK DV ³SDLQ DQG VXIIHULQJ´ RU SLHUFH policy limits. These regulations serve to protect the customers and other third parties who deal with us and are heavily influenced by the then current political environment. If we are found to have violated an applicable regulation, administrative or judicial proceedings may be initiated against us that could result in censures, fines, civil penalties (including punitive damages), the issuance of cease-and-desist orders, premium refunds or the reopening of closed claim files, among other consequences. These actions could have a material adverse effect on our financial position and results of operations. From time to time, Congress, as well as state and local governments, also consider legislation that could increase or modify our tax FRVWV )RU H[DPSOH RQ 'HFHPEHU WKH 7D[ &XWV DQG -REV $FW ³7&-$´ ZDV HQDFWHG DQG LQFOXGHG UHGXFWLRQV LQ WKH 8 6 corporate income tax rate, changes to the cost of related party reinsurance for foreign-owned insurers, and changes to the tax base, that impacted our effective tax rate in 2018 and will continue to have an impact in future years. The TCJA also reduced the carrying value of our net deferred tax asset upon implementation. Although we have estimated the effect that the TCJA will have on our current deferred WD[ SRVLWLRQ WKHUH FDQ EH QR DVVXUDQFH WKDW WKHVH HVWLPDWHV ZRQ¶W FKDQJH EDVHG RQ QHZ LQWHUSUHWDWLRQV RI WKH 7&-$ RU LQ WKH event that new information related to our current tax position becomes known. Although we believe that the TCJA will continue to result in a lower effective tax rate in future years as compared to years prior to enactment, competitive and state regulatory pressures may force us to enact rate and pricing decreases for our insurance products, which may reduce the net benefit of the tax reduction or significantly limit our ability to realize this benefit beyond the short term. In addition, we are reliant upon independent agents and brokers to market our products. Changes in regulations related to insurance agents and brokers that materially impact the profitability of the agent and broker business or that restrict the ability of agents and brokers to market and sell insurance products would have a material adverse effect on our business. Further, as we continue to expand our business into new regions, either organically or through acquisition, we become subject to the regulations and different regulatory bodies governing such business in those locales. From time to time, we are also involved in investigations and proceedings by federal, state, and other governmental and self-regulatory agencies. We cannot provide assurance that these investigations, proceedings and inquiries will not result in actions that would adversely affect our results of operations or financial condition. We are subject to litigation risks, including risks relating to the application and interpretation of contracts, and adverse outcomes in litigation and legal proceedings could adversely affect our results of operations and financial condition. We are subject to litigation risks, including risks relating to the application and interpretation of insurance and reinsurance contracts and our handling of claim matters (which can lead to bad faith and other forms of extra-contractual liability), and are routinely involved in litigation that challenges specific terms and language incorporated into property and casualty contracts, such as claims reimbursements, covered perils and exclusion clauses, among others, or the interpretation or administration of such contracts. We are also involved in legal actions that do not arise in the ordinary course of business, some of which assert claims for substantial amounts. Adverse outcomes could materially affect our results of operations and financial condition. We are subject to mandatory assessments by state guaranty funds; an increase in these assessments could adversely affect our results of operations and financial condition. All fifty U.S. states and the District of Columbia have insurance guaranty fund laws requiring property and casualty insurance companies doing business within the state to participate in guaranty associations. These associations are organized to pay contractual obligations under insurance policies issued by impaired or insolvent insurance companies. The associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired or insolvent insurer is engaged. Although mandatory assessments by state guaranty funds that are used to cover losses to policyholders of insolvent or rehabilitated companies can be substantially recovered over time through policyholder surcharges or a reduction in future premium taxes in many states (provided the collecting insurer continues to write business in such state), there can be no assurance that all funds will be recoupable in the future. During 2018, we had a total assessment of $3.9 million levied against us, with refunds of $0.4 million received in 2018 for a total net assessment of $3.5 million. As of December 31, 2018, we have $0.5 million of reserves related to guaranty fund assessments. In the future, these assessments may increase above levels experienced in prior years. Future increases in these assessments depend upon the rate of insolvencies of insurance companies. An increase in assessments could adversely affect our results of operations and financial condition. 23 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP