The Hanover Insurance Group, Inc. (NYSE: THG) today announced it has entered into a definitive agreement to sell the entities comprising Chaucer, its Lloyd's-focused international specialty business, to China Reinsurance (Group) Corporation, 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. The transaction will position The Hanover to continue the successful expansion of its domestic business, building out its strategic capabilities for its partners and customers.
The transaction is anticipated 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(1) as of June 30, 2018, was $520.0 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. 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.
"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 and casualty businesses, as we continue to advance our long-term strategy and deliver even stronger shareholder returns."
Roche added, "We will continue to invest in and execute our strategy to be the carrier of choice for our agent partners and their customers. 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 estimates the sale will result in a net GAAP after-tax gain which will 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.
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 is Goldman Sachs & Co. LLC, with legal advice provided by Debevoise & Plimpton LLP.
About The Hanover
The Hanover Insurance Group, Inc. is the holding company for several property and casualty insurance companies, which together constitute one of the largest insurance businesses in the United States. The Company provides exceptional insurance solutions in a dynamic world. The Hanover distributes its products through a select group of independent agents and brokers. Together with its agents, The Hanover offers standard and specialized insurance protection for small and mid-sized businesses, as well as for homes, automobiles, and other personal items. For more information, please visit www.hanover.com.
About Chaucer
Headquartered in London, with international hubs for Europe, MENA, Latin America and Asia, Chaucer protects clients in over 200 countries and territories worldwide. The company provides clients the flexibility of both Lloyd's, and the company market through Chaucer Dublin. Through Lloyd's, clients enjoy strong financial security with every policy supported by ratings from A.M. Best, Standard & Poor's and Fitch Ratings. Chaucer Dublin has an A- (excellent) rating from Standard & Poor's.
About China Re
China Re is the only state-owned reinsurance group established by the Ministry of Finance of the People's Republic of China and Central Huijin Investment Co., Ltd. China Re ranked first in Asia and eighth globally in terms of reinsurance premium. On 26 October 2015, the company was listed on the main board of the Stock Exchange of Hong Kong Limited. Its stock code is 1508.HK.
