THG 2018 Annual Report

CASH AND INVESTMENTS Total cash and investments increased $1,122.0 million, or 15.6%, for the year ended December 31, 2018. This increase was primarily attributable to the proceeds from the sale of Chaucer and the pre-signing dividend. Excluding the impact from the sale of Chaucer, the investment portfolio increased by 3.8% for the year, primarily due to operational cashflows, partially offset by market value depreciation and the funding of financing activities, including dividend payments and stock repurchases. The following table provides information about the investment types of our fixed maturities portfolio: DECEMBER 31 2018 (in millions) Amortized Cost Fair Value Net Unrealized Gains (Losses) Change in Net Unrealized for the Year U.S. Treasury and government agencies $ 414.7 $ 409.9 $ (4.8) $ (5.0) Foreign government 7.3 7.4 0.1 (0.2) Municipals: Taxable 820.4 827.8 7.4 (16.1) Tax-exempt 58.6 58.0 (0.6) (1.0) Corporate 3,476.6 3,410.7 (65.9) (128.3) Asset-backed: Residential mortgage-backed 728.4 716.4 (12.0) (12.9) Commercial mortgage-backed 648.4 640.3 (8.1) (12.8) Asset-backed 91.5 91.0 (0.5) (0.3) Total fixed maturities, excluding Chaucer $ 6,245.9 $ 6,161.5 $ (84.4) $ (176.6) The change in net unrealized gains (losses) on fixed maturities, from a gain of $92.2 million at year-end 2017 to a loss of $84.4 million at year-end 2018, was primarily due to higher prevailing interest rates and wider credit spreads in 2018. Amortized cost and fair value by rating category were as follows: DECEMBER 31 2018 2017 (dollars in millions) NAIC Designation Rating Agency Equivalent Designation Amortized Cost Fair Value % of Total Fair Value Amortized Cost Fair Value % of Total Fair Value 1 Aaa/Aa/A $ 4,297.7 $ 4,258.8 69.1% $ 3,745.9 $ 3,798.0 66.1% 2 Baa 1,636.7 1,601.0 26.0 1,594.4 1,623.0 28.2 3 Ba 176.4 173.2 2.8 159.7 166.8 2.9 4 B 120.0 113.8 1.9 149.1 153.3 2.7 5 Caa and lower 14.8 14.3 0.2 7.7 7.9 0.1 6 In or near default 0.3 0.4 ² 0.3 0.3 ² Total fixed maturities, excluding Chaucer $ 6,245.9 $ 6,161.5 100.0% $ 5,657.1 $ 5,749.3 100.0% %DVHG RQ UDWLQJV E\ WKH 1DWLRQDO $VVRFLDWLRQ RI ,QVXUDQFH &RPPLVVLRQHUV ³1$,&´ DSSUR[LPDWHO\ DQG RI WKH IL[HG PDWX rity portfolio consisted of investment grade securities at December 31, 2018 and 2017, respectively. The quality of our fixed maturity portfolio remains strong based on ratings, capital structure position, support through guarantees, underlying security, issuer diversification and yield curve position. Our investment portfolio primarily consists of fixed maturity securities whose fair value is susceptible to market risk, including interest UDWH FKDQJHV 6HH DOVR ³4XDQWLWDWLYH DQG 4XDOLWDWLYH 'LVFORVXUHV DERXW 0DUNHW 5LVN´ LQFOXGHG LQ 0DQDJHPHQW¶V 'LVFXVVLRQ DQG $ nalysis of Financial Condition. Duration is a measurement used to quantify our inherent interest rate risk and analyze invested assets relative to our reserve liabilities. 56 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT