THG 2018 Annual Report

REINSURANCE Reinsurance Program Overview We maintain ceded reinsurance programs designed to protect against large or unusual loss and LAE activity. We utilize a variety of proportional and non-proportional reinsurance agreements, which are intended to control our individual policy and aggregate exposure to large property and casualty losses, stabilize earnings and protect capital resources. These programs include facultative reinsurance (to limit exposure on a specified policy); specific excess and proportional treaty reinsurance (to limit exposure on individual policies or risks within specified classes of business); and catastrophe excess of loss reinsurance (to limit exposure to any one event that might impact more than one individual contract). Our proportional reinsurance consists of quota share reinsurance agreements and our non- proportional reinsurance includes excess of loss and stop loss reinsurance agreements. Catastrophe reinsurance protects us, as the ceding insurer, from significant losses arising from a single event including, among others, hurricanes, tornadoes and other windstorms, earthquakes, hail, severe winter weather, fire, explosions and terrorism. We determine the appropriate amount of reinsurance based upon our evaluation of the risks insured, exposure analyses prepared by consultants, our risk appetite and on market conditions, including the availability and pricing of reinsurance. Although we believe our catastrophe reinsurance program, including our retention and co-participation amounts for 2019, is appropriate given our surplus level and the current reinsurance pricing environment, there can be no assurance that our reinsurance program will provide coverage levels that will prove adequate should we experience losses from one significant or several large catastrophes during 2019. Additionally, as a result of the current economic environment, as well as losses incurred by reinsurers in the past several years, the availability and pricing of appropriate reinsurance programs may be adversely affected in future renewal periods. We may not be able to pass these costs on to policyholders in the form of higher premiums or assessments. We cede to reinsurers a portion of our risk based upon insurance policies subject to such reinsurance. Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to us. We believe that the terms of our reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. We believe our reinsurers are financially sound, based upon our ongoing review of the financial strength ratings assigned to them by rating agencies, their reputations in the reinsurance marketplace, our collections history, advice from third parties, and the analysis and guidance of our reinsurance advisors. Although we exclude coverage of nuclear, chemical or biological events from the Personal Lines and Commercial Lines policies we ZULWH LQ WKH 8 6 ZH DUH VWDWXWRULO\ UHTXLUHG WR SURYLGH WKLV FRYHUDJH LQ RXU ZRUNHUV¶ FRPSHQVDWLRQ SROLFLHV :H KDYH ZRUNHUV¶ compensation reinsurance coverage under our casualty reinsurance treaty of approximately $80 million for terrorism losses, limited to approximately $10 million for losses that result from nuclear, chemical or biological events. All other U.S.-based exposure or treaties exclude such coverage. Further, under The Terrorism Risk Insurance Program Reauth RUL]DWLRQ $FW RI ³75,35$´ RXU VKDUH RI U.S. domestic losses in 2018 from such events, if deemed certified terrorist events, is limited to 18% of losses in excess of an approximate $412 million deductible, up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. Such events FRXOG EH PDWHULDO WR RXU ILQDQFLDO SRVLWLRQ RU UHVXOWV RI RSHUDWLRQV 6HH DOVR ³7HUURULVP´ EHORZ IRU DGGLWLRQDO LQIRUPDWLRQ Reference is made to Note 16 ² ³5HLQVXUDQFH´ LQ WKH 1RWHV WR Consolidated Financial Statements. Reference is also made to ³,QYROXQWDU\ 5HVLGXDO 0DUNHWV´ Our 2019 reinsurance program for our Commercial Lines and Personal Lines segments is substantially consistent with our 2018 program design. The following discussion summarizes both our 2018 and 2019 reinsurance programs for our Commercial Lines and Personal /LQHV VHJPHQWV H[FOXGLQJ FRYHUDJH DYDLODEOH XQGHU WKH 8 6 IHGHUDO WHUURULVP SURJUDP ZKLFK LV GHVFULEHG XQGHU ³7HUURULVP´ but does not purport to be a complete description of the program or the various restrictions or limitations which may apply: x Our Commercial Lines and Personal Lines segments are primarily protected by a property catastrophe occurrence treaty, a property per risk excess of loss treaty, as well as a casualty excess of loss treaty, with retentions of $200 million, $2 million, and $2 million, respectively. We have lower retentions in place for certain lines, as discussed below. x The property catastrophe occurrence treaty provides coverage, on an occurrence basis, up to $1.1 billion countrywide, less a $200 million retention, with no co-participation, for all defined perils. Effective July 1, 2018, we added a top and aggregate feature which provides for up to $75 million of coverage in excess of $300 million in aggregate domestic losses, or against a single extreme event on the top of our $1.1 billion reinsurance treaty. The domestic catastrophe losses subject to the aggregate feature are limited only to those events that exceed $7.5 million of incurred losses. x The property per risk excess of loss treaty provides coverage, on a per risk basis, up to $100 million, less a $2 million retention, with a co-participation for the second half of 2018 and the first half of 2019 of 25% for reinsurance placed in the $2 million to $3 million layer and no co-participation for reinsurance placed in the $3 million to $100 million layer. x The casualty excess of loss treaty provides coverage, on a per occurrence basis for each loss, up to $75 million less a $2 million retention, with no co-participation. Umbrella and excess liability lines share coverage with casualty lines within the 9 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP