2. ACQUISITIONS AND DISCONTINUED OPERATIONS

ACQUISITIONS

Chaucer Acquisition

On July 1, 2011, the Company acquired Chaucer, a U.K. insurance business. Chaucer is a leading specialist insurance underwriting group at Lloyd’s. Chaucer underwrites business in several lines of business, including marine and aviation, energy, property, U.K. motor and casualty and other coverages (which include international liability, specialist coverages, and syndicate participations). Chaucer is headquartered in London, with a regional presence in Whitstable, England and locations in Houston, Singapore, Buenos Aires, and Copenhagen.

This transaction provides broader product and underwriting capabilities, as well as greater geographic and product diversification, advancing the Company’s specialty lines strategy. The acquisition added a presence in the Lloyd’s market, which includes access to international licenses, an excess and surplus insurance business and the ability to syndicate certain risks.

Determination of Purchase Price

Shareholders of Chaucer received 53.3 pence for each Chaucer share, which was paid in either cash or loan notes to those shareholders who elected to receive such notes in lieu of cash. Loan notes can be paid, at the election of the note holder, through 2016. The closing of the acquisition followed appro-val of the transaction by Chaucer shareholders on June 7, 2011, subsequent court approval in the U.K. and regulatory approvals in various jurisdictions. The following table summarizes the transaction in both GBP and U.S. dollars:


(in millions)
Aggregate purchase price announced on April 20, 2011 Based on 53.3p contract price	£	297.7	$	485.3
Actual consideration on July 14, 2011:
Cash	£	287.4	$	455.0
Loan notes and other payables		9.5		15.3
Foreign exchange forward settlement		—		11.3

Total	£	296.9	$	481.6

The difference between the aggregate purchase price at signing and closing is attributable to the effect of currency fluctuations between the GBP and the U.S. dollar, as well as a change in outstanding shares.

In connection with the transaction, the Company entered into a foreign exchange forward contract, which provided for an economic hedge between the agreed upon purchase price of Chaucer in GBP and currency fluctuations between the GBP and U.S. dollar prior to close. This contract effectively locked in the U.S. dollar equivalent of the purchase price to be delivered in GBP and was settled at a loss of $11.3 million during the year ended December 31, 2011. The loss on the contract was due to a decrease in the exchange rate between the GBP and U.S. dollar, but was partially offset by the lower U.S. dollars required to meet the GBP-based purchase price, resulting in a $6.4 million gain on foreign exchange during the year ended December 31, 2011.

This payment was funded from the THG holding company, which included approximately $300 million of proceeds from the senior unsecured notes issued on June 17, 2011. See Note 6 – “Debt and Credit Arrangements” for additional information.

Allocation of Purchase Price

The purchase price has been allocated as follows based on an estimate of the fair value of assets acquired and liabilities assumed as of July 1, 2011 (converted to U.S. dollars using an exchange rate of 1.6053):


(in millions)
Cash	$	756.1
Premiums and accounts receivable, net		469.5
Investments		1,630.8
Reinsurance recoverables, net		569.8
Deferred acquisition costs		171.9
Deferred income taxes		52.4
Other assets		18.1
Loss and loss adjustment expense reserves		(2,300.6	)
Unearned premiums		(857.3	)
Debt		(63.3	)
Other liabilities		(64.4	)

Net tangible assets		383.0
Goodwill		6.0
Intangible assets		87.7

Purchase price allocated to Chaucer		476.7
Additional hedge-related adjustment based upon July 14, 2011 settlement		4.9

Total purchase price, excluding transaction costs		481.6
Transaction costs		11.7

Total purchase price	$	493.3

Transaction costs associated with the acquisition, which included advisory, legal, and accounting costs, were expensed as incurred. Allowances for uncollectible accounts related to reinsurance recoverables were not significant at July 1, 2011.

Identification and Valuation of Intangible Assets

A summary of the fair value of goodwill and the identifiable intangible assets and their respective estimated useful lives at July 1, 2011 is as follows:

(in millions)

Amount

Estimated

Useful Life

Amortization

Method

Intangibles:

Lloyd’s syndicate capacity

78.7

Indefinite

N/A

Other intangibles

9.0

2-5 years

Straight line

Total intangible assets

87.7

Goodwill

6.0

Indefinite

N/A

Total goodwill and intangibles

93.7

The purchase price of the acquisition exceeded the fair value of the net tangible and intangible assets acquired, with the excess purchase price recorded as goodwill. Factors that contributed to the recognition of goodwill included the expected growth rate and profitability of Chaucer and the value of Chaucer’s experienced workforce. Goodwill and certain intangible assets are deductible for income tax purposes.

Pro Forma Results

The following unaudited pro forma information presents the combined revenues, net income (loss) and net income (loss) per share of THG and Chaucer for the years ended December 31, 2011 and 2010 with pro forma purchase accounting adjustments as if the acquisition had been consummated as of January 1, 2010. This pro forma information is not necessarily indicative of what would have occurred had the acquisition and related transactions been made on the dates indicated, or of future results of the Company. Amounts in 2011 and 2010 are converted from GBP to U.S. dollar at rates of 1.60 and 1.55, respectively.


	(Unaudited)
For the Year Ended December 31	2011			2010
(in millions, except per share data)
Revenue	$	4,360.4		$	4,134.6
Net income (loss)	$	(18.9	)	$	158.1
Net income (loss) per share – basic	$	(0.42	)	$	3.47
Net income (loss) per share – diluted⁽¹⁾	$	(0.42	)	$	3.41
Weighted average shares outstanding – basic		45.2			45.6
Weighted average shares outstanding – diluted⁽¹⁾		45.2			46.3

(1)	Weighted average shares outstanding and per diluted share amounts in 2011 exclude common stock equivalents, since the impact of these instruments would be antidilutive.

DISCONTINUED OPERATIONS

Discontinued operations primarily consist of the Company’s Discontinued Accident and Health Business and the Company’s Discontinued Third Party Administration Business, Citizens Management, Inc. (“CMI”).

During 1999, the Company exited its accident and health insurance business, consisting of its Employee Benefit Services business, its Affinity Group Underwriters business and its accident and health assumed reinsurance pool business. Prior to 1999, these businesses comprised substantially all of the former Corporate Risk Management Services segment. Accordingly, the operating results of the discontinued segment have been reported in accordance with Accounting Principles Board Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB Opinion No. 30”). On January 2, 2009, Hanover Insurance directly assumed a portion of the accident and health business; and therefore continues to apply APB Opinion No. 30 to this business. In addition, the remainder of the Discontinued First Allmerica Financial Life Insurance Company (“FAFLIC”) accident and health business was reinsured by Hanover Insurance in connection with the sale of FAFLIC to Commonwealth Annuity, and has been reported in accordance with ASC 205, Presentation of Financial Statements.

The accident and health business had no significant financial results that impacted 2012, 2011 or 2010. At December 31, 2012 and 2011, the portion of the discontinued accident and health business that was directly assumed had assets of $72.9 million and $70.4 million, respectively, consisting primarily of invested assets, and liabilities of $52.5 million and $52.1 million, respectively, consisting primarily of policy liabilities. At December 31, 2012 and 2011, the assets and liabilities of this business, as well as those of the reinsured portion of the accident and health business are classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.

On April 30, 2012, the Company completed the sale of its third party administration subsidiary, CMI. The Company recognized net gains of $10.8 million after taxes related to this transaction during the year ended December 31, 2012. Included in this amount was a contingent gain with a fair value of $1.7 million that was entirely contributed to the Company’s charitable foundation.