Hanover Insurance to sell Chaucer for $950 million

The transaction will enable Hanover to build on the growing momentum in their domestic property & casualty businesses.

The sell will reportedly enable Chaucer to continue to thrive and prosper by joining forces with China Re. (Image: Shutterstock)

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The Hanover Insurance Group, Inc., has entered into a definitive agreement to sell the entities comprising Chaucer, its Lloyd’s-focused international specialty business, to China Reinsurance Group Corporation (China Re), for total proceeds of $950 million, including cash consideration from China Re of $865 million and a pre-signing dividend from Chaucer of $85 million received in the second quarter of this year.

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In a statement, The Hanover said that the transaction will position it “to continue the successful expansion of its domestic business, building out its strategic capabilities for its partners and customers.”

Closing expected in late 2018 or Q1 2019

The Hanover said that it expects the transaction to close late this year or in the first quarter of next year, subject to regulatory approvals and other customary closing conditions. Tangible equity of Chaucer as of June 30, 2018 was $520 million, net of $73.2 million of goodwill and intangible assets.

The total consideration, adjusted for the pre-signing dividend, represents a multiple of 1.66 times Chaucer’s tangible equity as of June 30, 2018.

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The transaction is structured so that, subject to certain exceptions, the risks and rewards of Chaucer’s business from April 1, 2018 until closing are transferred to China Re.

Focus on domestic P & C businesses

“Our decision to sell Chaucer followed an extensive strategic review and careful consideration,” said John C. Roche, president and chief executive officer at The Hanover. “This transaction will enable us to build on the growing momentum in our domestic property & casualty businesses, as we continue to advance our long-term strategy and deliver even stronger shareholder returns.”

We will continue to invest in and execute our strategy to be the carrier of choice for our agent partners and their customers,” Roche added. “This includes accelerated expansion of our specialized capabilities in commercial lines businesses as well as continued growth and penetration in the personal lines and small commercial sectors. The acquisition will also enable Chaucer to continue to thrive and prosper by joining forces with China Re Group, as China Re is actively enhancing its international presence and exploring business opportunities in the global market. Furthermore, this transaction is an attractive outcome for our shareholders, recognizing the value created through our ownership of Chaucer since its acquisition in 2011.”

Cash consideration of $865 million (excluding the pre-signing dividend of $85 million) consists of initial consideration of $820 million payable at closing and contingent consideration of $45 million to be held in escrow, which may be adjusted downwards if catastrophe losses incurred in 2018 are above a certain threshold.

The Hanover estimated the sale would result in a net GAAP after-tax gain which would be recorded in discontinued operations at sale execution. Beginning in the third quarter of 2018, the earnings results for Chaucer operations will be reported as part of The Hanover’s discontinued operations for all periods presented in The Hanover’s financial statements.

Closing subject to regulatory approvals

The Hanover pointed out that the closing is subject to regulatory approvals, including the Prudential Regulation Authority, Lloyd’s of London, and required approvals from the regulatory entities of the People’s Republic of China, in addition to approval from China Re’s shareholders.

“This transaction represents an attractive return for shareholders, providing us with greater financial flexibility to invest in the growth of our U.S. agency business and return capital to our shareholders through a variety of options including continued dividends, stock buybacks, debt management, and special dividends,” said Jeffrey M. Farber, executive vice president and chief financial officer at The Hanover. “The sale will reduce catastrophe exposure to extreme global events, while enhancing our return on equity potential. We look forward to our continuing successful partnership with Chaucer through the close of the sale and the transition.”

The Hanover’s financial advisor for the transaction was Goldman Sachs & Co. LLC, with legal advice provided by Debevoise & Plimpton LLP.

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Victoria Prussen Spears, Esq., (vspears@alm.com) is associate director of FC&S Legal, editor of the Insurance Coverage Law Report, and senior vice president at Meyerowitz Communications Inc.