THG 2018 Annual Report

If we are unable to attract and retain qualified personnel, or if we experience the loss or retirement of key executives or other key employees, we may not be able to compete effectively and our operations could be impacted significantly. Our future success will be affected by our continued ability to attract, develop and retain qualified executives and other key employees, particularly those experienced in the property and casualty industry. Our profitability could be adversely affected by our relationships with our agencies. We distribute our products exclusively through independent agents and brokers who have the principal relationships with policyholders. $JHQWV DQG EURNHUV JHQHUDOO\ RZQ WKH ³UHQHZDO ULJKWV ´ DQG WKXV RXU EXVLQHVV PRGHO LV GHSHQGHQW RQ RXU UHODWLRQVKLSV ZLWK DQ d the success of, the agents and brokers with whom we do business. We periodically review the agencies, including managing general agencies, with whom we do business, to identify those that do not meet our profitability standards or are not aligned with our business objectives. Following these periodic reviews, we may restrict such DJHQFLHV¶ DFFHVV WR FHUWDLQ W\SHV RI SROLFLHV RU WHUPLQDWH RXU UHODWLRQVKLS ZLWK WKHP VXEMHFW WR DSSOLFDEOH FRQWUDFWXDO DQG regulatory requirements that limit our ability to terminate agents or require us to renew policies. We may not achieve the desired results from these measures, and our failure to do so could negatively affect our operating results and financial position. Because we rely on independent agents as our sales channel, any deterioration in the relationships with our independent agents or failure to provide competitive compensation to our independent agents could lead agents to place more premium with other carriers and less premium with us. In addition, we could be adversely affected if the agencies, including managing general agencies, with whom we do business exceed the authority that we have given them, fail to transfer premium to us or breach the obligations that they owe to us. Although we routinely monitor our agency relationships, such actions could expose us to liability and have a negative impact on our results of operations and financial condition. Also, if agency consolidation continues at its current pace or increases in the future and more agencies are consolidated into larger agencies or managing general agencies, our sales channel could be materially affected in a number of ways, including loss of market access or market share in certain geographic areas if an acquirer is not one of our appointed agencies, loss of agency talent as the people most knowledgeable about our products and with whom we have developed strong working relationships exit the business following a disposition of an agency, increases in our commission costs as larger agencies acquire more negotiating leverage over their fees, and interfere with the core agency business of selling insurance due to integration or distraction. Any such disruption that materially affects our sales channel could have a negative impact on our results of operations and financial condition. $V WKH VSHHG RI GLJLWL]DWLRQ DFFHOHUDWHV ZH DUH VXEMHFW WR ULVNV DVVRFLDWHG ZLWK ERWK RXU DJHQWV¶ DQG RXU DELOLW\ WR NHHS SD ce. In an increasingly digital world, agents who cannot provide a digital or technology-driven experience risk losing customers who demand such an experience, and such customers may choose to utilize more technology-driven agents or abandon the independent agency channel DOWRJHWKHU $GGLWLRQDOO\ LI ZH DUH QRW DEOH WR NHHS SDFH ZLWK FRPSHWLWRUV¶ GLJLWDO RIIHULQ gs, we may not be able to meet the demand from our agents or their customers, which could lead to a loss of customers, agents or both. A loss of agents or customers could negatively affect our operating results and financial position. We may be affected by disruptions caused by the introduction of new products, related technology changes, and new operating models in Commercial Lines, Personal Lines and Specialty businesses and recent or future acquisitions, and expansion into new geographic areas. There are increased underwriting risks associated with premium growth and the introduction of new products or programs in our Commercial Lines, Personal Lines and Specialty businesses. Additionally, there are increased underwriting risks associated with the appointment of new agencies and managing general agencies and with the expansion into new geographical areas. The introduction of new Commercial Lines products and the development of new niche and specialty lines, presents new risks. Certain new specialty prod XFWV PD\ SUHVHQW ORQJHU ³WDLO´ ULVNV DQG LQFUHDVHG YRODWLOLW\ LQ SURILWDELOLW\ 2XU H[SDQVLRQ LQWR ZHVWHUQ VWDWHV including California, presents additional underwriting risks since the regulatory, geographic, natural risk, legal environment, demographic, business, economic and other characteristics of these states present challenges different from those in the states where we historically have conducted business. In addition, our agency relationships in these new geographies are not as developed. Our Personal Lines production and earnings may be unfavorably affected by the continued introduction of new products, expanded risk appetites and our focus on account business (i.e., policyholders who have both automobile and homeowner insurance with us) that we believe, despite pricing discounts, will ultimately be more profitable business. We may also experience adverse selection, which occurs when insureds purchase our products because of under-pricing, operational difficulties or implementation impediments with independent agents or the inability to grow new markets after the introduction of new products or the appointment of new agents. $V ZH HQWHU QHZ VWDWHV RU UHJLRQV RU JURZ EXVLQHVV WKHUH FDQ EH QR DVVXUDQFH WKDW ZH ZRQ¶W H[SHULHQFH KLJKHU ORVV WUHQGV WKD n anticipated. 24 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT