THG 2018 Annual Report

PART I ITEM 1 ² BUSINESS ORGANIZATION 7KH +DQRYHU ,QVXUDQFH *URXS ,QF ³7+*´ LV D KROGLQJ FRPSDQ\ RUJDQL]HG DV D 'HODZDUH FRUSRUDWLRQ LQ :H WUDFH RXU URRW s to as early as 1852, when the Hanover Fire Insurance Company was founded. Our primary business operations are property and casualty insurance products and services. We market our products and services through independent agents and brokers in the United States ³8 6 ´ 2XU FRQVROLGDWHG ILQDQFLDO VWDWHPHQWV LQFOXGH WKH DFFRXQWV RI 7+* 7KH +DQRYHU ,QVXUDQFH &RPSDQ\ ³+DQRYHU ,QVXUDQFH´ DQG &LWL]HQV ,QVXUDQFH &RPSDQ\ RI $PHULFD ³&LWL]HQV´ ZKLFK DUH RXU SULQFLSDO SURSHUW\ DQG FDVXDOW\ VXEVLGLDULHV DQG RWKHU insurance and non-insurance subsidiaries. Our results of operations also include the results of our discontinued operations, consisting primarily of our former Chaucer international business, as well as our former accident and health, and life insurance businesses. As GLVFXVVHG IXUWKHU LQ ³'LVFRQWLQXHG 2SHUDWLRQV´ EHORZ RQ 'HFHPEHU ZH FRPSOHWHG WKH VDOH RI &KDXFHU +RO dings Limited, the PDMRU SRUWLRQ RI RXU /OR\G¶V LQWHUQDWLRQDO VSHFLDOW\ EXVLQHVV WR &KLQD 5HLQVXUDQFH *URXS &RUSRUDWLRQ ³&KLQD 5H´ :H VXEV equently completed the sale of our Chaucer-related Irish entity on February 14, 2019. The sale of the Australian entities is pending, subject only to local regulatory approval, and is expected to close in the first quarter of 2019. INFORMATION ABOUT OPERATING SEGMENTS We conduct our business operations through three operating segments. These segments are Commercial Lines, Personal Lines, and Other. We report interest expense related to our corporate debt separately from the earnings of our operating segments. ,QIRUPDWLRQ ZLWK UHVSHFW WR HDFK RI RXU VHJPHQWV LV LQFOXGHG LQ ³5HVXOWV RI 2SHUDWLRQV - 6HJPHQWV´ LQ 0DQDJHPHQW¶V 'LVFXVVLRQ DQG Analysis of Financial Condition and in Note 14 ± ³6HJPHQW ,QIRUPDWLRQ´ LQ WKH 1RWHV WR &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV ,QIRUPDWLRQ ZLWK UHVSHFW WR JHRJUDSKLF FRQFHQWUDWLRQV LV LQFOXGHG LQ ³0DUNHWLQJ DQG 'LVWULEXWLRQ´ EHORZ LQ 3D rt 1 ± Item 1 and in Note 14 ± ³6HJPHQW ,QIRUPDWLRQ´ LQ WKH 1RWHV WR &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV The following is a discussion of our operating segments. GENERAL In our Commercial Lines and Personal Lines segments, we underwrite commercial and personal property and casualty insurance through Hanover Insurance, Citizens and other THG subsidiaries, through an independent agent and broker network concentrated in the Northeast, Midwest and Southeast U.S. We also continue to actively grow our Commercia O /LQHV¶ SUHVHQFH LQ WKH :HVWHUQ UHJLRQ RI WKH U.S., particularly in California, which now is our largest state for Commercial Lines as measured by net premiums written. Included in RXU 2WKHU VHJPHQW DUH 2SXV ,QYHVWPHQW 0DQDJHPHQW ,QF ³2SXV´ D ZKROO\ owned subsidiary of THG, which provides investment management services to our insurance and non-insurance companies, as well as to unaffiliated institutions, pension funds and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to former life insurance employees and agents; and a run-off voluntary pools business. Our business strategy focuses on providing our agents and customers with competitive insurance products delivered with clear and consistent underwriting and pricing expectations, while prudently growing and diversifying our product and geographical business mix. We conduct our business with an emphasis on disciplined underwriting, pricing, quality claim handling, and customer service. In 2018, we wrote approximately $4.8 billion in gross premiums. Agency relationships and active agency management are core to our strategy. Based on net premiums written, we rank among the top 25 property and casualty insurers in the United States. RISKS 7KH LQGXVWU\¶V DQG RXU SURILWDELOLW\ DUH HDFK VLJQLILFDQWO\ DIIHFWHG E\ QXPHURXV IDFWRUV LQFOXGLQJ SULFH FRPSHWLWLRQ YRODW ile and unpredictable developments, such as extreme weather conditions, catastrophes and other disasters; legal and regulatory developments DIIHFWLQJ SULFLQJ XQGHUZULWLQJ SROLF\ FRYHUDJH DQG RWKHU DVSHFWV RI GRLQJ EXVLQHVV DV ZHOO DV LQVXUHU DQG LQVXUHGV¶ OLDELO ity; extra- contractual liability; increased attorney involvement; size of jury awards; acts of terrorism; fluctuations in interest rates or the value of investments; and other general economic conditions and trends, such as inflationary pressure or unemployment, that may affect the adequacy of reserves or the demand for insurance products. Our investment portfolio and its future returns are impacted by the capital markets and current economic conditions, which affect our liquidity, realized losses and impairments, credit default levels, our ability to hold such investments until recovery and other factors. Additionally, the economic conditions in geographic locations where we conduct business, especially those locations where our business is concentrated, affect the growth and profitability of our business. The regulatory environments in those locations, including any pricing, underwriting or product controls, shared market mechanisms or mandatory pooling arrangements, and other conditions, such as our agency relationships, affect the growth and profitability of our business. Our loss an G ORVV DGMXVWPHQW H[SHQVH ³/$(´ UHVHUYHV DUH EDVHG RQ HVWLPDWHV SULQFLSDOO\ LQYROYLQJ FDVH DVVHVVPHQWV DQG actuarial projections, at a given time, of what we expect the ultimate settlement and administration of 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 3 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP