THG 2018 Annual Report

Net premiums written in the personal automobile line of business for the year ended December 31, 2017 were $1,041.6 million, compared to $953.6 million for the year ended December 31, 2016, an increase of $88.0 million. This increase was primarily due to rate increases and an increase in policies in force of 3.8%. Net premiums written in the homeowners line of business for the year ended December 31, 2017 were $566.9 million, compared to $529.7 million for the year ended December 31, 2016, an increase of $37.2 million. This is attributable to rate increases and an increase in policies in force of 4.0%. Personal Lines underwriting profit for the year ended December 31, 2017 was $83.7 million, compared to $103.1 million for the year ended December 31, 2016, a decline of $19.4 million. Catastrophe losses for the year ended December 31, 2017 were $80.9 million, compared to $47.0 million for the year ended December 31, 2016, an increase of $33.9 million. This increase is primarily due to a large 0LGZHVW ZLQG HYHQW WKDW RFFXUUHG LQ WKH ILUVW TXDUWHU RI 8QIDYRUDEOH GHYHORSPHQW RQ SULRU \HDUV¶ ORVV UHVHUYHV IRU WKH year ended December 31, 2017 was $9.4 million, compared to $4.3 million for the year ended December 31, 2016, an increase of $5.1 million. Personal Lines current accident year underwriting profit, excluding catastrophes, was $174.0 million in the year ended December 31, 2017, compared to $154.4 million for the year ended December 31, 2016. This $19.6 million increase was primarily a result of earned premium growth and lower expenses. Also, higher current accident year losses in our homeowners line were substantially offset by lower losses in our personal automobile line. Other Other operating losses were $8.8 million for the year ended December 31, 2017, compared to $19.5 million for the year ended December 31, 2016, an improvement of $10.7 million, primarily due to 2016 unfavorable prior year reserve development in our run-off voluntary pools EXVLQHVV 6HH ³ /RVV DQG /$( 'HYHORSPHQW H[FOXGLQJ FDWDVWURSKHV´ VHFWLRQ EHORZ IRU IXUWKHU GLVFXVVLRQ RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Overview of Loss Reserve Estimation Process We maintain reserves for our property and casualty products to provide for our ultimate liability for losses and loss adjustment expenses RXU ³ORVV UHVHUYHV´ ZLWK UHVSHFW WR UHSRUWHG DQG XQUHSRUWHG FODLPV LQFXUUHG DV RI WKH HQG RI HDFK DFFRXQWLQJ SHULRG 7KHVH reserves are estimates, taking into account past loss experience, modified for current trends, as well as prevailing economic, legal and social conditions. Loss reserves represent our largest liability. 0DQDJHPHQW¶V SURFHVV IRU HVWDEOLVKLQJ ORVV UHVHUYHV LV D FRPSUHKHQVLYH SURFHVV WKDW LQYROYHV LQSXW IURP PXOWLSOH IXQFWLRQV WK roughout our organization, including actuarial, finance, claims, legal, underwriting, distribution and business operations management. The process incorporates facts currently known, as well as the current, and in some cases, the anticipated, state of the law and coverage litigation. Based on information currently available, we believe that the aggregate loss reserves at December 31, 2018 were adequate to cover claims for losses that had occurred as of that date, including both those known to us and those yet to be reported. However, as described below, there are significant uncertainties inherent in the loss reserving process. Our estimate of the ultimate liability for losses that had occurred as of December 31, 2018 is expected to change in future periods as we obtain further information, and such changes could have a material effect on our results of operations and financial position. Our loss reserves include case estimates for claims that have been reported and estimates for claims that have been incurred but not UHSRUWHG ³,%15´ DW WKH EDODQFH VKHHW GDWH 7KH\ DOVR LQFOXGH HVWLPDWHV RI WKH H[SHQVHV DVVRFLDWHG ZLWK SURFHVVLQJ DQG settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Our property and casualty loss reserves are not discounted to present value. Case reserves are established by our claim personnel individually on a claim by claim basis and based on information specific to the occurrence and terms of the underlying policy. For some classes of business, average case reserves are used initially. Case reserves are periodically reviewed and modified based on new or additional information pertaining to the claim. Our ultimate IBNR reserves are estimated by management and our reserving actuaries on an aggregate basis for each line of business or coverage for loss and loss expense liabilities not reflected within the case reserves. The sum of the case reserves and the IBNR reserves represents our estimate of total unpaid losses and loss adjustment expenses. We regularly review our loss reserves using a variety of industry accepted analytical techniques. We update the loss reserves as historical loss experience develops, additional claims are reported and resolved and new information becomes available. Net changes in loss reserves are reflected in operating results in the period in which the reserves are changed. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported to us, some of which may not yet be known to the insured, as well as a provision for future development on reported claims. IBNR represents a significant proportion of our total net loss reserves, particularly for long-tail liability classes. In fact, approximately 48% of our aggregate net loss reserves at December 31, 2018 were for IBNR losses and loss expenses. 46 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT