The Hanover Insurance Group has completed the sale of Chaucer, a major portion of its Lloyd's international specialty business, to China Reinsurance (China Re).
In conjunction with the closing, completed on 28 December, The Hanover’s board of directors approved a new $600m share repurchase authorization, and, pursuant to that authorization, an accelerated share repurchase agreement for $250m. The board also declared a special dividend of $4.75 per share, or approximately $200m in the aggregate.
The sales of Chaucer-related Irish and Australian entities, for proceeds of $28m and $13m, respectively, are pending final, local regulatory approvals and are expected to close in the first quarter of 2019. The option of a multi-stage transaction was agreed upon in the sale and purchase agreement, and all parties remain fully committed to executing the remaining two pieces of the transaction.
The Hanover president and CEO John C. Roche said: “With this transaction largely complete, we are excited to focus exclusively on the continued expansion of our distinctive domestic business.
“With a strong financial foundation, clear strategic focus, and a simplified operating structure, we are determined to be the premier property and casualty company in the independent agency channel. We will continue to build our organization around the needs of our agent partners, offering relevant and responsive insurance solutions to our partners and customers, and delivering superior returns for our shareholders.
Roche continued saying: “As we build on our unique competitive position, we will leverage our strong agency relationships and deep market insight, continuing to invest in our successful personal lines account strategy, flagship small commercial business, targeted middle market industries, and our growing specialty lines business.
“At the same time, we will intensify our efforts to drive innovation across our businesses, helping our partners meet the evolving needs and preferences of our customers. We are excited to close the transaction and eager to start the next chapter.”
Total proceeds of $930 m to $940m are comprised of $779m in initial cash consideration received from China Re, $41m in cash to be received upon the closing of the sales of the Irish and Australian entities, contingent consideration of $25m to $35m, and an $85m pre-signing dividend from Chaucer that was received in the second quarter of 2018. Receipt of the full $45m of the contingent consideration is dependent upon Chaucer generating a 2018 accident year catastrophe loss ratio below 10% of net premiums earned. It is subject to a dollar-for-dollar reduction if Chaucer’s 2018 accident year catastrophe losses are above 10% of its net premiums earned.
The company currently estimates Chaucer’s 2018 accident year catastrophe loss ratio to be above the 10% threshold and anticipates receipt of $25m to $35m of the contingent consideration, subject to final review and audit as of June 30, next year.
The company expects the transaction to generate approximately $840m to $860m of deployable equity and a net after-tax GAAP gain in the range of $130m to $150m, or $3.00 to $3.50 per share, dependent on final transaction costs, taxes, the amount of contingent consideration payable, and other items. The net after-tax economic gain, excluding the impact of historical unrealized investment losses, pension losses and other items, which better reflects the impact of the sale on the stated book value, is expected to be in the range of $190m to $210m, or $4.50 to $5.00 per share. The gain will be reflected in the discontinued operations section of the company’s fourth quarter 2018 financial statements.
Under the new $600m share repurchase authorization, the company may repurchase its common stock from time to time, in amounts, at prices, and at times the company deems appropriate, subject to market conditions and other considerations. The company’s stock purchases may be executed using open market repurchases, accelerated repurchase programs, or other transactions. The company may establish trading plans under the Securities and Exchange Commission’s (SEC) rule 10b5-1 that will provide additional flexibility as it buys back its stock. This share repurchase authorization replaces the prior authorization, which had a balance of approximately $90m when it was terminated.
The Hanover has used the new program to immediately execute the ASR agreement for an aggregate purchase price of $250m, with J.P. Morgan. The ASR repurchase period is expected to conclude during the second quarter of next year.
The special cash dividend of $4.75 per share, or approximately $200m in the aggregate, will be payable January 25, next year, to shareholders of record at the close of business on January 10, next year.
In addition, to improve the efficiency of its debt capital structure, the company will retire a $125m Federal Home Loan Bank (“FHLB”) note due 2029 with a coupon of 5.50%, with settlement to occur on January 2, 2019. In the fourth quarter of 2018, the company expects to record a non-operating charge of approximately $20m after-taxes, or $0.47 per share, related to the pre-payment provision. The company noted that the FHLB note was collateralized, and that the funding for its retirement will have no impact on Chaucer sale proceeds or deployable equity.
The Hanover executive vice president and chief financial officer Jeffrey M. Farber said: “We are fully committed to an effective and prompt execution of our capital deployment plan. When fully complete, we expect the transaction to generate approximately $850m of deployable equity. We have immediately deployed approximately $450m through the special dividend and the accelerated share repurchase program. We will continue to apply our existing capital framework to prioritize the remaining approximately $400m of deployable equity between business investments, share repurchases, and other capital return options. We fully anticipate deploying this capital in the best interest of our shareholders and in a very reasonable timeframe.”
Source: Company Press Release