THG 2018 Annual Report

development of $33.3 million was primarily due to higher than expected losses of $15.8 million within the homeowners line in accident years 2015 through 2017, and $15.0 million in the personal automobile line, driven by bodily injury severity in the 2016 accident year and, to a lesser extent, the 2015 accident year. In addition, Other segment unfavorable development of $1.2 million was due to higher than expected losses in our runoff voluntary pools business. 2017 Loss and LAE Development, excluding catastrophes In 2017, net unfavorable loss and LAE development, excluding catastrophes, was $1.2 million. Commercial Lines favorable GHYHORSPHQW RI PLOOLRQ ZDV SULPDULO\ GXH WR ORZHU WKDQ H[SHFWHG ORVVHV ZLWKLQ WKH ZRUNHUV¶ FRPSHQVDWLRQ OLQH LQ DFFLGHQW years 2012 through 2016. Personal Lines unfavorable development of $9.4 million was primarily due to higher than expected losses in homeowners for accident year 2016. In addition, Other segment unfavorable development of $1.2 million was due to higher than expected losses in our runoff voluntary pools business. 2016 Loss and LAE Development, excluding catastrophes In 2016, net unfavorable loss and LAE development was $235.6 million, primarily as a result of net unfavorable development of $223.0 million for Commercial Lines. The net unfavorable Commercial Lines development primarily resulted from higher than expected losses in other commercial lines of $168.0 million, which includes the AIX program business. This was primarily driven by AIX programs, general liability coverages in accident years 2012 through 2015, and surety bonds in accident years 2012 through 2015. We also experienced higher than expected losses within the commercial multiple peril line of $74.2 million for accident years 2012 through 2015 and the commercial automobile line of $27.5 million in accident years 2012 through 2014, both primarily within liability coverages. 3DUWLDOO\ RIIVHWWLQJ WKH XQIDYRUDEOH GHYHORSPHQW ZDV ORZHU WKDQ H[SHFWHG ORVVHV RI PLOOLRQ ZLWKLQ WKH ZRUNHUV¶ FRPSHQVD tion line, primarily related to accident years 2013 through 2015 and, to a lesser extent, our commercial umbrella line related to accident year 2015. As a result of our 2016 fourth quarter reserve review, carried reserves for prior accident years, excluding catastrophes, were increased by $174.1 million in the fourth quarter, of which $161.5 million related to Commercial Lines. The majority of this adjustment was attributed to our long-tailed commercial liability coverages, including our AIX program business and was largely driven by worsening trends in the number and nature of high severity losses and higher than anticipated legal defense costs. We reacted to this adverse emergence by updating our assumptions about loss severity, loss development patterns, expected loss ratios and loss adjustment expenses for the most recent accident years, placing greater weight on the adverse severity trends experienced in the most recent calendar years. The adverse prior year development for our Other segment was due to our run-off voluntary assumed reinsurance pools business. The reserve increase was based on an updated third-party actuarial study received in the fourth quarter for the Excess and Casualty 5HLQVXUDQFH $VVRFLDWLRQ ³(&5$´ SRRO WKDW SULPDULO\ FRQVLVWV RI DVEHVWRV DQG HQYLURQPHQWDO H[SRVXUHV Asbestos and Environmental Reserves As of December 31, 2018, we have $38.9 million of net asbestos and environmental reserves, comprised of $8.9 million of direct reserves and $30.0 million of assumed reinsurance pool reserves. This compares to net reserves of $39.8 million and $41.1 million as of December 31, 2017 and 2016, respectively. Ending loss and LAE reserves for all direct business written by our property and casualty companies related to asbestos and environmental damage liability were $8.9 million, $9.5 million, and $9.9 million, net of reinsurance of $18.7 million, $20.2 million, and $19.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. Activity for our direct asbestos and environmental reserves was not significant to our 2018, 2017 or 2016 financial results. As a result of our historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos and environmental damage liability loss experience has remained minimal in relation to our total loss and LAE incurred experience. Although we attempt to limit our exposures to asbestos and environmental damage liability through specific policy exclusions, we have been and may continue to be subject to claims related to these exposures. In addition to reserves we carry to cover exposure in our direct business, we have established gross and net loss and LAE reserves for assumed reinsurance pool business with asbestos and environmental damage liability of $30.0 million, $30.3 million and $31.2 million at December 31, 2018, 2017 and 2016, respectively. These reserves relate to pools in which we have terminated our participation; however, we continue to be subject to claims related to years in which we were a participant. Results of operations from these pools are included in our Other segment. A significant part of our pool reserves relates to our participation in the ECRA voluntary pool from 1950 to 1982. In 1982, the pool was dissolved and since that time, the business has been in run-off. Our percentage of the total pool liabilities varied from 1% to 6% during these years. Our participation in this pool has resulted in average paid losses of approximately $2 million annually over the past ten years. We estimate our ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, assumed reinsurance or pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. We believe that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. Nevertheless, the 54 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT