THG 2018 Annual Report

The duration of our fixed maturity portfolio was as follows: DECEMBER 31 2018 2017 (dollars in millions) Duration Amortized Cost Fair Value % of Total Fair Value Amortized Cost Fair Value % of Total Fair Value $ 1,092.3 $ 1,101.5 17.9% $ 770.6 $ 791.1 13.8% 2-4 years 1,427.3 1,420.4 23.0 1,428.7 1,471.6 25.6 4-6 years 1,831.2 1,801.4 29.2 1,559.4 1,584.4 27.5 6-8 years 1,768.6 1,710.3 27.8 1,620.9 1,619.1 28.2 8-10 years 57.5 59.7 1.0 201.1 203.7 3.5 10+ years 69.0 68.2 1.1 76.4 79.4 1.4 Total fixed maturities, excluding Chaucer $ 6,245.9 $ 6,161.5 100.0% $ 5,657.1 $ 5,749.3 100.0% Weighted average duration, excluding Chaucer 4.5 4.8 Our fixed maturity and equity securities are carried at fair value. Financial instruments whose value was determined using significant management judgment or estimation constituted less than 1% of the total assets we measured at fair value. See also Note 5 - ³)DLU 9DOXH´ in the Notes to Consolidated Financial Statements. Equity securities primarily consist of U.S. income-oriented large capitalization common stocks and developed market equity index exchange-traded funds. Mortgage and other loans consist primarily of commercial mortgage loan participations, which represent our interest in commercial mortgage loans originated by a third-party. We share, on a pro-rata basis, in all related cash flows of the underlying mortgage loans, which are investment-grade quality and diversified by geographic area and property type. Other investments consist primarily of our interest in corporate middle market and real estate limited partnerships. Corporate middle market limited partnerships may invest in senior or subordinated debt, preferred or common equity or a combination thereof, of middle market businesses. Real estate limited partnerships invest in debt and/or equity of real properties. Although we expect to invest new funds primarily in investment grade fixed maturities, we have invested, and expect to continue to invest, a portion of funds in limited partnerships, common equity securities, below investment grade fixed maturities and other investment assets. We deposit funds with various state and governmental authorities. See Note 3 ± ³,QYHVWPHQWV´ LQ WKH 1RWHV WR &RQVROLGDWHG )LQDQFLDO Statements for additional information. OTHER-THAN-TEMPORARY IMPAIRMENTS For the years ended December 31, 2018, 2017 and 2016, we recognized in earnings $4.6 million, $5.6 million and $27.4 million, respectively, of other-than- WHPSRUDU\ LPSDLUPHQWV ³277,´ ,Q 277, consisted of $2.6 million on fixed maturities and $2.0 million on other invested assets. In 2017, OTTI consisted of $2.0 million on other invested assets, $1.8 million on fixed maturities and $1.8 million on equity securities. In 2016, OTTI consisted primarily of $16.1 million on fixed maturities we intended to sell, $8.3 million related to estimated credit losses on fixed maturities and $2.7 million on equity securities. OTTI in 2016 that related to the energy sector was $16.4 million. The carrying values of fixed maturity securities on non-accrual status at December 31, 2018 and 2017 were not material. The effects of non-accruals compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities for the years ended December 31, 2018, 2017 and 2016 were also not material. Any defaults in the fixed maturities portfolio in future periods may negatively affect investment income. UNREALIZED LOSSES Gross unrealized losses on fixed maturities as of December 31, 2018 were $134.2 million, an increase of $95.8 million compared to December 31, 2017, primarily attributable to higher prevailing interest rates and wider credit spreads. At December 31, 2018, gross unrealized losses consisted primarily of $92.0 million of corporate fixed maturities, $24.5 million of residential and commercial mortgage-backed securities and $9.8 million on municipal securities. See also Note 3 ± ³,QYHVWPHQWV´ LQ WKH 1RWHV WR &RQVROLGDWHG Financial Statements. We view gross unrealized losses on fixed maturities as temporary since it is our assessment that these securities will recover in the near term, allowing us to realize their anticipated long-term economic value. Further, we do not intend to sell, nor is it more likely than not we will be UHTXLUHG WR VHOO VXFK GHEW VHFXULWLHV EHIRUH WKLV H[SHFWHG UHFRYHU\ RI DPRUWL]HG FRVW VHH DOVR ³/LTXLGLW\ DQG &DSLWDO 57 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP