THG 2018 Annual Report

5HVRXUFHV´ ,QKHUHQW LQ RXU DVVHVVPHQW DUH WKH ULVNV WKDW PDUNHW IDFWRUV PD\ GLIIHU IURP RXU H[SHFWDWLRQV WKH JOREDO HFRQRP y reverts to recessionary trends; we may decide to subsequently sell a security for unforeseen business needs; or changes in the credit assessment from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, an OTTI would be recognized as a realized loss. Although unrealized losses on fixed PDWXULWLHV DUH QRW UHIOHFWHG LQ WKH UHVXOWV RI ILQDQFLDO RSHUDWLRQV XQWLO WKH\ DUH UHDOL]HG RU GHHPHG ³RWKHU -than- WHPSRUDU\´ WKH IDLU YDOXH of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets. The following table sets forth gross unrealized losses for fixed maturities by maturity period at December 31, 2018 and 2017. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers. DECEMBER 31 2018 2017 (in millions) $ 0.3 $ 0.1 Due after one year through five years 20.2 5.7 Due after five years through ten years 80.2 19.6 Due after ten years 8.3 5.3 109.0 30.7 Mortgage-backed and asset-backed securities 25.2 7.7 Total fixed maturities, excluding Chaucer $ 134.2 $ 38.4 As of January 1, 2018, we adopted ASC Update No. 2016-01, (Subtopic 825-10) Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ³$68 1R - ´ ZKLFK UHVXOWHG LQ D FXPXODWLYH HIIHFW DGMXVWPHQW RI PLOOLRQ QHW RI WD[ UHFRUGHG LQ UHWDLQHG HDUQLQJV 6HH ,WHP 2 ³1HZ $FFRXQWLQJ 3URQRXQFHPHQWV´ LQ 1RWH ± ³6XPPDU\ RI 6LJQLILFDQW $FFRXQWLQJ 3ROLFLHV´ LQ WKH 1RWHV WR &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV for additional information. Beginning in 2018, our equity securities are carried at fair value with increases and decreases in fair value recorded in net income. Previously, changes in fair YDOXH RQ HTXLW\ VHFXULWLHV ZHUH UHFRUGHG LQ DFFXPXODWHG RWKHU FRPSUHKHQVLYH LQFRPH D FRPSRQHQW RI VKDUHKROGHUV¶ equity. 2XU LQYHVWPHQW SRUWIROLR DQG VKDUHKROGHUV¶ HTXLW\ FDQ EH VLJQLILFDQWO\ LPSDFWHG E\ FKDQJHV LQ PDUNHW YDOXHV RI RXU VHFXULWLHV . Market volatility could increase and defaults on fixed income securities could occur. As a result, we could incur additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations and/or financial position. Monetary policies in developed economies have become more divergent recently, but remain generally supportive of moderate economic growth. Major central banks continue to closely monitor developments in global financial markets and the outlook for growth, and reportedly are committed to adjust monetary policy as required to provide liquidity, support growth and achieve inflation targets. In the 8QLWHG 6WDWHV WKH )HGHUDO 5HVHUYH WKH ³)HG´ LQFUHDVHG LWV WDUJHW IRU WKH IHGHUDO IXQGV UDWH E\ LQ LQFOXGLQJ 25% in December, raising its target range to 2.25% to 2.50%. The Fed continues to signal that economic activity will expand at a moderate pace, labor conditions will remain strong with inflation stabilized around its 2% objective over the medium term. The Fed has communicated that it will be patient as it determines the timing and size of future adjustments to the federal funds rate, which will depend on realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. While the Fed believes near-term risks to the economic outlook appear roughly balanced, it continues to closely monitor inflation indicators and global economic and financial developments. One such development being watched carefully is the trade/tariff negotiations between the United States and its various trade partners. Should these negotiations lead to a shift or break-down in global trade patterns, there could be negative implications for certain issuers, sectors, or the economy at large. 0RVW GHYHORSHG HFRQRPLHV¶ FHQWUDO EDQNV KDYH QRZ HQGHG WKHLU H[WUDRUGLQDU\ PHDVXUHV DQG EHJXQ WR WL ghten monetary policy or signal potential tightening, but inflation remains below target in several large economies. Fundamental conditions in the corporate sector generally remain sound. While we may experience defaults on fixed income securities, particularly with respect to non-investment grade debt securities, it is difficult to foresee which issuers, industries or markets will be affected. As a result, the value of our fixed maturity portfolio could change rapidly in ways we cannot currently anticipate, and we could incur additional realized and unrealized losses in future periods. 58 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT