THG 2018 Annual Report

Intense competition could negatively affect our ability to maintain or increase our profitability, particularly in light of the various competitive, financial, strategic, structural, informational and resource advantages that our competitors have. We compete, and will continue to compete, with a large number of companies, including international, national and regional insurers, VSHFLDOW\ LQVXUDQFH FRPSDQLHV VR FDOOHG ³RII - VKRUH´ FRPSDQLHV ZKLFK HQMR\ FHUWDLQ WD[ DGYDQWDJHV XQGHUZULWLQJ DJHQFLHV DQG ILQDQFLDO services institutions. We also compete with mutual insurance companies, reciprocal and exchange companies that may not have shareholders and may have different profitability targets than publicly or privately owned companies. In recent years, there has been substantial consolidation and convergence among companies in the financial services industry, resulting in increased competition from large, well-capitalized financial services firms. Many of our competitors have greater financial, technical and operating resources than we do, greater access t R ³ELJ GDWD ´ DQG PD\ EH DEOH WR RIIHU D ZLGHU UDQJH RI RU PRUH VRSKLVWLFDWHG FRPPHUFLDO DQG SHUVRQDO OLQH products. Some of our competitors also have different marketing, advertising and sales strategies than we do and market and sell their products to consumers directly. Some companies are seeking to protect new products with patents or other legal protections, which may create new legal exposures or limit our ability to develop competing products. In addition, competition in the U.S. property and casualty insurance market has intensified over the past several years. This competition has had, and may continue to have, an adverse impact on our revenues and profitability. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include: x the implementation of commercial lines deregulation in several states; x programs in which state-sponsored entities provide property insurance in catastrophe-prone areas or other alternative markets types of coverage; and x changing practices caused by the Internet, application-based programs relying on algorithms and computer modeling to underwrite policies and administer claims, and the increased usage of real time comparative rating tools and claims management processes, which have led to greater competition in the insurance business in general, particularly on the basis of price, and pressure to reduce coverages to compete on price. We could face heightened competition resulting from the entry of new competitors and the introduction of new products by new and existing competitors. Additionally, recent entries into the property and casualty marketplace by large technology companies, retail companies, so- FDOOHG ³,QVXUWHFK´ FRPSDQLHV DQG other non-traditional insurance providers, who aim to leverage their information about DQG GLUHFW DFFHVV WR FXVWRPHUV WHFKQRORJ\ ZLWKRXW WKH EXUGHQ RI OHJDF\ V\VWHPV DFFHVV DQG DELOLW\ WR PDQLSXODWH ³ELJ GDWD ´ artificial intelligence or other developing opportunities, may increase competition. Increased competition could make it difficult for us to obtain new or retain existing customers. It could also result in increasing our service, administrative, policy acquisition or general expenses as we seek to distinguish our products and services from those of our competitors. In addition, our administrative, technology and management information systems expenditures could increase substantially as we try to maintain or improve our competitive position or keep up with evolving technology. We compete for business not just on the basis of price, but also on the basis of product coverages, reputation, financial strength, quality of service (including claims adjustment service), experience and breadth of product offering. We cannot provide assurance that we will be able to maintain a competitive position in the markets where we operate, or that we will be able to expand our operations into new markets. We are rated by several rating agencies, and downgrades to our ratings could adversely affect our operations. Our ratings are important in establishing our competitive position and marketing the products of our insurance companies to our agents and customers. Rating information is broadly disseminated and generally used throughout the industry. Many policyholders, particularly larger commercial customers, will not purchase, and many agents will not distribute, products of insurers that do not meet certain financial strength ratings. Our insurance company subsidiarie V DUH UDWHG E\ $ 0 %HVW 0RRG\¶V DQG 6WDQGDUG 3RRU¶V 7KHVH UDWLQJV UHIOHFW WKH UDWLQJ DJHQF\¶V RSLQLRQ RI RXU LQVXUDQFH VXEVLGLDULHV¶ ILQDQFLDO VWUHQJWK RSHUDWLQJ SHUIRUPDQFH SRVLWLRQ LQ WKH PDUNHW SODFH ULVN PDQDJHPH nt, and ability to meet their obligations to policyholders. These ratings are not evaluations directed to investors, and are not recommendations to buy, sell or hold our securities. Our ratings are subject to periodic review by the rating agencies, and we cannot guarantee the continued retention or improvement of our current ratings. This is particularly true given that rating agencies may change their criteria or increase capital requirements for various rating levels. $ GRZQJUDGH LQ RQH RU PRUH RI RXU RU DQ\ RI RXU VXEVLGLDULHV¶ FODLP s-paying ratings could negatively impact our business and competitive position, particularly in lines where customers require us to maintain minimum ratings. Additionally, a downgrade in one or more of our debt ratings could adversely impact our ability to access the capital markets and other sources of funds, increase the cost of current credit facilities, and/or adversely affect pricing of new debt sought in the capital markets in the future. Our ability to raise capital in the equity markets could also be adversely affected. 27 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP