China Re has finally realised its ambition of major international expansion after agreeing terms to buy Lloyd’s insurer Chaucer.
Chaucer – which was put up for sale by its US specialty owner The Hanover earlier this year – will shortly announce its sale for a sum thought to be in the region of $900mn, according to banking sources.
It is a major step forward in China Re’s international expansion plans which first gained a foothold in Lloyd’s in 2012 when it created a sub-syndicate with Catlin Group, the largest Lloyd’s Insurer. It now operates the standalone Syndicate 2088 which wrote £155mn in 2017, primarily driven by a whole-account reinsurance cover for XL Catlin’s Syndicate 2003.
It is likely this syndicate will now be managed by Chaucer Managing Agency rather than the current Axa-XL Lloyd’s platform.
The world’s eighth-largest reinsurer – which is owned jointly by the Chinese state’s Ministry of Finance and Central Hujin, the sovereign fund that holds stakes in the country’s banks - has been a front runner in the sale process for some time and is thought to have agreed a price in the region of 1.4x price to NTA, as first revealed by re-Insurance last month.
Chaucer’s 2017 year end NTA is $669.6mn. But this was based on a higher exchange rate of £1:$1.39 rather than current £1:$1.3. Based on today’s exchange rate this would suggest a valuation in the region of circa $900mn although it is unclear whether retained earnings might increase this figure.
Chaucer is projecting profits of $77.4mn for 2018 and a group combined ratio of 96.8 percent.
The sale also crystallises an impressive trade by Chaucer’s owner The Hanover which acquired the group in 2011 for £292mn, or $470mn at the then-exchange rate.
According to Goldman Sachs - who sold the business on behalf of The Hanover - the business has made $500mn in pre-tax profits alone since 2014.
One of the big drivers for Chaucer’s profits has been a consistent release of prior year reserves.
Indeed, in July re-Insurance.com revealed that the group had benefited from $680mn of reserve releases since the acquisition (see chart).
The Hanover was also a canny purchaser of Chaucer sweeping in to buy the then London-listed business for 53 pence a share after another bidder – Guy Hands’ private equity firm Terra Firma - got cold feet in the aftermath of the 2011 Tsunami and reduced its indicative offer.
Now led by Lloyd’s veteran John Fowle, Chaucer is the eleventh-largest Lloyd’s insurer, writing around $1.2bn of gross premiums in 2017.
In addition to its 100-percent-owned Syndicate 1084 it is also the managing agent for the small but highly profitable nuclear Syndicate 1176 and the Africa-focussed SPA syndicate 6130 in partnership with Axa.
It also has a good reputation for its political risk team and its claims operations.
According to AM Best data, China Re has $10.3bn in shareholders’ funds and wrote $7.86 in combined life and non-life premium in 2016.
Chaucer is one of a number of Lloyd’s businesses put up for sale this year. However, earlier this month re-Insurance revealed Enstar had ended the sale processes for its two platforms, Atrium and StarStone.