THG 2018 Annual Report

STATUTORY SURPLUS OF U.S. INSURANCE SUBSIDIARIES The following table reflects statutory surplus for our insurance subsidiaries: DECEMBER 31 2018 2017 (in millions) $ 2,172.5 $ 2,077.1 The statutory capital and surplus for our insurance subsidiaries increased $95.4 million during 2018, primarily due to approximately $290 million of income, partially offset by a $140.0 million dividend paid by Hanover Insurance to THG in the second quarter and increases in unrealized losses on investments. 7KH 1$,& SUHVFULEHV DQ DQQXDO FDOFXODWLRQ UHJDUGLQJ ULVN EDVHG FDSLWDO ³5%&´ 5%& UDWLRV IRU UHJXODWRU\ SXUSRVHV DV GHVFUL bed in the glossary, are expressed as a percentage of the capital required to be above the Authorize G &RQWURO /HYHO WKH ³5HJXODWRU\ 6FDOH´ however, in the insurance industry, RBC ratios are widely expressed as a percentage of the Company Action Level. The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other insurance subsidiaries), as of December 31, 2018 and 2017, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level): (dollars in millions) DECEMBER 31, 2018 Company Action Level Authorized Control Level RBC Ratio Industry Scale RBC Ratio Regulatory Scale The Hanover Insurance Company $ 1,036.8 $ 518.4 209% 417% DECEMBER 31, 2017 The Hanover Insurance Company $ 1,001.4 $ 500.7 207% 413% LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of our ability to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, our primary ongoing source of cash is dividends from our insurance subsidiaries. However, dividend payments to us by our insurance subsidiaries are subject to limitations imposed by regulators, such as prior notice periods and the requirement that dividends in excess of a specified per FHQWDJH RI VWDWXWRU\ VXUSOXV RU SULRU \HDU¶V VWDWXWRU\ HDUQLQJV UHFHLYH SULRU DSSURYDO VR FDOOHG ³H[WUDRUGLQDU\ GLYLGHQGV´ +DQRYHU ,QVXUDQFH SDLG PLOOLRQ LQ GLYLGHQGV WR WKH KROGLQJ FRPSDQ\ GXULQJ ,Q +DQRYHU ,QVXUDQF e paid $296.8 million in dividends to the holding company, which included $80.0 million of extraordinary dividends. In 2016, a $218.8 million . ordinary dividend was paid by Hanover Insurance Dividend payments previously made to the holding company by Chaucer were regulated by U.K. law. Chaucer paid dividends of $85.0 million and $79.5 million to the holding company in 2018 and 2016, respectively, and did not pay any dividend in 2017. Additionally, in connection with an intercompany borrowing arrangement between Chaucer and a wholly-owned non-insurance subsidiary of the holding company, interest on a $300 million note was paid by Chaucer on a quarterly basis to this affiliate, which is ultimately available to provide dividends to the holding company. During 2018 and 2017, Chaucer made payments of $22.5 million and $20.7 million, respectively, related to this agreement of which $22.1 million and $20.2 million, respectively, were then dividended to the holding company. In 2016, Chaucer made a payment of $22.4 million directly to the holding company. This agreement was terminated as part of the sale of Chaucer. Sources of cash for our insurance subsidiaries primarily consist of premiums collected, investment income and maturing investments. Primary cash outflows are paid claims, losses and loss adjustment expenses, policy and contract acquisition expenses, other underwriting expenses, and investment purchases. Cash outflows related to losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. We periodically adjust our investment policy to respond to changes in short-term and long-term cash requirements. Net cash provided by operating activities was $551.3 million during 2018, as compared to $704.6 million during 2017 and $743.4 million in 2016. During 2018, the $153.3 million decrease in cash provided was primarily the result of higher loss payments, the contribution made to the qualified defined benefit plan and taxes paid, partially offset by an increase in premiums collected. During 2017, the $38.8 million decrease in cash provided was primarily the result of higher loss payments and taxes paid to foreign jurisdictions, partially offset by an increase in premiums collected. Net cash provided by investing activities was $271.3 million during 2018, as compared to net cash used of $506.3 million during 2017 and $495.4 million in 2016. During 2018, cash provided by investing activities primarily related to net proceeds received from the sale 69 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP