THG 2018 Annual Report

CONTINGENCIES AND REGULATORY MATTERS Information regarding litigation and legal contingencies appears in Note 18 ± ³&RPPLWPHQWV DQG &RQWLQJHQFLHV´ LQ WKH 1RWHV WR Consolidat HG )LQDQFLDO 6WDWHPHQWV ,QIRUPDWLRQ UHODWHG WR FHUWDLQ UHJXODWRU\ DQG LQGXVWU\ GHYHORSPHQWV DUH FRQWDLQHG LQ ³5HJXODWLRQ´ in Part 1 - Item DQG LQ ³5LVN )DFWRUV´ LQ 3DUW ± Item 1A. RATING AGENCIES Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers information on specific LQVXUDQFH FRPSDQLHV +LJKHU UDWLQJV JHQHUDOO\ LQGLFDWH WKH UDWLQJ DJHQFLHV¶ RSLQLRQ UHJDUGLQJ ILQDQFLDO VWDELOLW\ DQG D VWURQ ger ability to pay claims. We believe that strong ratings are important factors in marketing our products to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry. Insurance company financial strength ratings are assigned to an insurer based upon factors deemed by the rating agencies to be relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security. Customers typically focus on claims- SD\LQJ UDWLQJV ZKLOH FUHGLWRUV IRFXV RQ GHEW UDWLQJV ,QYHVWRUV XVH ERWK WR HYDOXDWH D FRPSDQ\¶V RYHUDOO ILQDQFLDO VWUHQJWK RISKS AND FORWARD-LOOKING STATEMENTS 0DQDJHPHQW¶V 'LVFXVVLRQ DQG $QDO\VLV FRQWDLQV ³IRUZDUG - ORRNLQJ VWDWHPHQWV´ ZL thin the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of indicators of forward-looking statements and specific important factors that could cause actual results to differ materially from those contained in forward-looki QJ VWDWHPHQWV VHH ³5LVN )DFWRUV´ LQ 3DUW ± Item 1A. This 0DQDJHPHQW¶V 'LVFXVVLRQ DQG $QDO\VLV VKRXOG EH UHDG DQG LQWHUSUHWHG LQ OLJKW RI VXFK IDFWRUV GLOSSARY OF SELECTED INSURANCE TERMS Account business - Customers with multiple policies and/or coverages. Account rounding ± The conversion of single policy customers to accounts with multiple policies and/or additional coverages. Benefit payments ± Payments made to an insured or their beneficiary in accordance with the terms of an insurance policy. Casualty insurance ± Insurance that is primarily concerned with the losses caused by injuries to third persons and their property (other than the policyholder) and the related legal liability of the insured for such losses. Catastrophe ± A severe loss, resulting from natural or manmade events, including, among others, hurricanes, tornadoes and other windstorms, earthquakes, hail, severe winter weather, fire, explosions, and terrorism. Catastrophe loss ± Loss and directly identified los V DGMXVWPHQW H[SHQVHV IURP FDWDVWURSKHV LQFOXGLQJ GHYHORSPHQW RQ SULRU \HDUV¶ FDWDVWURSKH ORVV UHVHUYHV 7KH ,QVXUDQFH 6HUYLFHV 2IILFH ³,62´ 3URSHUW\ &ODLP 6HUYLFHV ³3&6´ GHILQHV D FDWDVWURSKH ORVV D s an event that causes $25 million or more in insured property losses from U.S. direct writers and affects a significant number of property and casualty policyholders and insurers. In limited instances where the impact of an event extends across multiple geographic areas or time periods, but is not within the specific parameters established by PCS, the Company may determine that certain losses are better included within the same catastrophe event. In addition to those catastrophe events declared by ISO, claims management also generally includes within the de ILQLWLRQ RI D ³FDWDVWURSKH ORVV´ D SURSHUW\ ORVV HYHQW WKDW FDXVHV DSSUR[LPDWHO\ PLOOLRQ RU PRUH LQ &RPSDQ\ LQVXUHG losses and affects in excess of one hundred policy holders. Cede; cedent; ceding company ± When a party reinsures its liability with ano WKHU SDUW\ LW ³FHGHV´ EXVLQHVV DQG LV UHIHUUHG WR DV WKH ³FHGHQW´ RU ³FHGLQJ FRPSDQ\´ Credit spread ± The difference between the yield on the debt securities of a particular corporate debt issue and the yield of a similar maturity of U.S. Treasury debt securities. Current accident year results – A non-GAAP measure of the estimated earnings impact of current premiums offset by estimated loss experience and expenses for the current accident year. This measure includes the estimated increase in revenue associated with higher prices (premiums), including those caused by price inflation and changes in exposure, partially offset by higher volume driven expenses and inflation of loss costs. Volume driven expenses include acquisition costs such as commissions paid to agents, which are typically based on a percentage of premium dollars. Earned premium ± The portion of a premium that is recognized as income, or earned, based on the expired portion of the policy period, that is, the period for which loss coverage has actually been provided. For example, after six months, $50 of a $100 annual premium is generally considered earned premium. The remaining $50 of annual premium is unearned premium. Net earned premium is earned premium net of reinsurance. Excess of loss reinsurance ± Reinsurance that indemnifies the insured against all or a specific portion of losses under reinsured policies LQ H[FHVV RI D VSHFLILHG GROODU DPRXQW RU ³UHWHQWLRQ´ 72 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT