THG 2018 Annual Report

of Chaucer. These proceeds were partially offset by net purchases of fixed maturities, commercial mortgage loan participations, and other investments. During 2017, cash used in investing activities primarily related to net purchases of fixed maturities, commercial mortgage loan participations, and other investments. During 2016, cash used in investing activities primarily related to net purchases of fixed maturities, commercial mortgage loan participations, and other investments. These cash outflows were partially offset by proceeds from net sales of equity securities. Net cash used in financing activities was $171.0 million during 2018, as compared to $111.7 million during 2017 and $300.8 million in 2016. During 2018, cash used in financing activities primarily resulted from the payment of dividends to shareholders and repurchases of common stock. During 2017, cash used in financing activities primarily resulted from the payment of dividends to shareholders and repurchases of common stock, partially offset by cash inflows related to option exercises. During 2016, cash used in financing activities primarily resulted from the repayment of debt, repurchases of common stock, and payment of dividends to shareholders. These cash outflows were partially offset by cash inflows related to the issuance of $375 million of senior unsecured debentures. Dividends to common shareholders are subject to quarterly board approval and declaration. During 2018, as declared by the Board, dividends totaled $288.0 million. This included three quarterly dividends of $0.54 per share and one quarterly dividend of $0.60 per share to our shareholders, as well as a special dividend declared on December 30, 2018 of $4.75 per share. We believe that our holding company assets are sufficient to provide for future shareholder dividends, should the Board of Directors declare them. At December 31, 2018, THG, as a holding company, held approximately $1.2 billion of fixed maturities and cash. This amount includes deployable capital primarily generated through the sale of Chaucer which provided approximately $779 million of proceeds to the holding company upon closing the sale of the U.K. subsidiaries in December 2018. On January 2, 2019, we paid cash of $250.0 million DV SDUW RI DQ DFFHOHUDWHG VKDUH UHSXUFKDVH ³$65´ DJUHHPHQW GHVFULEHG EHORZ $GGLWLRQDOO\ LQ -DQXDU\ ZH SDLG WKH aforementioned special dividend of $4.75 per share with total cash payments of approximately $193 million. We believe our holding company assets will be sufficient to meet other 2019 obligations, which consist primarily of quarterly dividends to our shareholders (as and to the extent declared), interest on our senior and subordinated debentures, certain costs associated with benefits due to our former life employees and agents, and, to the extent required, payments related to indemnification of liabilities associated with the sale of various subsidiaries. As discussed below, we have, and opportunistically may continue to, repurchase our common stock and debt. We do not expect that it will be necessary to dividend additional funds from our insurance subsidiaries in order to fund 2019 holding company obligations; however, we may decide to do so. We expect to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements relating to current operations, including the funding of our qualified defined benefit pension plan. Based upon the current estimate of liabilities and certain assumptions regarding investment returns and other factors, our qualified defined benefit pension plan has plan liabilities in excess of plan assets of approximately $19 million. The ultimate payment amounts for our benefit plan is based on several assumptions, including but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates, inflation and the ultimate valuation and determination of benefit obligations. Since differences between actual plan experience and our assumptions are almost certain, changes, both positive and negative, to our current funding status and ultimately our obligations in future periods are likely. Our insurance subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short- term investments. We believe that the quality of the assets we hold will allow us to realize the long-term economic value of our portfolio, including securities that are currently in an unrealized loss position. We do not anticipate the need to sell these securities to meet our LQVXUDQFH VXEVLGLDULHV¶ FDVK UHTXLUHPHQWV VLQFH ZH H[SHFW RXU LQVXUDQFH VXEVLGLDULHV WR JHQHUDWH VXIILFLHQW RSHUDWLQJ FDV h to meet all short-term and long-term cash requirements relating to current operations. However, there can be no assurance that unforeseen business needs or other items will not occur causing us to have to sell those securities in a loss position before their values fully recover, thereby causing us to recognize impairment charges in that time period. On December 30, 2018, the Board of Directors authorized a new stock repurchase program which provides for aggregate repurchases of our common stock of up to $600 million. Under the repurchase authorization, the Company may repurchase, from time to time, common shares in amounts, at prices and at such times as the Company deems appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. On January 2, 2019, pursuant to the terms of an ASR agreement, we paid $250.0 million and received an initial delivery of approximately 1.8 million shares of our common stock, which is approximately 80% of the total number of shares expected to be repurchased under this agreement. Additionally, under the prior repurchase program, during 2018, we repurchased 0.5 million shares at a cost of $57.7 million. From time to time, we may repurchase our debt on an opportunistic basis. During the third quarter of 2018, we repurchased subordinated debentures with a net carrying value of $9.6 million at a cost of $11.5 million, resulting in a loss of $1.9 million. Additionally, on January 2, 2019, we repaid $125 million of our FHLB advances due 2029 with a coupon of 5.5%. In the fourth quarter of 2018, we recorded a non-operating charge of approximately $26.3 million for related pre-payment fees. Membership in the FHLB provides us with access to additional liquidity based on our stock holdings and pledged collateral. At December 31, 2018, we had additional 70 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT