THG 2018 Annual Report

The Company has processes designed to ensure that the values received from its third-party pricing service are accurately recorded, that the data inputs and valuation approaches and techniques utilized are appropriate and consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. The Company performs a review of the fair value hierarchy classifications and of prices received from its pricing service on a quarterly basis. The Company reviews the pricing service V¶ SROLFLHV describing its methodology, processes, practices and inputs, including various financial models used to value securities. Also, the Company reviews the portfolio pricing, including a process for which securities with changes in prices that exceed a defined threshold are verified to independent sources, if available. If upon review, the Company is not satisfied with the validity of a given price, a pricing challenge would be submitted to the pricing service along with supporting documentation for its review. The Company does not adjust TXRWHV RU SULFHV REWDLQHG IURP WKH SULFLQJ VHUYLFH XQOHVV WKH SULFLQJ VHUYLFH DJUHHV ZLWK WKH &RPSDQ\¶V FKDOOHQJH 'XULQJ 8 and 2017, the Company did not adjust any prices received from its pricing service. Changes in the observability of valuation inputs may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. Reclassifications between levels of the fair value hierarchy are reported as of the beginning of the period in which the reclassification occurs. As previously discussed, the Company utilizes a third party pricing service for the valuation of the majority of its fixed maturities and equity securities. The pricing service has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company will use observable market data to the extent it is available, but may also be required to make assumptions for market based inputs that are unavailable due to market conditions. 7KH IROORZLQJ WDEOHV SURYLGH IRU HDFK KLHUDUFK\ OHYHO WKH &RPSDQ\¶V DVVHWV WKDW ZHUH PHDVXUHG DW IDLU YDOXH RQ D UHFXUULQJ basis. DECEMBER 31, 2018 (in millions) Total Level 1 Level 2 Level 3 Fixed maturities: U.S. Treasury and government agencies $ 409.9 $ 154.9 $ 255.0 $ ² Foreign government 7.4 ² 7.4 ² Municipal 885.8 ² 864.7 21.1 Corporate 3,410.7 ² 3,409.9 0.8 Residential mortgage-backed, U.S. agency backed 713.7 ² 713.7 ² Residential mortgage-backed, non-agency 2.7 ² 2.7 ² Commercial mortgage-backed 640.3 ² 627.2 13.1 Asset backed 91.0 ² 91.0 ² Total fixed maturities 6,161.5 154.9 5,971.6 35.0 Equity securities 464.4 463.3 ² 1.1 Other investments 3.5 ² ² 3.5 Total investment assets at fair value, excluding held-for-sale (Chaucer) 6,629.4 618.2 5,971.6 39.6 Investment assets, held-for-sale 24.5 5.7 18.8 ² Total investment assets at fair value $ 6,653.9 $ 623.9 $ 5,990.4 $ 39.6 99 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP