THG 2018 Annual Report

During the third quarter of 2018, the Company repurchased subordinated debentures maturing February 3, 2027 with a net carrying value of $9.6 million at a cost of $11.5 million, resulting in a loss of $1.9 million. In 2009, Hanover Insurance received a $125.0 million advance through its membership in the FHLB. This collateralized advance bears interest at a fixed rate of 5.50% per annum over a twenty-year term. As collateral to FHLB, the Company pledged government agency securities with a fair value of $234.7 million and $223.6 million, for the aggregate borrowings of $125.0 million as of December 31, 2018 and December 31, 2017, respectively. The fair value of the collateral pledged must be maintained at certain specified levels of the borrowed amount, which can vary depending on the type of assets pledged. If the fair value of this collateral declines below these specified levels, the Company would be required to pledge additional collateral or repay outstanding borrowings. The Company is permitted to voluntarily repay the outstanding borrowings at any time, subject to a repayment fee. As a requirement of membership in the FHLB, the Company maintains a certain level of investment in FHLB stock. Total holdings of FHLB stock were $8.7 million and $8.5 million at December 31, 2018 and 2017, respectively. At December 31, 2018, the Company notified FHLB of its intent to repay its $125 million advance and recorded a pre-tax charge of $26.3 million related to the pre-payment provision. p y At December 31, 2018, the Com an had a $200.0 million credit g p y p y a reement which ex ires in Ma 2019. The Com an had no borrowings under this agreement as of December 31, 2018. Interest expense was $45.1 million, $45.2 million, and $51.4 million in 2018, 2017 and 2016, respectively. At December 31, 2018, the Company was in compliance with the covenants associated with all of its debt indentures and credit arrangements. 7. INCOME TAXES Provisions for income taxes have been calculated in accordance with the provisions of ASC 740. Income from continuing operations before income taxes and a summary of the components of income tax expense in the Consolidated Statements of Income are shown below: YEARS ENDED DECEMBER 31 2018 2017 2016 (in millions) Income from continuing operations before income taxes $ 282.5 $ 292.9 $ 66.0 Income tax expense: Current $ 46.2 $ 3.1 $ 26.2 Deferred (2.7) 73.7 (27.2) Total income tax expense (benefit) $ 43.5 $ 76.8 $ (1.0) The income tax expense attributable to the consolidated results of continuing operations is different from the amount determined by multiplying income from continuing operations before income taxes by the U.S. statutory federal income tax rate of 21% in 2018 and 35% in both 2017 and 2016. The sources of the difference and the tax effects of each were as follows: YEARS ENDED DECEMBER 31 2018 2017 2016 (in millions) Expected income tax expense $ 59.3 $ 102.5 $ 23.1 Effect of the enactment of the Tax Cuts and Jobs Act (4.3) (3.9) ² Tax difference related to investment disposals and maturities (9.2) (12.7) (20.7) Stock-based compensation windfall benefit (2.3) (5.3) ² Nondeductible expenses 1.6 1.0 1.0 Dividend received deduction (1.2) (3.2) (3.3) Tax-exempt interest (0.4) (0.9) (1.1) Change in liability for uncertain tax positions ² (0.5) ² Other, net ² (0.2) ² Income tax expense $ 43.5 $ 76.8 $ (1.0) Effective tax rate 15.4% 26.2% -1.5% 103 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP