THG 2018 Annual Report

DISCONTINUED OPERATIONS - CHAUCER BUSINESS As discussed above, the Chaucer business includes both the gain related to the sale and the income or ORVV IURP &KDXFHU¶V WKHQ FXUUHQW operations. Gain on Sale of Chaucer Business On December 28, 2018, we completed the sale of Chaucer Holdings Limited to China Re. Total consideration payable by China Re for this portion of the transaction is expected to total approximately $793.7 million (1) and is subject to adjustment based upon 2018 accident year catastrophe losses in excess RI RI &KDXFHU¶V QHW HDUQHG SUHPLXP 7KH SUH -tax gain on the sale is estimated to be $174.4 million. THG paid customary transaction costs along with providing certain representations and warranties and agreeing to indemnify China Re for certain pre-sale contingent liabilities. The following table summarizes the components of the estimated gain related to the sale of the Chaucer business as of December 28, 2018. This gain below excludes an expected gain on the Irish and Australian entities associated with the Chaucer business. We subsequently completed the sale of our Chaucer-related Irish entity on February 14, 2019. The sale of the Australian entities is pending, subject only to local regulatory approval. We received $28 million of additional consideration for the Irish entity, and we expect to receive $13 million of additional consideration related to the Australian entities. FOR THE YEAR ENDED DECEMBER 31 2018 (in millions) Initial consideration received from sale (1) $ 779.0 Adjustment (1) (17.0) Contingent proceeds (1)(2) 31.7 Total cash proceeds expected from sale of Chaucer Holdings Limited (1) 793.7 Less: Carrying value of Chaucer business (3) 530.0 Transaction and other sale-related costs (4) 30.6 Net realized losses on securities, pension and currency translation obligations related to Chaucer business (5) 58.7 Total pre-tax reductions 619.3 Pre-tax gain on sale 174.4 Income tax expense (6) 42.5 Gain on sale $ 131.9 (1) Initial consideration for Chaucer Holdings Limited as determined in the sales and purchase agreement was $779 million. This amount, along with $28 million in cash proceeds received from the sale of the Irish entity on February 14, 2019, $13 million in cash proceeds to be received upon the closing of the sale of the Australian entities, estimated contingent consideration of $31.7 million, and an $85 million pre-signing dividend from Chaucer that was received in the second quarter of 2018, results in expected total proceeds from the entire transaction of $936.7 million. These amounts were partially offset by $17.0 million paid to China Re to adjust the purchase price for amounts received by the Company from Chaucer prior to December 28, 2018. (2) Contingent proceeds, as reflected in the sales and purchase agreement, may be up to $45 million and is determined based upon 2018 catastrophe ORVVHV %DVHG XSRQ RXU EHVW HVWLPDWH RI &KDXFHU¶V catastrophe losses, expected contingent consideration is $31.7 million. (3) The carrying value of the Chaucer business reflects its U.S. GAAP book value at December 28, 2018, excluding $7.9 million of U.S.-related deferred tax assets that are no longer likely to be realized and therefore are reflected in the income tax expense category. (4) Transaction and other sale related costs primarily include brokerage, legal, actuarial, tax and other professional fees, employee retention costs, costs for the purchase of aggregate excess of loss catastrophe coverage in consideration of the contingent proceeds provision, along with certain other miscellaneous charges related to the execution of the transaction. (5) As part of the transaction, investments held by Chaucer were transferred to China Re resulting in the recognition of net realized investment ORVVHV WKDW ZHUH SUHYLRXVO\ UHIOHFWHG LQ DFFXPXODWHG RWKHU FRPSUHKHQVLYH LQFRPH $GGLWLRQDOO\ &KDXFHU¶V GHIHUUHG SHQVLRQ RE ligations and currency translation obligations previously recognized in accumulated other comprehensive income were recognized as losses associated with the transaction. (6) The income tax expense represents the current tax obligation on the sale and the derecognition of deferred tax assets that are no longer likely to be realized. 61 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP