On September 13, 2018, The Hanover Insurance Group announced that it will sell its , Chaucer, to the China Reinsurance Group. The Worcester-based insurer first express interest in acquiring the Lloyd’s-focused international specialty business back in April of 2011, officially completing the transaction on July 1, 2011. Selling Chaucer will allow The Hanover to better focus on the expansion of its domestic business.
“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.”
China Re’s & Chaucer comments on the sale
With regards to the acquisition of Chaucer, Yuan Linjiang, Chairman of China Re said in the company’s official announcement that the deal is a major strategic step taken by China Re in response to the nation’s call to “build China Re into a world-class modern reinsurance group”. It is also a milestone in China Re’s international development which is an integral part of its “One-Three-Five” Strategy.
“We are deeply impressed by Chaucer’s long history, outstanding management and corporate teams, robust profitability and strong risk management capabilities. With Chaucer’s established market leading position in specialty insurance, we are convinced that with this acquisition, our Group’s core competitiveness and capacity to serve “the Belt and Road Initiative” will be greatly strengthened. Together, we will secure greater and more diversified business and a higher status in international markets.
He Chunlei, Vice Chairman & President of China Re added, “As Asia’s leading reinsurance group pursuing international development, China Re regards Chaucer as its ideal partner. We are delighted to be acquiring a top quartile performer in the Lloyd’s market and respect its senior management’s achievements to date in growing the business to this point. We look forward to working closely with John Fowle, Chaucer CEO, and the management team.”
And John Fowle, Chief Executive Officer of Chaucer commented in the same announcement that, “At Chaucer, we are fully committed to delivering a first class underwriting and claims service to our brokers, coverholders and clients, and believe that the support of China Re will enable us to build on our success to date, and accelerate our strategy which has profitable growth at its core.”
A breakdown of the deal
According to the terms of the deal which is valued at $950 million, China Re will pay $865 cash for Chaucer, with a payment of initial consideration of $820 million to be paid at the closing.
A contingent consideration of $45 million will be held in escrow pending the results of any potential catastrophe losses incurred in 2018 that rise above a pre-determined threshold.
The deal also include and includes a “pre-signing dividend from Chaucer of $85 million.” The total consideration, adjusted for the pre-signing dividend, represents a multiple of 1.66 times of Chaucer’s tangible equity as of June 30, 2018.” The deal has been structured so that, subject to certain exceptional circumstances, both the risks and rewards of Chaucer’s business as of April 1, 2018 until the offering deal is closed, have been transferred to China Re.
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.”
According to The Hanover’s announcement of the deal, estimates the sale will result in a net GAAP after-tax gain which will be recorded in discontinued operations at sale execution. Then “…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 deal is expected to close in Q4-2018 or in the first quarter of 2019 and is subject to various regulatory approvals including the Prudential Regulation Authority, Lloyd’s of London. The deal must also obtain the necessary approvals from the regulatory entities of the People’s Republic of China, in addition to approval from China Re’s shareholders.