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20 April 2018

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The Hanover places Chaucer up for sale

Adam McNestrie 28 March 2018

New York-listed insurer The Hanover is set to run a formal sales process for its Lloyd's business Chaucer, The Insurance Insider can reveal.

Sources told this publication that Goldman Sachs has been retained as the sell-side bank and will launch the process next week for the business, which wrote $1.24bn of gross premiums in 2017.

M&A valuations have remained high both inside and outside of Lloyd's, and with underlying returns in the market running at roughly zero, those holding non-core assets may consider it an attractive time to sell.

Market sources estimated Chaucer's book value at around $600mn-$700mn. They said The Hanover may be expected to push for a valuation in the $850mn-$1bn range - equivalent to 1.3x-1.5x book value.

There were persistent rumours early last year that The Hanover's now-departed CEO Joe Zubretsky - still early in his tenure - was weighing up disposing of Chaucer as a non-core asset.

However, speculation about a sale was squashed by an investor presentation which made clear Chaucer was core to its growth aspirations.

This was before Zubretsky left the company in October to become CEO of Molina Healthcare. Zubretsky was succeeded by John "Jack" Roche, who was previously leader of The Hanover's personal and commercial lines businesses.

AIG's $5.6bn acquisition of Validus and Axa's $15.3bn takeover of XL have sparked intense speculation around M&A within the sector, although Chaucer is a very different profile of business as a much smaller dedicated Lloyd's player.

Lloyd's-on-Lloyd's M&A has always proved difficult so it seems more likely that Chaucer would be sold to a trade player without a presence in the 330-year-old market.

Chaucer constituted 21.4 percent of the Worcester, Massachusetts-based group's top line in 2017.

The Lloyd's (re)insurer delivered a $7.1mn operating income in 2017, down from $127mn, as its combined ratio deteriorated from 90.4 percent to 105.3 percent.

The underwriting performance reflected $155mn of cat losses, up from $46mn in 2016, and a reduction in favourable prior-year development on cat losses from $95mn to $34mn.

Chaucer outperformed the Lloyd's market as a whole, which ran up a 114 percent combined ratio and made a £2.0bn pre-tax loss.

The Hanover bought Chaucer, then listed on the London Stock Exchange, in 2011 for £313mn. The business was valued at 1.26x book value.

Goldman Sachs had the sell-side mandate when Lloyd's insurer and members' agent Argenta was sold last year.

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