Discontinued Operations

12 Months Ended

Dec. 31, 2020

Chaucer [Member]

Discontinued Operations

2. DISCONTINUED OPERATIONS

Gain on Sale of Chaucer Business

On December 28, 2018, the Company completed the sale of the Chaucer U.K. companies (“Chaucer”) to China Re and recognized a pre-tax gain on the sale of $174.4 million and an income tax expense of $42.5 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 in 2018 related to the sale of the Chaucer business as of December 28, 2018. As discussed below the table, both the pre-tax gain and income tax expense were updated in 2019.

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 as determined in the purchase and sales 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 from the sale of the Australian entities on April 10, 2019, 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, resulted 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, could have been up to $45 million and was determined based upon 2018 catastrophe losses.  In 2018, the Company’s best estimate of contingent consideration was $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 losses that were previously reflected in accumulated other comprehensive income.  Additionally, Chaucer’s deferred pension obligations 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 were no longer likely to be realized.  

Included in the previously recorded $174.4 million gain was $31.7 million of contingent proceeds, which were subject to change, based on development of Chaucer’s 2018 catastrophe losses. During the first half of 2019, Chaucer experienced unfavorable development on its 2018 catastrophe losses, primarily due to higher than expected losses for hurricane Michael, Typhoon Jebi and a Columbian dam construction loss. Accordingly, the Company updated and reduced its best estimate of pre-tax contingent proceeds by $9.7 million. The Company received a cash payment of $22.0 million in final settlement of the contingent proceeds.

In addition, the Company recognized an income tax charge of $1.2 million in 2019 related to new tax regulations that were issued on June 14, 2019 by the U.S. Department of the Treasury, with an effective date retroactive to January 1, 2018. These new regulations retroactively changed the taxation of certain non-U.S. income. Although the impact of these regulations relates to the calculation of the income tax expense related to the sale of Chaucer, unlike the $42.5 million of income tax expense, noted above, that was reflected in discontinued operations, ASC 740, Income Taxes, prescribes that the effect of certain retroactive tax law changes be presented in continuing operations. Accordingly, we have presented this charge as a separate component of our non-operating items from continuing operations. (See also Note - 7 “Income Taxes” below). Additionally, in the third quarter of 2019, the Company recognized $3.4 million of tax benefits related to prior years.

On February 14, 2019, the Company completed the sale of its Chaucer-related Irish entity and on April 10, 2019 finalized the sale of the Australian entities, completing the transfer of all Chaucer-related companies. Collectively, these entities constituted the Chaucer business in 2018 and prior, whereas just the Irish and Australian entities comprised the Chaucer business reported in its results in 2019, until their respective sales to China Re. The sale of the Irish entity provided total proceeds of $28 million and resulted in a pre-tax gain of $0.4 million, with a related income tax benefit of $0.5 million. The sale of the Australian entities for total proceeds of $13 million resulted in a pre-tax gain of $1.2 million and a related income tax expense of $0.1 million.

Income (loss) from Chaucer Business

Year ended December 31, 2019

Revenues from the portion of the Chaucer business remaining after the sale of the U.K. entities in 2018 was $6.7 million during the year ended December 31, 2019. Pre-tax operating losses in this business totaled $0.5 million during the same period, whereas this business provided after-tax income of $1.6 million for the year ended December 31, 2019. Income from the Chaucer business in 2019 included a $2.0 million tax benefit related to a decrease in an uncertain tax position due to the expiration of the statute of limitations.

Year ended December 31, 2018

The following table summarizes the results of operations for Chaucer for 2018, reflecting the results of operations for the period in which THG owned the Chaucer U.K. entities, which concluded with their sale on December 28, 2018:

(in millions)
Revenues
Net premiums earned	$	850.0
Net investment income		54.9
Other income		7.5
		912.4
Losses and operating expenses
Losses and LAE		515.5
Amortization of deferred acquisition costs		252.5
Other expenses		115.0
		883.0
Income from Chaucer business before income taxes and other items     (previously presented as Chaucer's operating income)		29.4
Other items:
Interest expense		(3.8	)
Net realized and unrealized investment losses		(1.3	)
Other income		0.4
Income from Chaucer business before income taxes		24.7
Income tax expense		(4.7	)
Income from Chaucer business, net of taxes	$	20.0

The Company recognized $0.8 million  in foreign currency transaction losses in net income in 2018.

The following table provides the effects of reinsurance related to the Chaucer business for the year ended 2018.

(in millions)
Premiums written:
Direct	$	625.3
Assumed		685.3
Ceded		(459.9	)
Net premiums written	$	850.7
Premiums earned:
Direct	$	611.9
Assumed		667.2
Ceded		(429.1	)
Net premiums earned	$	850.0
Losses and LAE:
Direct	$	362.2
Assumed		568.7
Ceded		(415.4	)
Net losses and LAE	$	515.5

Cash Flows

The sales of the Chaucer businesses were completed in 2019, therefore there were no material cash flows associated with the Chaucer business in 2020. The following table details the cash flows associated with the Chaucer business during the years indicated:

DECEMBER 31	2019			2018
(in millions)
Net cash provided by (used in) operating activities		3.5			(22.8	)
Net cash (used in) provided by investing activities		(6.8	)		131.1

Discontinued accident and health and life businesses

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. On January 2, 2009, Hanover Insurance directly assumed a portion of the accident and health business and 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.

At December 31, 2020 and 2019, the portion of the discontinued accident and health business that was directly assumed had assets of $90.3 million and $82.4 million, respectively, consisting primarily of invested assets, and liabilities of $89.8 million and $84.4 million, respectively, consisting primarily of policy liabilities. At December 31, 2020 and 2019, 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.

The Company’s former life insurance businesses include indemnity obligations and other activities.

Discontinued accident and health and life operations for the year ended December 31, 2020 resulted in losses of $3.7 million, including $1.7 million related to income taxes. This business resulted in losses of $4.3 million, including $0.9 million related to income taxes in 2019, and gains of $0.1 million in 2018.