THG 2018 Annual Report

THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 2018 2017 2016 (in millions) Cash Flows From Operating Activities Net income $ 391.0 $ 186.2 $ 155.1 Adjustments to reconcile net income to net cash provided by operating activities: Gain from sale of Chaucer business (131.9) ² ² Net loss from repayment of debt 1.9 ² 88.3 Net realized investment losses (gains) 51.3 (23.7) (8.6) Net amortization and depreciation 24.6 30.1 30.7 Stock-based compensation expense 13.4 12.3 12.0 Amortization of defined benefit plan costs 9.7 14.0 9.9 Deferred income tax expense (benefit) (23.4) 39.8 (13.2) Change in deferred acquisition costs (19.2) (31.8) (7.8) Change in premiums receivable, net of reinsurance premiums payable (73.9) (29.6) (28.2) Change in loss, loss adjustment expense and unearned premium reserves 584.9 949.5 527.8 Change in reinsurance recoverable (248.1) (414.0) (35.8) Change in expenses and taxes payable 4.6 (0.5) 12.7 Other, net (33.6) (27.7) 0.5 Net cash provided by operating activities 551.3 704.6 743.4 Cash Flows From Investing Activities Proceeds from disposals and maturities of fixed maturities 1,094.2 1,225.3 1,602.3 Proceeds from disposals of equity securities and other investments 158.4 164.9 271.1 Purchase of fixed maturities (1,425.6) (1,645.8) (2,020.9) Purchase of equity securities and other investments (178.3) (222.6) (351.2) Capital expenditures (13.1) (18.6) (15.7) Net proceeds from sale of Chaucer business 635.7 ² ² Other investing activities ² (9.5) 19.0 Net cash provided by (used in) investing activities 271.3 (506.3) (495.4) Cash Flows From Financing Activities Proceeds from exercise of employee stock options 14.8 23.1 16.2 Proceeds from debt borrowings, net ² ² 370.7 Change in cash collateral related to securities lending program (19.0) (6.7) (6.4) Dividends paid to shareholders (94.3) (86.8) (80.4) Repayment of debt (11.6) ² (475.4) Repurchases of common stock (57.7) (37.2) (105.6) Other financing activities (3.2) (4.1) (19.9) Net cash used in financing activities (171.0) (111.7) (300.8) Effect of exchange rate changes on cash (4.0) 7.2 (3.4) Net change in cash and cash equivalents 647.6 93.8 (56.2) Net change in cash related to discontinued operations 75.2 56.8 14.0 Cash and cash equivalents, beginning of year 297.9 147.3 189.5 Cash and cash equivalents, end of year $ 1,020.7 $ 297.9 $ 147.3 Supplemental Cash Flow Information Interest payments $ 47.8 $ 47.5 $ 53.1 Income tax net payments $ 57.0 $ 51.1 $ 29.7 The accompanying notes are an integral part of these consolidated financial statements. 80 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT