THG 2018 Annual Report

The expected return on asset assumption was 4.75% and 5.00% in 2018 and 2017, respectively. Asset returns are reflected net of administrative expenses. Net actuarial losses related to the domestic qualified plan of $19.9 million and gains of $11.4 million were reflected as changes to accumulated other comprehensive income in 2018 and 2017, respectively. Net actuarial losses in 2018 resulted primarily from investment losses experienced during the year, partially offset by increases in the discount rate. Net actuarial gains in 2017 resulted primarily from benefits from investment gains experienced during the year, partially offset by decreases in the discount rate. The change in these actuarial gains and losses is amortized into earnings in future periods. In 2018 and 2017, amortization of actuarial losses from prior years was $8.6 million and $12.5 million, respectively. Expenses related to our defined benefit plan are generally calculated based upon information available at the beginning of the plan year. Our pre-tax expense related to our domestic qualified defined benefit plan was $6.5 million and $11.4 million for 2018 and 2017, respectively. As a result of the significant decline of our actual investment experience in 2018, which was only partially offset by an increase in the discount rate, our pension expense related to our domestic qualified defined benefit plan is expected to increase from $6.5 million in 2018 to $7.6 million in 2019. Holding all other assumptions constant, sensitivity to changes in our key assumptions related to our qualified defined pension plan is as follows: (in millions) Discount Rate - 25 basis point increase Change in Benefit Obligation $ (9.2) Change in 2018 Expense (1.0) 25 basis point decrease Change in Benefit Obligation 9.5 Change in 2018 Expense 1.0 Expected Return on Plan Assets - 25 basis point increase Change in 2018 Expense (1.1) 25 basis point decrease Change in 2018 Expense 1.1 OTHER-THAN-TEMPORARY IMPAIRMENTS We employ a systematic methodology to evaluate declines in fair values below amortized cost for all fixed maturity investments. The methodology utilizes a quantitative and qualitative process that seeks to ensure that available evidence concerning the declines in fair value below amortized cost is evaluated in a disciplined manner. In determining whether a decline in fair value below amortized cost is other-than- WHPSRUDU\ ZH HYDOXDWH VHYHUDO IDFWRUV DQG FLUFXPVWDQFHV LQFOXGLQJ WKH LVVXHU¶V RYHUDOO ILQDQFLDO FRQGLWLRQ WKH LVVXHU¶V FUHGLW DQG ILQDQFLDO VWUHQJWK UDWLQJV WKH LVVXHU¶V ILQDQFLDO SHUIRUPDQFH LQFOXGLQJ HDUQLQJV WUHQGV GLYLGHQG SD\PHQWV DQG D sset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or JHRJUDSKLF UHJLRQ LQ ZKLFK WKH LVVXHU RSHUDWHV DQG WKH OHQJWK RI WLPH DQG WKH GHJUHH WR ZKLFK WKH IDLU YDOXH RI DQ LVVXHU¶V securities remains below our cost. We consider factors that might raise doubt about the is VXHU¶V DELOLW\ WR PDNH FRQWUDFWXDO SD\PHQWV DV WKH\ become due and whether we expect to recover the entire amortized cost basis of the security. We monitor corporate fixed maturity securities with unrealized losses on a quarterly basis and more frequently when necessary to identify potential credit deterioration, as evidenced by ratings downgrades, unexpected price variances, and/or company or industry specific concerns. We apply consistent standards of credit analysis which includes determining whether the issuer is current on its contractual payments, and we consider past events, current conditions and reasonable forecasts to evaluate whether we expect to recover the entire amortized cost basis of the security. We utilize valuation declines as a potential indicator of credit deterioration and apply additional levels of scrutiny in our analysis as the severity of the decline increases or duration persists. 67 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP