10-K 1 thg-20141231x10k.htm 10-K 20141231 10K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:                      to                       

Commission file number: 1-13754

 

THE HANOVER INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

04-3263626

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

440 Lincoln Street, Worcester, Massachusetts

01653

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:

(508) 855-1000

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

 

Name of each exchange on which registered

 

Common Stock, $.01 par value

New York Stock Exchange

7 5/8% Senior Debentures due 2025

New York Stock Exchange

6.35% Subordinated Debentures due 2053

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes      No    

 

 


 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    Yes      No   

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No   

Based on the closing sales price of June 30, 2014, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $2,746,167,107.  

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 44,302,074 shares as of February 20, 2015. 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of The Hanover Insurance Group, Inc.’s Proxy Statement to be filed pursuant to Regulation 14A relating to the 2015 Annual Meeting of Shareholders to be held May 19, 2015 are incorporated by reference in Part III.

 

 

 

 

 

 

 


 

 

THE HANOVER INSURANCE GROUP, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014 

TABLE OF CONTENTS

 

 

 

 

 

 

 

Item

 

Description

 

Page

 

 

 

 

 

Part I

 

 

 

 

 

 

 

 

 

1

 

Business

 

1A.

 

Risk Factors

 

22 

1B.

 

Unresolved Staff Comments

 

39 

2

 

Properties

 

39 

3

 

Legal Proceedings

 

39 

4

 

Mine Safety Disclosures

 

39 

 

 

 

 

 

Part II

 

 

 

 

 

 

 

 

 

5

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of 

 

 

 

 

Equity Securities

 

40 

6

 

Selected Financial Data

 

41 

7

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

42 

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

83 

8

 

Financial Statements and Supplementary Data

 

84 

9

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

135 

9A.

 

Controls and Procedures

 

135 

9B.

 

Other Information

 

135 

 

 

 

 

 

Part III

 

 

 

 

 

 

 

 

 

10

 

Directors, Executive Officers and Corporate Governance

 

136 

11

 

Executive Compensation

 

138 

12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

139 

13

 

Certain Relationships and Related Transactions, and Director Independence

 

139 

14

 

Principal Accounting Fees and Services

 

139 

 

 

 

 

 

Part IV

 

 

 

 

 

 

 

 

 

15

 

Exhibits, Financial Statement Schedules

 

140 

 

 

Exhibits Index

 

141 

 

 

Signatures

 

146 

 

 

 


 

 

PART I

ITEM 1 — BUSINESS 

ORGANIZATION

The Hanover Insurance Group, Inc. (“THG”) is a holding company organized as a Delaware corporation in 1995. We trace our roots to as early as 1852, when the Hanover Fire Insurance Company was founded. Our primary business operations are property and casualty insurance products and services. We market our domestic products and services through independent agents and brokers in the United States (“U.S.”) and conduct business internationally through a wholly-owned subsidiary, Chaucer Holdings Limited (“Chaucer”), which operates through the Society and Corporation of Lloyd’s (“Lloyd’s”) and is domiciled in the United Kingdom (“U.K.”). Our consolidated financial statements include the accounts of THG; The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), which are our principal U.S. domiciled property and casualty subsidiaries; Chaucer; and certain other insurance and non-insurance subsidiaries. Our results of operations also include the results of our discontinued operations, consisting primarily of our former life insurance and accident and health businesses.

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

We conduct our business operations through four operating segments. These segments are Commercial Lines, Personal Lines, Chaucer and Other. We report interest expense related to our corporate debt separately from the earnings of our operating segments.

Information with respect to each of our segments is included in “Results of Operations - Segments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 14 – “Segment Information” in the Notes to the Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.

Information with respect to geographic concentrations is included in the “Description of Business by Segment” in Part 1 – Item 1 and in Note 14 – “Segment Information” in the Notes to the Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K. 

DESCRIPTION OF BUSINESS BY SEGMENT

Following is a discussion of each of our operating segments.

GENERAL

We manage our operations principally through four operating segments, including three in which we provide insurance products and services: Commercial Lines, Personal Lines, and Chaucer. We underwrite commercial and personal property and casualty insurance through Hanover Insurance, Citizens and other THG subsidiaries, through an independent agent and broker network concentrated in the Northeast, Midwest and Southeast U.S. We also continue to actively grow our Commercial Lines’ presence in the Western region of the U.S. Our Chaucer segment is a specialist insurance underwriting group which operates through Lloyd’s and writes business internationally. Included in our fourth operating segment, Other, are Opus Investment Management, Inc. (“Opus”), a wholly-owned subsidiary of THG, which provides investment management services to our insurance and non-insurance companies, as well as to unaffiliated institutions, pension funds and other organizations; earnings on holding company assets; and a discontinued voluntary pools business.

Our business strategy focuses on providing our agents and customers stability, financial strength, and competitive insurance products while prudently growing and diversifying our product and geographical business mix. We conduct our U.S. business with an emphasis on agency relationships and active agency management, disciplined underwriting, pricing, quality claim handling, and customer service. Our Lloyd’s business is focused on disciplined and specialized underwriting in selected markets. Annually, we write over $5 billion in premiums, including over $3.5 billion domestically. Based on direct U.S. premiums written, we rank among the top 30 property and casualty insurers in the United States.

3

 


 

 

RISKS

The industry’s profitability and cash flow can be, and historically has been, significantly affected by numerous factors, including price; competition; volatile and unpredictable developments such as extreme weather conditions, catastrophes and other disasters; legal and regulatory developments affecting pricing, underwriting, policy coverage and other aspects of doing business, as well as insurer and insureds’ liability; extra-contractual liability; size of jury awards; acts of terrorism; fluctuations in interest and currency rates or the value of investments; and other general economic conditions and trends, such as inflationary pressure or unemployment, that may affect the adequacy of reserves or the demand for insurance products. Our investment portfolio and its future returns may be further impacted by the capital markets and current economic conditions, which could affect our liquidity, the amount of realized losses and impairments that will be recognized, credit default levels, our ability to hold such investments until recovery and other factors. Additionally, the economic conditions in geographic locations where we conduct business, especially those locations where our business is concentrated, may affect the growth and profitability of our business. The regulatory environments in those locations, including any pricing, underwriting or product controls, shared market mechanisms or mandatory pooling arrangements, and other conditions, such as our agency relationships, affect the growth and profitability of our business. Our loss and loss adjustment expense (“LAE”) reserves are based on estimates, principally involving actuarial projections, at a given time, of what we expect the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity and judicial theories of liability, costs of repairs and replacement, legislative activity and other factors. We expect to regularly reassess our estimate of loss reserves and LAE, both for current and past years, and any resulting changes will affect our reported profitability and financial position.

Reference is also made to “Risk Factors” in Part 1 – Item 1A of this Form 10-K.

LINES OF BUSINESS

We underwrite commercial and personal property and casualty insurance coverage through our Commercial Lines, Personal Lines and Chaucer operating segments.

Commercial Lines

Our Commercial Lines segment generated $2.2 billion, or 44.6%, of consolidated operating revenues and $2.2 billion, or 44.8%, of net premiums written, for the year ended December 31, 2014.

The following table provides net premiums written by line of business for our Commercial Lines segment.

 

 

 

 

 

 

 

 

 

 

 

 

Net Premiums

 

 

 

YEAR ENDED DECEMBER 31, 2014

 

 

Written

 

% of Total

 

(in millions, except ratios)

 

 

 

 

 

 

Commercial multiple peril

 

$

705.1 

 

32.7 

%

Commercial automobile

 

 

302.6 

 

14.0 

 

Workers' compensation

 

 

247.8 

 

11.5 

 

Other commercial lines:

 

 

 

 

 

 

AIX program business

 

 

232.9 

 

10.8 

 

Inland marine

 

 

209.0 

 

9.7 

 

Management and professional liability

 

 

148.9 

 

6.9 

 

Surety

 

 

71.4 

 

3.3 

 

Other

 

 

238.2 

 

11.1 

 

Total

 

$

2,155.9 

 

100.0 

%

Our Commercial Lines product suite provides agents and customers with products designed for small, middle and specialized markets.

Commercial Lines coverages include:

Commercial multiple peril coverage insures businesses against third party general liability from accidents occurring on their premises or arising out of their operations, such as injuries sustained from products sold. It also insures business property for damage, such as that caused by fire, wind, hail, water damage (which may exclude flood), theft and vandalism.

Commercial automobile coverage insures businesses against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured’s vehicle and property damage to other vehicles and property.

Workers’ compensation coverage insures employers against employee medical and indemnity claims resulting from injuries related to work. Workers’ compensation policies are often written in conjunction with other commercial policies.

4

 


 

 

Other commercial lines is comprised of:

·

AIX program business provides coverage to under-served markets where there are specialty coverage or risk management needs, including commercial multiple peril, workers’ compensation, commercial automobile, general liability and other commercial coverages;

·

inland marine coverage insures businesses against physical losses to property, such as contractor’s equipment, builders’ risk and goods in transit, and also covers jewelers block, fine art and other valuables;

 

·

management and professional liability coverage provides protection for directors and officers of companies that may be sued in connection with their performance, errors and omissions protection to companies and individuals against negligence or bad faith, as well as protection for employment practices liability and fidelity and crime;

·

surety provides businesses with contract surety coverage in the event of performance or non-payment claims, and commercial surety coverage related to fiduciary or regulatory obligations; and

·

other commercial lines coverages include umbrella, monoline general liability, specialty property and miscellaneous commercial property.

Our strategy in Commercial Lines focuses on building deep relationships with partner agents through differentiated product offerings, industry segmentation, and franchise value through limited distribution. We have made a number of enhancements to our products and technology platforms that are intended to drive more total account placements in our small commercial and middle market business, while delivering enhanced margins in our specialty businesses. This aligns with our focus of improving and expanding our partnerships with a limited number of agents.

Our small commercial, middle market and specialty businesses each constitute approximately one-third of our total Commercial Lines business. Small commercial offerings, which generally include premiums of $50,000 or less, deliver value through product expertise, local presence, and ease of doing business. Middle market accounts require greater claim and underwriting expertise, as well as a focus on industry segments where we can deliver differentiation in the market and value to agents and customers. Small and middle market accounts comprise $1.4 billion of the Commercial Lines segment. Our specialty lines of business generally include program business, inland marine, management and professional liability, surety and specialty property.

In our small commercial and middle market businesses, we have developed several niche insurance programs, including for schools, human services organizations, such as non-profit youth and community service organizations, and religious institutions. We have added additional segmentation to our core middle market commercial products, including real estate, hospitality and wholesale distributors and introduced products focused on management liability, specifically non-profit and private company directors and officers liability and employment practices liability.

Part of our strategy is to expand our specialty lines offerings in order to provide our agents and policyholders with a broader product portfolio and to increase our market penetration. As part of our strategy, we have over time acquired various specialized businesses aimed at further diversifying and growing our specialty lines. We used these acquisitions as platforms to expand our product offerings and grow through our existing agency and broker distribution network.

We believe our small commercial capabilities, distinctiveness in the middle market, and continued development of specialty business provides us with a more diversified portfolio of products and enables us to deliver significant value to our agents and policyholders. We believe these efforts will enable us to continue to improve the overall mix of our business and ultimately our underwriting profitability.

Personal Lines

Our Personal Lines segment generated $1.5 billion, or 29.7%, of consolidated operating revenues and $1.4 billion, or 29.6%, of net premiums written, for the year ended December 31, 2014. 

The following table provides net premiums written by line of business for our Personal Lines segment.

 

 

 

 

 

 

 

 

 

 

 

Net Premiums

 

 

 

YEAR ENDED DECEMBER 31, 2014

 

 

Written

 

% of Total

 

(in millions, except ratios)

 

 

 

 

 

 

Personal automobile

 

$

884.1 

 

62.1 

%

Homeowners

 

 

499.0 

 

35.1 

 

Other

 

 

39.7 

 

2.8 

 

Total

 

$

1,422.8 

 

100.0 

%

 

5

 


 

 

Personal Lines coverages include:

Personal automobile coverage insures individuals against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured’s vehicle, and property damage to other vehicles and other property.

Homeowners coverage insures individuals for losses to their residences and personal property, such as those caused by fire, wind, hail, water damage (excluding flood), theft and vandalism, and against third party liability claims.

Other personal lines are comprised of personal inland marine (jewelry, art, etc.), umbrella, fire, personal watercraft, earthquake and other miscellaneous coverages.

Our strategy in Personal Lines is to build account–oriented business through our partner agencies, with a focus on greater geographic diversification. The market for our Personal Lines business continues to be very competitive, with continued pressure on independent agents from direct writers, as well as from the increased usage of real time comparative rating tools and increasingly sophisticated rating and pricing tools. We maintain a focus on partnering with high quality, value added agencies that stress the importance of consultative selling and account rounding (the conversion of single policy customers to accounts with multiple policies and/or additional coverages). We are focused on making investments that are intended to help us maintain profitability, build a distinctive position in the market, and provide us with profitable growth opportunities. We continue to refine our products and to work closely with these high potential agents to increase the percentage of business they place with us and to ensure that it is consistent with our preferred mix of business. Additionally, we remain focused on further diversifying our state mix beyond the historical core states of Michigan, Massachusetts, New York and New Jersey. We expect these efforts to decrease our risk concentrations and our dependency on these four states, as well as to contribute to improved profitability over time.

Chaucer

Our Chaucer segment generated $1.3 billion, or 25.5%, of consolidated operating revenues and $1.2 billion, or 25.6%, of net premiums written, for the year ended December 31, 2014.

The following table provides net premiums written by line of business for our Chaucer segment.

 

 

 

 

 

 

 

 

 

 

 

 

Net Premiums

 

 

 

YEAR ENDED DECEMBER 31, 2014

 

 

Written

 

% of Total

 

(in millions, except ratios)

 

 

 

 

 

 

Marine and aviation

 

$

304.8 

 

24.8 

%

U.K. motor

 

 

297.7 

 

24.2 

 

Property

 

 

179.2 

 

14.5 

 

Energy

 

 

173.0 

 

14.0 

 

Casualty and other

 

 

276.7 

 

22.5 

 

Total

 

$

1,231.4 

 

100.0 

%

 

The Chaucer segment is comprised of international business written through Lloyd’s, and includes:

Marine and aviation includes worldwide direct, facultative and treaty business. The marine account provides cover for hull, liability, war, terrorism, aviation war, cargo, political risk, specie, fine art, satellite and ports and terminals. The aviation account insures airline hull and liability, general aviation, refuellers and aviation products.

Energy encompasses exploration and production, construction, downstream, operational power and renewables, insuring against physical damage, business interruption, control of well, seepage and pollution and liabilities. Energy also includes a nuclear account, which provides coverage across the nuclear fuel cycle from raw uranium and nuclear fuel to the shipment and storage of waste, with the majority of the exposure relating to power generation at nuclear power stations. In addition to providing coverage for physical damage to civil nuclear power stations, nuclear also provides limited liability coverage.

Property includes treaty business, as well as direct and facultative coverage for commercial and industrial risks against physical damage and business interruption. The treaty account covers cedants on a global basis, predominantly on an “excess of loss” basis for both per risk and catastrophe coverage, with a limited amount of proportional treaty and reinsurance assumed business.

U.K. motor provides primary insurance coverage to U.K. motor policyholders. Chaucer writes personal automobile, commercial and fleet polices, as well as specialist classes, including motorcycles, motor trade, and classic and specialist vehicles. In addition, the U.K. motor line includes a small amount of commercial property damage and liability polices protecting small/medium-sized enterprises.

 

Casualty and other provides liability coverage internationally, including our expanded U.S. casualty business, for professional and commercial risks on a direct and treaty basis, credit and bond, crime and professional liability coverage for financial institutions,

6

 


 

 

medical malpractice and excess workers’ compensation. Other lines also encompass liabilities arising from previous participations on risks insured by third party Lloyd’s syndicates, principally from Syndicate 4000, which provided liability coverage to financial institutions.

Chaucer is a specialist insurance underwriting group that participates in the Lloyd’s market through the provision of capital to support the underwriting activities of syndicates at Lloyd’s and the ownership of Chaucer Syndicates Limited (“CSL”), a managing agent. CSL manages two syndicates currently underwriting at Lloyd’s.

Chaucer provides capital to Syndicate 1084, which underwrites a range of property, marine, aviation, casualty and energy products for commercial clients worldwide and motor business for personal and commercial clients in the U.K.; and Syndicate 1176, which primarily provides protection against physical damage and limited liability exposures from power generation at nuclear power stations. The energy line of business includes $18.9 million of net premiums written from Syndicate 1176.

We increased our economic interest in Syndicate 1084 to 100% in 2014, from 98% in 2013. Our economic interest in Syndicate 1176 increased to 57% in 2014 from 56% in 2013.

Chaucer has broad underwriting expertise to support its diversified underwriting portfolio that, we believe, provides many benefits, including capital diversification, volatility management and long-term protection of our underwriting capabilities. We actively manage our portfolio, transferring underwriting capital to increase premium volumes during periods of increased rates, while remaining selective or reducing our capital and premium volumes in those lines where rates are under pressure.

Overall, we believe that the strength and depth of our underwriting teams, together with the broad diversity of our underwriting portfolio and our membership in the Lloyd’s market, underpin our ability to manage both the scale and composition of our business. Moreover, these strengths, combined with our continued active management of our portfolio and the underwriting opportunities available, provide a sound basis for the profitable development of the Chaucer business.

Other

The Other segment consists of: Opus, which provides investment advisory services to affiliates and also manages approximately $1.4 billion of assets for unaffiliated institutions such as insurance companies, retirement plans and foundations; earnings on holding company assets; and our discontinued voluntary pools business.

MARKETING AND DISTRIBUTION

We serve a variety of standard, specialty and niche markets. Consistent with our objective to diversify our underwriting risks on a geographic and line of business basis, we currently have a distribution split of approximately one-third each of domestic standard Commercial Lines, international and domestic specialty lines, and domestic standard Personal Lines. Our Commercial and Personal Lines segments, comprising our principal domestic U.S. subsidiaries, distribute our products primarily through an independent agent network. Our Chaucer segment, comprising our international business, distributes primarily through insurance brokers in the Lloyd’s market, as well as through comparative website aggregators with respect to the U.K. motor business.

Commercial and Personal Lines

Our Commercial and Personal Lines agency distribution strategy and field structure are designed to maintain a strong focus on local markets and the flexibility to respond to specific market conditions. During 2014, we wrote 20.4% of our Commercial and Personal Lines business in Michigan and 9.6% in Massachusetts. Our structure is a key factor in the establishment and maintenance of productive, long-term relationships with mid-sized, well-established independent agencies. We maintain 40 local offices across 29 states. The majority of processing support for these locations is provided from Worcester, Massachusetts; Howell, Michigan; Salem, Virginia; and Windsor, Connecticut.

Independent agents account for substantially all of the sales of our Commercial and Personal Lines property and casualty products. Agencies are appointed based on profitability, track record, financial stability, professionalism, and business strategy. Once appointed, we monitor their performance and, subject to legal and regulatory requirements, may take actions as necessary to change these business relationships, such as discontinuing the authority of the agent to underwrite certain products or revising commissions or bonus opportunities. We compensate agents primarily through base commissions and bonus plans that are tied to an agency’s written premium, growth and profitability.

We are licensed to sell property and casualty insurance in all fifty states in the U.S., as well as in the District of Columbia. We actively market Commercial Lines policies throughout the U.S. in 37 states and Personal Lines policies in 17 states. 

7

 


 

 

The following table provides our top Commercial and Personal Lines geographical markets based on total net premiums written in the state in 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED DECEMBER 31, 2014

 

Commercial Lines

 

 

Personal Lines

 

 

Total Commercial and Personal Lines

 

(in millions, except percentage)

 

 

Net Premiums Written

 

% of Total

 

 

 

Net Premiums Written

 

% of Total

 

 

 

Net Premiums Written

 

% of Total

 

Michigan

 

$

136.2 

 

6.3 

%

 

$

595.2 

 

41.8 

%

 

$

731.4 

 

20.4 

%

Massachusetts

 

 

155.6 

 

7.2 

 

 

 

187.2 

 

13.2 

 

 

 

342.8 

 

9.6 

 

New York

 

 

226.9 

 

10.5 

 

 

 

100.0 

 

7.0 

 

 

 

326.9 

 

9.1 

 

California

 

 

270.3 

 

12.5 

 

 

 

0.1 

 

 -

 

 

 

270.4 

 

7.6 

 

New Jersey

 

 

119.9 

 

5.6 

 

 

 

63.0 

 

4.4 

 

 

 

182.9 

 

5.1 

 

Illinois

 

 

96.1 

 

4.5 

 

 

 

76.7 

 

5.4 

 

 

 

172.8 

 

4.8 

 

Texas

 

 

164.5 

 

7.6 

 

 

 

 -

 

 -

 

 

 

164.5 

 

4.6 

 

Connecticut

 

 

52.3 

 

2.4 

 

 

 

62.1 

 

4.4 

 

 

 

114.4 

 

3.2 

 

Maine

 

 

59.8 

 

2.8 

 

 

 

41.3 

 

2.9 

 

 

 

101.1 

 

2.8 

 

Virginia

 

 

58.3 

 

2.7 

 

 

 

34.4 

 

2.4 

 

 

 

92.7 

 

2.6 

 

Georgia

 

 

55.7 

 

2.6 

 

 

 

29.4 

 

2.1 

 

 

 

85.1 

 

2.4 

 

Florida

 

 

76.6 

 

3.6 

 

 

 

 -

 

 -

 

 

 

76.6 

 

2.1 

 

New Hampshire

 

 

38.9 

 

1.8 

 

 

 

37.0 

 

2.6 

 

 

 

75.9 

 

2.1 

 

Indiana

 

 

38.2 

 

1.8 

 

 

 

35.1 

 

2.5 

 

 

 

73.3 

 

2.0 

 

Louisiana

 

 

33.8 

 

1.6 

 

 

 

33.7 

 

2.4 

 

 

 

67.5 

 

1.9 

 

Wisconsin

 

 

33.9 

 

1.6 

 

 

 

28.5 

 

2.0 

 

 

 

62.4 

 

1.7 

 

Tennessee

 

 

33.5 

 

1.5 

 

 

 

26.8 

 

1.9 

 

 

 

60.3 

 

1.7 

 

Ohio

 

 

28.4 

 

1.3 

 

 

 

27.9 

 

2.0 

 

 

 

56.3 

 

1.6 

 

Oklahoma

 

 

32.6 

 

1.5 

 

 

 

20.4 

 

1.4 

 

 

 

53.0 

 

1.5 

 

Other

 

 

444.4 

 

20.6 

 

 

 

24.0 

 

1.6 

 

 

 

468.4 

 

13.2 

 

Total

 

$

2,155.9 

 

100.0 

%

 

$

1,422.8 

 

100.0 

%

 

$

3,578.7 

 

100.0 

%

We manage our Commercial Lines portfolio, which includes our core and specialty businesses, with a focus on growth from the most profitable industry segments within our underwriting expertise. Our core business is generally comprised of several coordinated commercial lines of business, including small and middle market accounts, which include segmented businesses and niches. Such business is split between small accounts, generally having less than $50,000 in premium, and middle market accounts, those with premium over $50,000, with most middle market accounts having less than $250,000 of premium. Additionally, we have multiple specialty lines of business, which include program business, inland marine, management and professional liability, surety and specialty property. The Commercial Lines segment seeks to maintain strong agency relationships as a strategy to secure and retain our agents’ best business. We monitor quality of business written through ongoing quality review efforts, accountability for which is shared at the local, regional and corporate levels.

We manage Personal Lines business with a focus on acquiring and retaining quality accounts. Currently, approximately 78% of our policies in force are account business. Approximately 55% of our Personal Lines net premium written is generated in the combined states of Michigan and Massachusetts. In Michigan, based upon direct premiums written for 2013, we underwrite approximately 7% of the state’s total market.

Approximately 65% of our Michigan Personal Lines business is in the personal automobile line and 33% is in the homeowners line. Michigan business represents approximately 44% of our total personal automobile net premiums written and 40% our total homeowners net premiums written. In Michigan, we are a principal market for many of our appointed agencies with approximately $1.5 million of total direct premiums written per agency in 2014.

Approximately 70% of our Massachusetts Personal Lines business is in the personal automobile line and 26% is in the homeowners line. Massachusetts business represents approximately 15% of our total personal automobile net premiums written and approximately 10% of our total homeowners net premiums written. 

 

8

 


 

 

We sponsor local and national agent advisory councils to gain the benefit of our agents’ insight and enhance our relationships. These councils provide feedback, input on the development of products and services, guidance on marketing efforts, support for our strategies, and assist us in enhancing our local market presence.

Chaucer

Chaucer underwrites business from two main sources: approximately 79% from Lloyd’s brokers and underwriting agencies, placed in the open market, and 21% from retail brokers and comparative website aggregators for U.K. motor business. We primarily compensate brokers, underwriting agencies and aggregators through commission payments.

In the Lloyd’s open market, brokers approach Chaucer with individual insurance and reinsurance risk opportunities for underwriter consideration. Brokers also gain access to Chaucer’s products through selected underwriting agencies (also referred to as coverholders), to which Chaucer has granted limited authority to make underwriting decisions on individual risks. In general, risks written through underwriting agencies are smaller in terms of both exposure and premium. Risks are placed in Lloyd’s through a subscription placement process whereby generally several syndicates take a share of a contract rather than one insurer taking 100% on a direct basis. This facilitates the spreading of large and complex risks across a number of insurers, while limiting the counterparty risk of each insurer.

We have an international network of offices to improve our access to high quality risks worldwide. This is expected to improve the diversification of our underwriting and our ability to manage our portfolio. We have offices in Singapore and Copenhagen, Denmark to capitalize upon specific class of business opportunities in these regions. From January 2015, our underwriting representation for Latin American business has relocated to Miami, Florida from Buenos Aires, Argentina. We also have an office in Oslo, Norway, to provide access to the Norwegian and regional North Sea energy sector.

 

The following table provides a geographical breakdown of Chaucer’s total gross premiums written (“GPW”) based on the location of risk:

 

 

 

 

 

YEAR ENDED DECEMBER 31, 2014

 

% of Total GPW in Chaucer Segment

 

United Kingdom (1)

 

20.6 

%

United States

 

19.8 

 

Americas, excluding the United States

 

10.1 

 

Asia Pacific

 

5.0 

 

Middle East and Africa

 

4.5 

 

Europe

 

3.3 

 

Worldwide and other (2)

 

36.7 

 

Total

 

100.0 

%

(1)

Primarily U.K. motor.

(2)

“Worldwide and other” comprises insured risks that move across multiple geographic areas due to their mobile nature or insured risks that are fixed in locations that span more than one geographic area. These contracts include, for example, marine and aviation hull, satellite and offshore energy exploration and production risks that can move across multiple geographic areas and assumed risks where the cedant insures risks in two or more geographic zones.

 

9

 


 

 

Other

With respect to our Other segment business, we market our investment advisory services directly through Opus.

PRICING AND COMPETITION

The property and casualty industry is a very competitive market. Our competitors include national, international, regional and local companies that sell insurance through various distribution channels, including independent agencies, captive agency forces, brokers and direct to consumers through the internet or otherwise. They also include mutual insurance companies, reciprocals and exchanges. In the Commercial and Personal Lines segments, we market through independent agents and brokers and compete for business on the basis of product, price, agency and customer service, local relationships, ratings, and effective claims handling, among other things. We believe that an emphasis on maintaining strong agency relationships and a local presence in our markets, coupled with investments in products, operating efficiency, technology and effective claims handling, will enable us to compete effectively. Our broad product offerings in Commercial Lines and total account strategy in Personal Lines are instrumental to our strategy to capitalize on these relationships and improve profitability.

We seek to achieve targeted combined ratios in each of our product lines. Targets vary by product and geography and change with market conditions. The targeted combined ratios reflect competitive market conditions, investment yield expectations, our loss payout patterns, and target returns on equity. This strategy is intended to enable us to achieve measured growth and consistent profitability.

For all major product lines, we employ pricing teams which produce exposure and experience-based rating models to support underwriting and pricing decisions. In addition, in the Commercial and Personal Lines segments, we seek to utilize our understanding of local markets to achieve superior underwriting results. We rely on market information provided by our local agents and on the knowledge of staff in the local branch offices. Since we maintain a strong regional focus and a significant market share in a number of states, we can better apply our knowledge and experience in making underwriting and rate setting decisions. Also, we seek to gather objective and verifiable information at a policy level during the underwriting process, including prior loss experience, past driving records and, where permitted, credit histories.

The Commercial and Personal Lines segments are not dependent on a single customer or even a few customers, for which the loss of any one or more would have an adverse effect upon the insurance operations for these segments.

Although we conduct some business on a direct basis through the Chaucer segment, we market the majority of Chaucer product offerings through insurance brokers in the Lloyd’s specialty and the U.K. motor markets, which provide access to business from clients and coverholders. We are able to attract business through our recognized capability to serve as the lead underwriter in most classes we write, particularly in classes where such lead ability is sought by clients and recognized by following underwriters. This requires significant underwriting and claims handling expertise in very specialized lines of business. Our competitors include large international insurance companies and other Lloyd’s managing underwriters. In the U.K. motor lines, our competitors include large U.K. personal lines insurers. Broker relationships that are ten percent or more of total Chaucer 2014 gross premiums written are with Marsh & McLennan Companies (14%), Aon Benfield (14%) and Willis Group (10%). 

CLAIMS MANAGEMENT

Claims management includes the receipt of initial loss notifications, generation of appropriate responses to claim reports, loss appraisals, identification and handling of coverage issues, determination of whether further investigation is required, retention of legal representation where appropriate, establishment of case reserves, approval of loss payments and notification to reinsurers. Part of our strategy focuses on efficient, timely, and fair claim settlements to meet customer service expectations and maintain valuable independent agent relationships. Additionally, effective claims management is important to our business as claim payments and related loss adjustment expenses are our single largest expenditures.

Commercial and Personal Lines

We utilize experienced claims adjusters, appraisers, medical specialists, managers and attorneys to manage our claims. Our U.S. property and casualty operations have field claims adjusters located throughout the states and regions in which we do business. Claims field staff members work closely with the independent agents who bound the policies under which coverage is claimed. Claims office adjusting staff is supported by general adjusters for large property and large casualty losses, by automobile and heavy equipment damage appraisers for automobile material damage losses, and by medical specialists whose principal concentration is on workers’ compensation and automobile injury cases. Additionally, the claims offices are supported by staff attorneys, both in the home office and in regional locations, who specialize in litigation defense and claim settlements. We have a catastrophe response team to assist policyholders impacted by severe weather events. This team mobilizes quickly to impacted regions, often in advance for a large tracked storm, to support our local claims adjusters and facilitate a timely response to resulting claims. We also maintain a special unit that investigates suspected insurance fraud and abuse. We utilize claims processing technology which allows most of the smaller and more routine Personal Lines claims to be processed at centralized locations.

10

 


 

 

Chaucer

For international risks, the Chaucer claims team generally is responsible for establishing case reserves, loss and LAE cost management, exposure mitigation and litigation management. Chaucer has engaged a third party administrator to handle aviation claims and authorizes selected agencies to manage claims under risks which they have bound on Chaucer’s behalf.

For claims under our direct claims team management, where Chaucer is the lead syndicate or designated claims manager, our appointed claims adjusters work with the broker representing the insured. This may involve appointing attorneys, loss adjusters or other third party experts. Where Chaucer is not the lead underwriter or designated claims manager, the lead underwriter and designated claims manager together establish case reserves in conjunction with professional third party adjusters, and then advise all other syndicates participating on the risk of the loss reserve requirements. In such cases, the Chaucer claims team reviews material claims and developments. Chaucer also engages automobile body and repair shops to assist in managing claims for its U.K. motor business.

CATASTROPHES

We are subject to claims arising out of catastrophes, which historically have had a significant impact on our results of operations and financial condition. Coverage for such events is a core part of our business and we expect to experience catastrophe losses in the future, which could have a material adverse impact on us. Catastrophes can be caused by various events, including, among others, hurricanes, tornadoes and other windstorms, earthquakes, hail, severe winter weather, fire, explosions, and terrorism. The incidence and severity of catastrophes are inherently unpredictable.

Commercial and Personal Lines

We endeavor to manage our catastrophe risks through underwriting procedures, including the use of deductibles and specific exclusions for floods and earthquakes, subject to regulatory restrictions and competitive pressures, and through geographic exposure management and reinsurance. The catastrophe reinsurance program is structured to protect us on a per-occurrence basis. We monitor geographic location and coverage concentrations in order to manage corporate exposure to catastrophic events. Although catastrophes can cause losses in a variety of property and casualty lines, commercial multiple peril and homeowners property coverages have, in the past, generated the majority of catastrophe-related claims.

Chaucer

Individual commercial and industrial risks within our property, marine and aviation, and energy lines include protection against natural or man-made catastrophes worldwide. We accept these risks on direct, facultative, and proportional and excess of loss treaty bases. Such risks are managed through limiting the proportion of any individual risk or class of risk we assume and managing geographic concentration, and through the purchase of reinsurance.

We purchase reinsurance to limit our exposure to individual risks and catastrophic events. This includes facultative reinsurance, to limit the exposure on a specified risk; specific excess and proportional treaty, to limit exposure to individual contracts or risks within specified classes of business; and catastrophe excess of loss reinsurance, to limit exposure to any one event that might affect more than one individual contract.

The level of reinsurance that Chaucer purchases is dependent on a number of factors, including our underwriting risk appetite for catastrophe risk, the specific risks inherent in each line or class of business risk written and the pricing, coverage and terms and conditions available from the reinsurance market.

TERRORISM

As a result of the tragic events of September 11, 2001, the insurance industry has had heightened concern about the potential for losses caused by terrorist acts. These losses may encompass people, property and business operations covered under workers’ compensation, commercial multiple peril and other Commercial Lines policies. In certain cases, we are not able to exclude coverage for these losses, either because of regulatory requirements or competitive pressures. We continually evaluate the potential effect of these low frequency, but potentially high severity events in our overall pricing and underwriting plans, especially for policies written in major metropolitan areas.

Private sector catastrophe reinsurance is limited and generally unavailable for losses attributed to acts of terrorism, particularly those involving nuclear, biological, chemical and/or radiological events. As a result, the industry’s primary reinsurance protection against large-scale terrorist attacks in the U.S. is provided through a Federal program that provides compensation for insured losses resulting from acts of terrorism. Additionally, certain terrorism-related risks embedded in our Commercial and Personal Lines are covered under the existing Catastrophe, Property per Risk and Casualty Excess of Loss corporate reinsurance treaties (see “Reinsurance” for additional information).

11

 


 

 

The Terrorism Risk Insurance Act of 2002 established the Terrorism Risk Insurance Program (the “U.S. Program”). Coverage under the U.S. Program applies to workers’ compensation, commercial multiple peril and certain other Commercial Lines policies for U.S. direct written policies. The Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”) extended the U.S. Program through December 31, 2020. All commercial property and casualty insurers licensed in the U.S. participate in the program. Under the program, a participating issuer, in exchange for making terrorism insurance available, may be entitled to be reimbursed by the Federal Government for a portion of its aggregate losses. The U.S. Program does not cover losses in surety, Personal Lines or certain other lines of insurance. Losses caused by terrorist acts are not excluded from homeowners or personal automobile policies.

As required by the current U.S. Program, we offer policyholders in specific lines of commercial insurance the option to elect terrorism coverage. In order for a loss to be covered under the U.S. Program, the loss must meet aggregate industry loss minimums and must be the result of an act of terrorism as certified by the Secretary of the Treasury in consultation with the Secretary of Homeland Security and the U.S. Attorney General. Losses from acts which do not qualify or are not so certified will not receive the benefit of the U.S. Program and in fact, may be deemed covered losses whether or not terrorism coverage was purchased. The current U.S. Program requires insurance carriers to retain 15% of any claims from a certified terrorist event in excess of the federally mandated deductible in 2015 subject to an annual industry-wide cap of $100 billion. This retention will increase, beginning on January 1, 2016, by 1% each calendar year until it reaches 20% in 2020. The federally mandated deductible represents 20% of direct earned premium for the covered lines of business of the prior year. In 2014, our deductible was $350.4 million, which represents 19.1% of year-end 2013 statutory policyholder surplus of our U.S. domestic insurers, and is estimated to be $355.9 million in 2015, representing 17.3% of 2014 year-end statutory policyholder surplus.

Given the unpredictability of terrorism losses, future losses from acts of terrorism could be material to our operating results, financial position, and/or liquidity. We attempt to manage our exposures on an individual line of business basis and in the aggregate by one-half square mile grids.

Chaucer’s direct written U.S. policies are also covered under the provisions of TRIPRA. A limited portion of Chaucer’s business outside of the U.S. is exposed to terrorism with respect to certain commercial property classes that are written on a standalone basis. We manage this exposure through policy limits, monitoring of risk aggregation and reinsurance. Generally, terrorism coverage is excluded from most commercial property classes and coverages that Chaucer writes. For our nuclear energy business, most of our liability coverage does not exclude losses resulting from acts of terrorism. Where terrorism exposure is accepted, Chaucer normally ensures that the net liability involved does not exceed 50% of the full exposure, whether property, liability or combined. 

REGULATION

Commercial and Personal Lines

Our U.S. property and casualty insurance subsidiaries are subject to extensive regulation in the various states in which they transact business and are supervised by the individual state insurance departments. Numerous aspects of our business are subject to regulation, including premium rates, mandatory covered risks, limitations on the ability to non-renew or reject business, prohibited exclusions, licensing and appointment of agents, investments, restrictions on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the benefit of policyholders, investments and capital, policy forms and coverages, advertising, and other conduct, including restrictions on the use of credit information and other factors in underwriting, as well as other underwriting and claims practices. States also regulate various aspects of the contractual relationships between insurers and independent agents.

Such laws, rules and regulations are usually overseen and enforced by the various state insurance departments, as well as through private rights of action and increasingly, by state attorneys general. Such regulations or enforcement actions are often responsive to current consumer and political sensitivities such as automobile and homeowners insurance rates and coverage forms, or which may arise after a major event. Such rules and regulations may result in rate suppression, limit our ability to manage our exposure to unprofitable or volatile risks, or lead to fines, premium refunds or other adverse consequences. The federal government also may regulate aspects of our businesses such as the use of insurance (credit) scores in underwriting and the protection of confidential information.

In addition, as a condition to writing business in certain states, insurers are required to participate in various pools or risk sharing mechanisms or to accept certain classes of risk, regardless of whether such risks meet its underwriting requirements for voluntary business. Some states also limit or impose restrictions on the ability of an insurer to withdraw from certain classes of business. For example, Massachusetts, New Jersey, New York, and California each impose material restrictions on a company’s ability to materially reduce its exposures or to withdraw from certain lines of business in their respective states. The state insurance departments can impose significant charges on an insurer in connection with a market withdrawal or refuse to approve withdrawal plans on the grounds that they could lead to market disruption. Laws and regulations that limit cancellation and non-renewal of policies or that subject withdrawal plans to prior approval requirements may significantly restrict our ability to exit unprofitable markets.

12

 


 

 

Over the past several years, other state-sponsored insurers, reinsurers or involuntary pools have increased, particularly in those states which have Atlantic or Gulf Coast storm exposures. As a result, the potential assessment exposure of insurers doing business in such states and the attendant collection risks have increased. Such actions and related regulatory restrictions may limit our ability to reduce our potential exposure to hurricane-related losses.

The insurance laws of many states subject property and casualty insurers doing business in those states to statutory property and casualty guaranty fund assessments. The purpose of a guaranty fund is to protect policyholders by requiring that solvent property and casualty insurers pay insurance claims of insolvent insurers. These guaranty associations generally pay these claims by assessing solvent insurers proportionately based on the insurer’s share of voluntary premiums written in the state. While most guaranty associations provide for recovery of assessments through subsequent rate increases, surcharges or premium tax credits, there is no assurance that insurers will ultimately recover these assessments, which could be material, particularly following a large catastrophe or in markets which become disrupted.

 

We are subject to periodic financial and market conduct examinations conducted by state insurance departments. We are also required to file annual and other reports with state insurance departments relating to the financial condition of our insurance subsidiaries and other matters. The National Association of Insurance Commissioners (“NAIC”) and the Federal Insurance Office are each actively engaged in reviewing and considering proposed insurer risk-based capital standards, risk analysis, solvency assessments and other regulatory initiatives.

Chaucer

Chaucer is regulated by both the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”), who together have responsibility for the U.K. financial services industry, including insurers, insurance intermediaries and Lloyd’s. The PRA is responsible for the prudential supervision of, among other financial institutions, Lloyd’s insurers, with a particular focus on financial stability. The FCA focuses on conduct of business issues, with a particular focus on consumer protection and market integrity. In addition, Chaucer is supervised by the Council of Lloyd’s, which is the franchisor for all Lloyd’s operations.

The PRA, FCA and Council of Lloyd’s have common objectives in ensuring the appropriate regulation of the Lloyd’s market and, to minimize duplication, the PRA and FCA have arrangements with Lloyd’s for co-operation on supervision and enforcement. Lloyd’s, which is regulated by both the PRA and FCA, has responsibility under the Lloyd’s Act 1982 (“the Lloyd’s Act”) for the implementation of certain PRA and FCA prescribed rules relating to the operation of the Lloyd’s market. Lloyd’s prescribes, in respect of its managing agents and corporate members, minimum standards relating to their management and control, solvency and various other requirements. The PRA and FCA directly monitor compliance of Lloyd’s managing agents with the systems and controls that Lloyd’s prescribes.

The Council of Lloyd’s has wide discretionary powers to regulate Lloyd’s underwriting. For example, it may change the basis of allocation for syndicate expenses or the capital requirements for syndicate participations. Exercising any of these powers might affect the return on an investment of the corporate member, such as Chaucer, in a given underwriting year. In addition, the annual business plans of each syndicate are subject to the review and approval of the Lloyd’s Franchise Board, which is responsible for business planning and monitoring for all syndicates.

We participate in the Lloyd’s market through our ownership of Chaucer Syndicates Limited, which we refer to as CSL, a managing agent with responsibility for the management of Syndicates 1084 and 1176, for which we provide capital to support their underwriting activities. Our membership in Lloyd’s requires us to comply with its bylaws and regulations, the Lloyd’s Act and the applicable provisions of the Financial Services and Markets Act of 2000. These include the requirement to provide capital (referred to as “Funds at Lloyd’s”) in the form of cash, securities or letters of credit in an amount agreed with by Lloyd’s under the capital setting regime of the PRA. The completion of an annual capital adequacy exercise enables each corporate member to calculate the capital required. These requirements allow Lloyd’s to evaluate whether each corporate member has sufficient assets to meet its underwriting liabilities plus a required solvency margin.

If a corporate member of Lloyd’s is unable to meets its policyholder obligations, such obligations may be payable by the Lloyd’s Central Fund, which acts similar to a state guaranty fund in the U.S. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on all current Lloyd’s members. The Council of Lloyd’s has discretion to call or assess up to 3% of a member’s underwriting capacity as a Central Fund contribution.

13

 


 

 

Solvency II

In 2009, the European Union (“E.U.”) adopted a directive covering capital requirements, risk management and regulatory reporting for insurance organizations. The directive, known as Solvency II, imposes economic risk-based solvency requirements across all E.U. member states that comprise three “pillars”. First, there are quantitative capital requirements, based on a valuation of the entire balance sheet of an insurance organization. Second, Solvency II requires insurance organizations to undertake a qualitative regulatory review, including governance, internal controls, enterprise risk management and the supervisory review process. Third, to enhance market discipline, insurance organizations must report their financial conditions to regulators. The commencement date for the new regulatory regime is January 1, 2016. Chaucer continues to work to ensure compliance with the requirements in accordance with the timetable set out by Lloyd’s. 

Other

In addition to the U.K. and E.U. regulations, Chaucer is subject to regulation in the U.S through the Lloyd’s market. The Lloyd’s market has licenses to engage in insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an eligible excess and surplus lines insurer in all other states and territories. Lloyd’s is also an accredited reinsurer in all states and territories. Lloyd’s maintains various trust funds in the state of New York to protect its U.S. business and is subject to regulation by the New York Insurance Department, which acts as the domiciliary department for Lloyd’s U.S. trust funds. There are also deposit trust funds in other U.S. states to support Lloyd’s excess and surplus lines insurance and reinsurance business.

See also to Note 18 — “Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.

INVOLUNTARY RESIDUAL MARKETS

As a condition of our license to write business in various domestic states and international jurisdictions, we are required to participate in mandatory property and casualty residual market mechanisms which provide insurance coverages where such coverage may not otherwise be available at rates deemed reasonable. Such mechanisms provide coverage primarily for personal and commercial property, personal and commercial automobile, and workers’ compensation, and include assigned risk plans, reinsurance facilities and involuntary pools, joint underwriting associations, fair access to insurance requirements (“FAIR”) plans, and commercial automobile insurance plans.

For example, since most states compel the purchase of a minimal level of automobile liability insurance, states have developed shared market mechanisms to provide the required coverages and in many cases, optional coverages, to those drivers who, because of their driving records or other factors, cannot find insurers who will insure them voluntarily. Also, FAIR plans and other similar property insurance shared market mechanisms increase the availability of property insurance in circumstances where homeowners are unable to obtain insurance at rates deemed reasonable, such as in coastal areas or in areas subject to other hazards. Licensed insurers writing business in such states are often required to pay assessments to cover reserve deficiencies generated by such plans.

With respect to FAIR plans and other similar property insurance shared market mechanisms that have significant exposures, it is difficult to accurately estimate our potential financial exposure for future events. Assessments following a large coastal event, particularly affecting Massachusetts, Florida, Louisiana or New York, could be material to our results of operations. Our participation in such shared markets or pooling mechanisms is generally proportional to our direct writings for the type of coverage written by the specific pooling mechanism in the applicable state or other jurisdiction. For example, we are subject to mandatory participation in the Michigan Assigned Claims (“MAC”) facility. MAC is an assigned claim plan covering people injured in uninsured motor vehicle accidents. Our participation in the MAC facility is based on our share of personal and commercial automobile direct written premium in the state and resulted in underwriting losses of $11.7 million in 2014 and $15.0 million in 2013 and 2012. Additionally, Chaucer’s U.K. motor line is subject to similar mandatory assessments from the U.K. Motor Insurance Bureau (“MIB”) and these assessments were $4.0 million in 2014, $4.3 million in 2013 and not significant to our results of operation in 2012. There were no other mandatory residual market mechanisms that were significant to our 2014, 2013 or 2012 results of operations.

14

 


 

 

RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Reference is made to “Results of Operations - Segments – Reserve for Losses and Loss Adjustment Expenses” of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

The following table reconciles reserves determined in accordance with accounting practices prescribed or permitted by U.S. insurance statutory authorities (“U.S. Statutory”) and the U.K. financial services regulatory authorities (“U.K. Statutory”) for our domestic and Chaucer operations, respectively, to reserves determined in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The primary difference between the U.S. Statutory reserves and our U.S. GAAP reserves is the requirement, on a U.S. GAAP basis, to present reinsurance recoverables as an asset, whereas U.S. Statutory guidance provides that reserves are reflected net of the corresponding reinsurance recoverables. There are no significant differences between U.K. Statutory reserves and our U.S. GAAP reserves. We do not use discounting techniques in establishing U.S. GAAP reserves for losses and LAE, nor have we participated in any loss portfolio transfers or other similar transactions.

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31

 

 

2014

 

 

2013

 

 

2012

(in millions)

 

 

 

 

 

 

 

 

 

U.S. Statutory reserve for losses and LAE

 

$

2,819.0 

 

$

2,725.0 

 

$

2,646.7 

U.K. Statutory reserve for losses and LAE

 

 

2,421.0 

 

 

2,373.9 

 

 

2,397.7 

Total Statutory reserve for losses and LAE

 

 

5,240.0 

 

 

5,098.9 

 

 

5,044.4 

U.S. GAAP adjustments:

 

 

 

 

 

 

 

 

 

Reinsurance recoverables on unpaid losses of our U.S.

 

 

 

 

 

 

 

 

 

insurance subsidiaries

 

 

1,256.3 

 

 

1,242.2 

 

 

1,265.0 

Reserves for discontinued operations

 

 

(114.7)

 

 

(121.3)

 

 

(126.8)

Other

 

 

10.1 

 

 

11.7 

 

 

14.4 

U.S. GAAP reserve for losses and LAE

 

$

6,391.7 

 

$

6,231.5 

 

$

6,197.0 

Reserves for discontinued operations of our U.S. insurance subsidiaries are included in liabilities of discontinued operations for U.S. GAAP and loss and loss adjustment expenses for Statutory reporting.

15

 


 

 

ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT

The following table sets forth the development of our U.S. GAAP reserves (net of reinsurance recoverables) for unpaid losses and LAE from 2004 through 2014. This table includes our Chaucer segment U.S. GAAP reserves beginning December 31, 2011. Conditions and trends that have affected reserve development in the past will not necessarily recur in the future. It is not appropriate to extrapolate future favorable or unfavorable development based on amounts experienced in prior periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

2010

 

 

2009

 

 

2008

 

 

2007

 

 

2006

 

 

2005

 

 

2004

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net reserve for losses and LAE (1)

 

$

4,408.7 

 

$

4,201.1 

 

$

4,122.7 

 

$

3,828.5 

 

$

2,162.2 

 

$

2,093.7 

 

$

2,214.9 

 

$

2,227.2 

 

$

2,276.5 

 

$

2,354.1 

 

$

2,166.3 

Cumulative amount paid as of: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year later

 

 

 

 

 

1,398.9 

 

 

1,469.8 

 

 

1,396.5 

 

 

840.7 

 

 

738.6 

 

 

788.5 

 

 

711.1 

 

 

689.9 

 

 

729.5 

 

 

622.0 

Two years later

 

 

 

 

 

 

 

 

2,264.0 

 

 

2,172.6 

 

 

1,277.9 

 

 

1,120.3 

 

 

1,126.8 

 

 

1,050.5 

 

 

1,061.8 

 

 

1,121.9 

 

 

967.0 

Three years later

 

 

 

 

 

 

 

 

 

 

 

2,650.0 

 

 

1,543.6 

 

 

1,355.8 

 

 

1,362.8 

 

 

1,222.7 

 

 

1,268.4 

 

 

1,368.3 

 

 

1,175.4 

Four years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,726.0 

 

 

1,487.2 

 

 

1,500.5 

 

 

1,346.8 

 

 

1,364.7 

 

 

1,499.6 

 

 

1,312.9 

Five years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,591.3 

 

 

1,577.6 

 

 

1,426.6 

 

 

1,438.8 

 

 

1,555.7 

 

 

1,384.4 

Six years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,644.5 

 

 

1,473.9 

 

 

1,493.9 

 

 

1,606.3 

 

 

1,416.2 

Seven years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,518.4 

 

 

1,527.5 

 

 

1,647.8 

 

 

1,456.3 

Eight years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,561.4 

 

 

1,676.7 

 

 

1,489.9 

Nine years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,706.0 

 

 

1,515.3 

Ten years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,541.0 

Net reserve re-estimated as of: (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

End of year

 

 

4,408.7 

 

 

4,201.1 

 

 

4,122.7 

 

 

3,828.5 

 

 

2,162.2 

 

 

2,093.7 

 

 

2,214.9 

 

 

2,227.2 

 

 

2,276.5 

 

 

2,354.1 

 

 

2,166.3 

One year later

 

 

 

 

 

4,066.1 

 

 

4,052.0 

 

 

3,841.6 

 

 

2,094.4 

 

 

1,982.6 

 

 

2,059.6 

 

 

2,075.6 

 

 

2,140.1 

 

 

2,274.1 

 

 

2,086.8 

Two years later

 

 

 

 

 

 

 

 

4,038.9 

 

 

3,843.2 

 

 

2,090.5 

 

 

1,916.4 

 

 

1,973.3 

 

 

1,865.7 

 

 

2,011.0 

 

 

2,158.8 

 

 

1,994.4 

Three years later

 

 

 

 

 

 

 

 

 

 

 

3,819.8 

 

 

2,124.2 

 

 

1,902.7 

 

 

1,930.8 

 

 

1,793.7 

 

 

1,852.7 

 

 

2,075.0 

 

 

1,904.4 

Four years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,163.7 

 

 

1,923.4 

 

 

1,922.6 

 

 

1,770.6 

 

 

1,810.9 

 

 

1,965.3 

 

 

1,858.0 

Five years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,950.5 

 

 

1,939.7 

 

 

1,773.2 

 

 

1,793.9 

 

 

1,936.4 

 

 

1,780.8 

Six years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,961.1 

 

 

1,779.4 

 

 

1,798.0 

 

 

1,922.4 

 

 

1,761.2 

Seven years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,793.4 

 

 

1,802.4 

 

 

1,924.6 

 

 

1,749.0 

Eight years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,814.7 

 

 

1,929.1 

 

 

1,749.0 

Nine years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,939.6 

 

 

1,754.7 

Ten years later

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,764.5 

Cumulative net redundancy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(deficiency) (4)

 

$

 -

 

$

135.0 

 

$

83.8 

 

$

8.7 

 

$

(1.5)

 

$

143.2 

 

$

253.8 

 

$

433.8 

 

$

461.8 

 

$

414.5 

 

$

401.8 

Adjustment for foreign currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

exchange (3)

 

 

 -

 

 

(35.9)

 

 

(17.0)

 

 

14.7 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cumulative net redundancy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(deficiency) excluding foreign currency exchange (3) (4)

 

$

 -

 

$

99.1 

 

$

66.8 

 

$

23.4 

 

$

(1.5)

 

$

143.2 

 

$

253.8 

 

$

433.8 

 

$

461.8 

 

$

414.5 

 

$

401.8 

Gross reserves for losses and LAE

 

$

6,391.7 

 

$

6,231.5 

 

$

6,197.0 

 

$

5,760.3 

 

$

3,277.7 

 

$

3,153.9 

 

$

3,203.1 

 

$

3,167.7 

 

$

3,166.0 

 

$

3,461.7 

 

$

3,073.4 

Reinsurance recoverables

 

 

1,983.0 

 

 

2,030.4 

 

 

2,074.3 

 

 

1,931.8 

 

 

1,115.5 

 

 

1,060.2 

 

 

988.2 

 

 

940.5 

 

 

889.5 

 

 

1,107.6 

 

 

907.1 

Net liability

 

 

4,408.7 

 

 

4,201.1 

 

 

4,122.7 

 

 

3,828.5 

 

 

2,162.2 

 

 

2,093.7 

 

 

2,214.9 

 

 

2,227.2 

 

 

2,276.5 

 

 

2,354.1 

 

 

2,166.3 

Re-estimated gross reserve for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses and LAE

 

 

 -

 

 

6,029.7 

 

 

6,004.3 

 

 

5,696.0 

 

 

3,417.1 

 

 

3,239.0 

 

 

3,231.9 

 

 

3,047.2 

 

 

3,038.5 

 

 

3,423.6 

 

 

3,051.6 

Re-estimated reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

recoverables

 

 

 -

 

 

1,963.6 

 

 

2,015.0 

 

 

1,876.7 

 

 

1,253.4 

 

 

1,288.5 

 

 

1,270.8 

 

 

1,253.8 

 

 

1,223.8 

 

 

1,484.0 

 

 

1,287.1 

Re-estimated net liability

 

 

 -

 

 

4,066.1 

 

 

3,989.3 

 

 

3,819.3 

 

 

2,163.7 

 

 

1,950.5 

 

 

1,961.1 

 

 

1,793.4 

 

 

1,814.7 

 

 

1,939.6 

 

 

1,764.5 

Cumulative gross redundancy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(deficiency) (4)

 

$

 -

 

$

201.8 

 

$

192.7 

 

$

64.3 

 

$

(139.4)

 

$

(85.1)

 

$

(28.8)

 

$

120.5 

 

$

127.5 

 

$

38.1 

 

$

21.8 

 

 

16

 


 

 

(1)

Sets forth the estimated net liability for unpaid losses and LAE recorded at the balance sheet date at the end of each of the indicated years; represents the estimated amount of net losses and LAE for claims arising in the current and all prior years that are unpaid at the balance sheet date, including incurred but not reported (“IBNR”) reserves.

(2)

Cumulative loss and LAE payments made in succeeding years for losses incurred prior to the balance sheet date. Chaucer claims payments denominated in foreign currencies are converted to U.S. dollars at the average foreign exchange rates during the year of payment and are not revalued at the current year foreign exchange rates. Because claims paid in prior years are not revalued at the current year’s foreign exchange rates, the difference between the cumulative claims paid at the end of any given year and the immediately previous year represents the claims paid during the year.

(3)

Re-estimated amount of the previously recorded liability based on experience for each succeeding year; increased or decreased as payments are made and more information becomes known about the severity of remaining unpaid claims. Chaucer unpaid losses and LAE denominated in foreign currencies are re-estimated using the foreign exchange rates in effect as of each respective re-estimation date. For example, 2012 reserves re-estimated one year later are re-estimated using the December 31, 2013 rates and two years later are re-estimated using December 31, 2014 rates. The resulting cumulative foreign exchange translation effect is shown as an adjustment to the cumulative net redundancy (deficiency) based on the rates in effect as of December 31, 2014.  

(4)

Cumulative redundancy or deficiency at December 31, 2014 of the net and gross reserve amounts shown in the corresponding column. A redundancy in reserves means the reserves established in prior years exceeded actual losses and LAE or were re-evaluated at less than the original reserved amount. A deficiency in reserves means the reserves established in prior years were less than actual losses and LAE or were re-evaluated at more than the original reserved amount.

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 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). 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.

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 their financial statements, 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 write in the U.S., we are statutorily required to provide this coverage in our workers’ compensation policies. We have workers’ compensation reinsurance coverage under our casualty reinsurance treaty of approximately $10 million for losses that result from nuclear, chemical or biological events and approximately $80 million for terrorism losses excluding those that result from nuclear, chemical or biological events. All other U.S.-based exposure or treaties exclude such coverage. Further, under TRIPRA, our retention of U.S. domestic losses in 2015 from such events, if deemed certified terrorist events, is limited to 15% of losses in excess of an approximate $369 million deductible, up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. Such events could be material to our financial position or results of operations. See “Terrorism” for additional information.

Reference is made to Note 16 — “Reinsurance” in the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K. Reference is also made to “Involuntary Residual Markets”.

Commercial and Personal Lines

Our 2015 reinsurance program for our Commercial Lines and Personal Lines segments is substantially consistent with our 2014 program design. In light of the favorable reinsurance market conditions at January 1, 2015, we expanded our reinsurance coverage in some treaties and increased our limit in others. The following discussion summarizes both our 2014 and 2015 reinsurance programs for our Commercial Lines and Personal Lines segments (excluding coverage available under the U.S. federal terrorism program which is described under “Terrorism”), but does not purport to be a complete description of the program or the various restrictions or limitations which may apply:

·

Our Commercial Lines and Personal Lines segments were 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.  

17

 


 

 

·

The property catastrophe occurrence treaty provides coverage, on an occurrence basis, up to $1.1 billion countrywide (previously it provided $700 million of coverage countrywide, with an additional $400 million of coverage for the Northeast only, i.e., up to $1.1 billion for the Northeast only), less a $200 million retention, with no co-participation, for all defined perils. Roughly two-fifths of the program is effective through July 1, 2016 with the remainder expected to be renewed by July 2015.  For 2014 and 2015, 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 co-participations for 2014 and 2015 of up to 10% 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.

·

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 $2 million to $10 million layers, with the maximum umbrella limit of $5 million subject to the casualty treaty. There is also separate umbrella and excess liability only coverage that provides protection in both 2014 and 2015 for the $5 million to $25 million layer. Management liability and professional liability lines have been covered in a $1 million to $2 million layer within the casualty program, meant only for these risks. That layer also includes healthcare in 2015, which previously had been covered in its own separate treaty.

·

For 2014 and 2015, Commercial Lines segments are further protected by excess of loss treaty agreements for specific lines of business such as surety and fidelity bond liability, and for 2014, healthcare liability. Surety and fidelity bond excess of loss treaty provides coverage, on a per principal basis, up to $35 million, less a $5 million retention, with co-participations ranging from 5% to 15% for individual layers placed within the treaty.  

·

In addition to certain layers of coverage from our Commercial and Personal Lines segment reinsurance program as described above, the Commercial Lines AIX Holdings, Inc. (“AIX”) program business also includes surplus share, quota share, excess of loss, facultative and other forms of reinsurance that cover the writings from AIX specialty and proprietary programs. There are approximately 44 different AIX programs, and the reinsurance structure is customized to fit the exposure profile for each program.

Our intention is to renew the surety and fidelity bond treaty, the property per risk excess of loss treaty and three-fifths of the property catastrophe treaty in July 2015 with the same or similar terms and conditions, but there can be no assurance that we will be able to maintain our current levels of reinsurance, pricing and terms and conditions. For our 2015 reinsurance program, all other treaties described above were effective January 1, 2015 for a twelve month period.  

Chaucer

Chaucer’s 2015 reinsurance program is substantially consistent with the 2014 program design. The 2014 and 2015 Chaucer reinsurance programs contain a combination of reinsurance treaties that either provide coverage across several lines or are specific to individual lines of business or classes of business within certain lines. Generally, for each line or class of Chaucer’s business, there are a variety of proportional, excess of loss (mainly occurrence basis), facultative and other treaty forms, which work in conjunction to manage against severity, and to a certain extent, frequency. For 2014, Chaucer increased its net retentions for certain lines and classes predominantly through various co-participation levels within certain treaty layers. For 2015, Chaucer’s net retentions are either consistent with the 2014 levels or lower.

The Chaucer programs described below are substantially in place as of February 1, 2015 and we expect to implement throughout the year any remaining parts of the program as described; however, there can be no assurances that we will be successful in placing reinsurance for each line as planned. The following discussion summarizes both our 2014 and 2015 reinsurance programs for the Chaucer segment, but does not purport to be a complete description of the program or the various restrictions or limitations which may apply. The limit figures below are presented net of treaty co-participation.

We purchase proportional and non-proportional reinsurance which is intended to provide sufficient underwriting capacity to effectively conduct business in the Lloyd’s market and to protect against frequency and severity of losses.

For the property lines reinsurance coverage in 2014 and 2015:

·

The direct property catastrophe occurrence reinsurance for selected international territories provides coverage up to approximately $37 million and $38 million, less retentions of approximately $8 million for both years.

·

The assumed property catastrophe reinsurance for selected international territories provides coverage up to approximately $115 million and $104 million, less retentions of approximately $24 million and $19 million, respectively. Additionally, the assumed property catastrophe occurrence reinsurance for the United States and the Caribbean provides coverage up to approximately $133 million and $110 million, less retentions of approximately $30 million and $25 million, respectively. For the 2014 and 2015 reinsurance programs, our assumed property catastrophe coverage is placed partially on an occurrence, and partially on an aggregate basis.

18

 


 

 

·

The direct property per risk excess of loss reinsurance provides coverage up to approximately $10 million for both years, less retentions of approximately $3 million for both years.

The majority of the casualty direct and facultative portfolio has reinsurance coverage in 2014 and 2015 of approximately $30 million, less a retention of approximately $2  million. A stop loss contract was purchased in 2014, and is expected to renew in 2015, protecting the US casualty treaty portfolio, and providing cover up to a loss ratio of 115%.

For the energy, marine and aviation lines reinsurance coverage in 2014 and 2015:

·

The nuclear energy lines occurrence reinsurance provides coverage up to approximately $165 million and $174 million, less retentions of approximately $55 million for both years. 

·

The non-nuclear energy lines occurrence reinsurance provides coverage up to approximately $154 million and $140 million, respectively, less retentions of approximately $20 million for both years.

·

The marine lines excess of loss reinsurance provides coverage, on a per occurrence basis, up to approximately $70 million and $101 million, respectively, less retentions of approximately $5 million for both years.

·

The aviation lines reinsurance provides coverage, on a per occurrence basis, up to approximately $52 million and $48 million, respectively, less retentions of approximately $3 million for both years.

The U.K. motor line has protection from a reinsurance program placed on a losses occurring basis, which is unlimited in excess of $1.6 million, both in terms of the amount and the number of losses sustained. For 2013, 2014 and 2015, there is co-participation on the $1.6 million in excess of $1.6 million layer of 30%, 15% and 9.5% for each year, respectively.

For Chaucer’s 2014 U.S. casualty treaty lines, we have entered into a whole account aggregate excess of loss reinsurance contract.  The reinsurance contract covers the U.S. casualty treaty lines exposures, except workers compensation clash, and provides coverage up to a 115% loss ratio less retention of a 45% loss ratio.

Chaucer had a capital provision reinsurance treaty with Flagstone Re to provide additional gross underwriting capacity to Syndicate 1084 for the years 2009 through 2012.  The treaty was commuted in 2014, therefore, increasing Chaucer’s economic interest in Syndicate 1084 by 8.0%, 11.6%, 12.0% and 12.0% for those years, respectively.  

Reinsurance Recoverables

Other than our investment portfolio, the single largest asset class is our reinsurance receivables, which consist of our estimate of amounts recoverable from reinsurers with respect to losses incurred to date (including losses incurred but not reported) and unearned premiums, net of amounts estimated to be uncollectible. This estimate depends upon a number of factors, including an estimate of the amount of reserves attributable to business written in various lines and in various years. This estimate is expected to be revised at each reporting period and such revisions, which could be material, affect our results of operations and financial position. Reinsurance recoverables include amounts due from both United States and state mandatory reinsurance or other risk sharing mechanisms, and private reinsurers to whom we have voluntarily ceded business.

We are subject to concentration of risk with respect to reinsurance ceded to various mandatory residual markets, facilities and pooling mechanisms. As a condition to conduct business in various states, we are required to participate in residual market mechanisms, facilities and pooling arrangements which usually are designed to provide insurance coverages to individuals or other entities that are otherwise unable to purchase such coverage voluntarily or at rates deemed reasonable. These market mechanisms, facilities and pooling arrangements comprise $917.2 million of our total reinsurance recoverables on paid and unpaid losses and unearned premiums at December 31, 2014 and include, among others, the Michigan Catastrophic Claims Association (“MCCA”).

The MCCA is a mandatory reinsurance association which reinsures claims under Michigan’s unlimited personal injury protection coverage which is required under all Michigan automobile insurance policies. The MCCA reinsures all such claims in excess of a statutorily established company retention, currently $530,000. Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders. This recoverable accounted for 64% and 61% of our total personal automobile gross reserves at December 31, 2014 and 2013, respectively. Reinsurance recoverables related to MCCA were $899.5 million and $867.0 million at December 31, 2014 and 2013, respectively. Because the MCCA is supported by assessments permitted by statute, and there have been no significant uncollectible balances from MCCA identified during the three years ending December 31, 2014, we believe that we have no significant exposure to uncollectible reinsurance balances from this entity.

19

 


 

 

In addition to the reinsurance ceded to various residual market mechanisms, facilities and pooling arrangements we have $1,351.0 million of reinsurance assets due from traditional reinsurers as of December 31, 2014. These amounts are due principally from highly-rated reinsurers, defined as rated A- or higher by A.M. Best Rating Agency or other equivalent rating. The following table displays balances recoverable from our ten largest reinsurance groups at December 31, 2014, along with the group’s rating from the indicated rating agency. The contractual obligations under reinsurance agreements are typically with individual subsidiaries of the group or syndicates at Lloyd’s and are not typically guaranteed by other group members or syndicates at Lloyd’s. Reinsurance recoverables are comprised of paid losses recoverable, outstanding losses recoverable, incurred but not reported losses recoverable, and ceded unearned premium.

 

 

 

 

 

 

 

REINSURERS

 

A.M.  Best Rating

 

 

Reinsurance Recoverable

(in millions)

 

 

 

 

 

Lloyd's Syndicates

 

A

 

$

280.9 

Munich Reinsurance Companies

 

A+

 

 

148.1 

HDI Group

 

A

 

 

123.4 

Alleghany Corporation

 

A

 

 

89.9 

Partner Re Ltd. Companies

 

A+

 

 

85.6 

XL Group PLC

 

A

 

 

59.6 

Swiss Re Ltd.

 

A+