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Hanover Insurance Closes Sale Of Chaucer; Declares Special Dividend Of $4.75/shr

Hanover Insurance Group Inc. (THG) said it has completed the sale of Chaucer Holdings Limited, the major portion of its Lloyd's international specialty business, to China Reinsurance (Group) Corporation. In conjunction with the closing, completed on December 28, The Hanover's board of directors approved a new $600 million share repurchase authorization, and, pursuant to that authorization, an accelerated share repurchase agreement for $250 million.

The board also declared a special dividend of $4.75 per share, or approximately $200 million in the aggregate.

The sales of Chaucer-related Irish and Australian entities, for proceeds of $28 million and $13 million, 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.

Total proceeds of $930 to $940 million are comprised of $779 million in initial cash consideration received from China Re, $41 million in cash to be received upon the closing of the sales of the Irish and Australian entities, contingent consideration of $25 to $35 million, and an $85 million pre-signing dividend from Chaucer that was received in the second quarter of 2018. Receipt of the full $45 million 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 $25 million to $35 million of the contingent consideration, subject to final review and audit as of June 30, 2019.

The company expects the transaction to generate approximately $840 to $860 million of deployable equity and a net after-tax GAAP gain in the range of $130 to $150 million, 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 $190 to $210 million, 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 $600 million 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. This share repurchase authorization replaces the prior authorization, which had a balance of approximately $90 million when it was terminated.

The Hanover has used the new program to immediately execute the ASR agreement for an aggregate purchase price of $250 million, with J.P. Morgan. The ASR repurchase period is expected to conclude during the second quarter of 2019.

The special cash dividend of $4.75 per share, or approximately $200 million in the aggregate, will be payable January 25, 2019, to shareholders of record at the close of business on January 10, 2019.

In addition, to improve the efficiency of its debt capital structure, the company will retire a $125 million 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 $20 million 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.

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