THG 2018 Annual Report

Reinsurance ± An arrangement in which an insurance company, or a reinsurance company, known as the reinsurer, agrees to indemnify another insurance or reinsurance company, known as the ceding company, against all or a portion of the insurance or reinsurance risks underwritten by the ceding company under one or more policies. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on risks and catastrophe protection from large or multiple losses. Reinsurance does not legally discharge the primary insurer from its liability with respect to its obligations to the insured. Risk based capital (“RBC”) ± A method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The RBC ratio for regulatory purposes is calculated as total adjusted capital divided by required risk based capital. Total adjusted capital for property and casualty companies is capital and surplus, adjusted for the non-tabular reserve discount applicable to our assumed discontinued accident and health insurance business. The Company Action Level is the first level at which regulatory involvement is specified based upon the level of capital. Regulators may take action for reasons other than triggering various RBC action levels. The various action levels are summarized as follows: x The Company Action Level, which equals 200% of the Authorized Control Level, requires a company to prepare and submit a RBC plan to the commissioner of the state of domicile. A RBC plan proposes actions which a company may take in order to bring statutory capital above the Company Action Level. After review, the commissioner will notify the company if the plan is satisfactory. x The Regulatory Action Level, which equals 150% of the Authorized Control Level, requires the insurer to submit to the commissioner of the state of domicile an RBC plan, or if applicable, a revised RBC plan. After examination or analysis, the commissioner will issue an order specifying corrective actions to be taken. x The Authorized Control Level authorizes the commissioner of the state of domicile to take whatever regulatory actions are considered necessary to protect the best interest of the policyholders and creditors of the insurer. x The Mandatory Control Level, which equals 70% of the Authorized Control Level, authorizes the commissioner of the state of domicile to take actions necessary to place the company under regulatory control (i.e., rehabilitation or liquidation). Security Lending ± We engage our banking provider to lend securities from our investment portfolio to third parties. These lent securities are fully collateralized by cash. We monitor the fair value of the securities on a daily basis to assure that the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. We record securities lending collateral as a cash equivalent, with an offsetting liability in expenses and taxes payable. Severity ± A monetary increase in the loss costs associated with the same or similar type of event or coverage. Specialty Lines ± A major component of RXU RWKHU FRPPHUFLDO OLQHV 7KHUH LV QR DFFHSWHG LQGXVWU\ GHILQLWLRQ RI ³VSHFLDOW\ OLQHV´ EXW for our purpose specialty lines consist of products such as inland and ocean marine, surety, specialty property, professional liability, management liability and various other program businesses. When discussing net premiums written and other financial measures of our specialty businesses, we may include non-specialty premiums that are written as part of the entire account. Statutory accounting practices ± Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by insurance regulatory authorities including the National Association of Insurance Commissioners, which in general reflect a liquidating, rather than going concern, concept of accounting. Underwriting ± The process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept risks. Underwriting expenses ± Expenses incurred in connection with the acquisition, pricing and administration of a policy or contract, and other insurance company expenses unrelated to claims handling or investments. Unearned premiums ± The portion of a premium representing the unexpired amount of the contract term as of a certain date. Written premium ± The premium assessed for the entire coverage period of an insurance policy or contract without regard to how much RI WKH SUHPLXP KDV EHHQ HDUQHG 6HH DOVR ³(DUQHG SUHPLXP´ DERYH 1HW SUHPLXP ZULWWHQ LV ZULWW en premium net of reinsurance. (1) Ratios may not be comparable to similarly titled measures of other companies. ITEM 7A ± QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 5HIHUHQFH LV PDGH WR ³4XDQWLWDWLYH DQG 4XDOLWDWLYH 'LVFORVXUHV DERXW 0DUNHW 5LVN´ LQ 0DQDJHPHQW¶V 'LVFXVVLRQ DQG $QDO\VLV RI Financial Condition. 74 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT