Good day. Welcome to The Hanover Insurance Group's conference call to discuss the agreement to sell Chaucer. My name is Anita, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.
Thank you, operator. Good morning. Thank you for joining us. On today's conference call, we will discuss our agreement announced this morning to sell Chaucer, our Lloyd's focused international specialty division to China Re. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer, and our Chief Financial Officer, Jeff Farber. After our prepared remarks, we will answer questions during a Q&A session. Please note that in addition to our news release, there is an investor presentation available in the investor section of our website at hanover.com. Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements regarding the sale, the potential uses of proceeds from the sale, and prospects for our domestic operations, among others.
There are certain factors that could cause the sale, use of proceeds, and financial targets to differ materially from those anticipated. We caution you with respect to forward-looking statements. In this respect, refer you to the forward-looking statements section in our press release, slides two through four of the presentation deck, and our filings with the SEC. Today's discussion will also reference certain non-GAAP measures, such as pro forma impact of the sale of Chaucer on operating income, operating return on equity, among others. A reconciliation of these non-GAAP measures to the closest GAAP measure on a historical basis can be found in the press release and the presentation, which are posted on our website, as I mentioned earlier. With those comments, I will now turn the call over to Jack.
Thank you, Oksana. Good morning, everyone. Thank you for joining our call, especially on such short notice. We are very pleased to have executed this agreement, setting the stage for the continued successful expansion of our domestic business. This morning, I will provide an overview of the transaction we announced earlier today. Jeff will share additional insight into the structure and terms of the transaction, discuss accounting and capital allocation implications, and provide an update to our 2018 guidance and long-term targets. I will come back to discuss the strength of our domestic business and our strategic focus going forward. We will open the line for questions. We are very pleased with the outcome of the strategic review process we began earlier this year.
We are confident the sale of Chaucer will further enhance our goal to be the premier property and casualty company in the independent agency channel, one that delivers significant value to our partners, customers, shareholders, and employees. As outlined in our news release, the total proceeds from the transaction are expected to be $950 million, inclusive of a pre-signing dividend of $85 million received in the second quarter of this year. We expect to close the transaction late this year or in the first quarter of 2019. Chaucer has been an important contributor to our company since we acquired the business in 2011. It has surpassed our earnings expectations, consistently outperformed the Lloyd's market, and delivered a very high return on our initial investment. Chaucer continues to successfully navigate the challenging conditions in the Lloyd's market, building on its strong market position and exceptional reputation.
Had we elected to retain Chaucer, it would have continued to be an important and meaningful contributor to our company. We want to sincerely thank John Fowle and the entire Chaucer team for their partnership, expertise, and commitment through this process. We will continue to work together as we close this transaction and manage through a smooth transition. We expect this transaction to provide significant benefits to our company, generating substantial value for our shareholders and other stakeholders. First, the transaction will enable us to place even greater focus on our primary domestic property and casualty business, building business segments in which we currently enjoy strong market presence and where we believe we have significant prospects for profitable growth. Our domestic business is on a strong and improving trajectory and delivering above-target returns. Second, the transaction reduces our tail risk exposure to significant global catastrophe events.
In years characterized by lower-severity cats in the U.S., Chaucer has had a diversifying effect on our portfolio, contributing to overall earnings persistency. However, Chaucer can compound our risk aggregation and losses in years characterized by higher, more severe catastrophe events in the U.S., as was evident during 2017. This transaction will stabilize our catastrophe risk profile and make it more consistent with a U.S. primary insurance carrier while also reducing our capital requirements. Third, this transaction will provide us with greater financial flexibility. It will set the stage for prudent strategic investment in attractive markets, allocating capital to our more profitable businesses and providing us the opportunity to return capital to shareholders. This transaction also represents an opportunity for Chaucer to gain a strategic partner that is seeking to expand its international specialty market presence. With that, I will turn the call over to Jeff.
Thank you, Jack, and good morning, everyone. In my remarks, I will reference the slide presentation we published earlier today. You can find it on the investors page of our website. As outlined on slides seven and eight of the presentation deck, there are several components of the transaction that are worthy of note. Cash consideration of $865 million, excluding the pre-signing dividend, represents an implied multiple of 1.66 times the $520 million of Chaucer's tangible equity as of June 30, 2018. The transaction is subject to regulatory approvals, including Lloyd's and the PRA, the London regulators. It is also subject to regulatory approvals customary in the People's Republic of China, as well as the approval of the buyer's shareholders. The board of directors of China Re has approved the transaction.
China Re is a public company, more than 80% is directly or indirectly state-owned by the People's Republic of China. There is execution risk in closing any sale transaction. This deal meets our structural requirements, including certain protections against the execution risk. A substantial amount of due diligence has been performed on all sides to provide a level of confidence that the approval process can be done efficiently and successfully. China Re has reviewed the transaction and its terms with the PRC regulators and its shareholders, they have a high confidence in a positive outcome. China Re fails to obtain approvals from the PRC or from its shareholders, a break fee of $57 million would be triggered.
The agreement provides for the transfers of the risks and rewards of ownership from The Hanover to China Re as of the end of March 2018, a so-called locked box transaction. Chaucer's results between signing and closing will not impact the proceeds, except for the amount of contingent consideration tied to excess cat losses. Included in the $950 million of proceeds is contingent consideration of $45 million, which will be held in escrow and paid in full at the closing, assuming Chaucer's 2018 current accident year catastrophe losses are below 10% of its earned premiums. The contingent consideration is reduced dollar for dollar with cats above 10%. Through six months, Chaucer's cats are running below such levels. We are considering putting a reinsurance agreement in place with a third party to further solidify this portion of the consideration.
We expect total proceeds of $950 million to be reduced by customary transaction costs, taxes, and potential contingent consideration, and to fall within a range of $825 million-$875 million. We expect deployable capital proceeds to be in a similar range. There will be very little to no stranded overhead or post-transaction dis-synergies due to the nature of this business. Looking back to when we acquired Chaucer in 2011, this has proven to be a very profitable investment with an internal rate of return of approximately 20% over the seven-year period. From a reporting standpoint, we will reclassify Chaucer's results to discontinued operations in our third quarter financial statements. Our definition of operating earnings excludes earnings from discontinued operations, as well as unrealized and realized investment gains and losses.
With today's announcement, Chaucer's previously reported operating earnings will be reclassified to discontinued operations. Operating earnings per share for the first half of 2018 of $4.15 per diluted share will now be $3.31, while net income per share will remain the same as $3.88 per diluted share. Chaucer's balance sheet will be reclassified as held for sale, which aggregates all the assets and liabilities of the businesses to be sold to one line on each side of the balance sheet. The sale will be executed through a locked box transaction and is expected to generate a net after-tax gain. The amount of the gain will vary until execution date, dependent upon the interplay between Chaucer's earnings recorded through discontinued operations, realization of contingent consideration related to catastrophe losses, final tax impacts, and other items.
Slide 10 of the presentation includes preliminary pro forma information excluding Chaucer. For the first half of 2018, The Hanover's domestic standalone results reflected growth of approximately 8% and a combined ratio consistent with that, including Chaucer. Domestic combined ratio for this period was somewhat elevated by higher than typical catastrophe losses. While Chaucer's cats were lower than usual. Excluding catastrophes, our domestic combined ratio, at just over 90%, was lower overall as expected. Underlying this result, there was a meaningful improvement in the expense ratio and a higher loss ratio reflective of a different mix between the two businesses. We expect our domestic operations to run at a slightly improved combined ratio and a higher ROE going forward compared to that including Chaucer. Slide 12 provides a summary of our full year 2018 operating earnings outlook.
Changes to our original guidance primarily reflect removal of Chaucer's results from operating income into discontinued operations. Underlying expectations for our domestic business remain substantially in line with our original 2018 guidance. We anticipate 2018 full year written premium growth to be at the high end of the previously guided mid-single digit range based on the strong first half performance in 2018. NII from our domestic operations is anticipated to increase by approximately 5%, helped by outperformance in partnership income in the first and second quarters, as well as the marginally better than expected view of cash flows and new money rates for the remainder of the year. We expect our domestic expense ratio to improve half a point, in line with our original expectations as we continue to see the benefit of expense savings actions executed in July of 2017 and robust earned premium growth.
Our domestic combined ratio, excluding catastrophes, should be on the lower end of the 90%-91% guided previously for the combined entity. Through the first six months of 2018, catastrophe losses exceeded our expectations, while the second half catastrophe loss assumption is set at 4.2% of the net earned premium for the domestic business. We expect a go-forward effective tax rate of approximately 21%. Now, moving on to discuss capital and ROE metrics. On Slide 11, we provided an indication of the capital allocation between our remaining businesses and Chaucer. As you are aware, Chaucer's ROE is currently lower than the ROE for our domestic business. For example, our annualized six-month Chaucer operating ROE was 10%, while our domestic businesses delivered a 13% return even with the elevated catastrophe experience in the first half of 2018. The sale of Chaucer allows us to unlock the domestic ROE potential.
However, it will take some time to be fully reflected in our financial statements because first, we need to close the transaction. Second, we need to redeploy the proceeds. Going forward, in order to provide additional transparency to our investors and analysts, we will disclose the progress on the capital deployment. We also will provide an adjusted return on equity measure after removal of both undeployed proceeds from the sale and the related net investment income in our quarterly results. As outlined on Slide 13, our capital management strategy remains unchanged, with superior shareholder value creation as our goal.
The net proceeds from the transaction will be used for a variety of capital management initiatives, including but not limited to organic growth opportunities through accelerated expansion of our specialized capabilities, continued growth and penetration in our personal lines and small commercial offerings, coupled with investments in innovation to better serve our agents and customers. Potential inorganic growth as we continue to explore accretive, bolt-on type acquisitions through renewal rights, strategic hires, and small size M&A very consistent with our historical activity. We will continue to support our regular quarterly dividend, taking our payout ratio into consideration. We fully expect stock buybacks to be an important tool in our go-forward capital management strategy, with known limitations related to float and trading volume. We will consider buying back debt with a higher coupon or debt that is inefficient from a rating agency capital perspective.
As special dividends are concerned, there are perceived positives and negatives associated with this capital return method. Given our level of excess capital, there is the potential to return capital to our shareholders quickly through this approach. Before I turn the call back over to Jack, I would like to update you on our long-term financial targets presented on Slide 17 of the presentation. We remain confident in our ability to deliver above-industry growth and top quartile returns. As a reminder, we identified three major aspirational financial targets, specifically ROE and growth in both operating earnings and book value per share. Our domestic business is targeting an ROE in the range of 13%-14%, excluding the deployable proceeds created by the Chaucer sale.
This is an increase from the targeted target of 11%-12%, primarily due to lower tax rates and, to a lesser extent, the go-forward domestic business performance. This goal assumes relatively stable market conditions, consistent with the assumption we used for our original targets communicated in 2017. On an earnings per share basis, while we remain confident in our underlying earnings trajectory, it is difficult to be specific on this metric due to the potential impact of share purchases, both timing and volume. Similarly, book value per share growth will also be highly dependent on potential capital management actions. We believe a total shareholder value creation metric is valuable as well, reflecting the impact of shareholder dividends. After closing the sale and communicating key components of our capital management strategy, we will be better able to provide more specific information on these metrics.
We also shared an expectation for premium growth, which we continue to consider a means to our earnings growth goal and not a primary goal in and of itself. Our current growth trajectory, including the growth initiatives already in place, should drive a 6%-7% CAGR. Additional premium growth will be dependent upon the pricing environment and navigating it with effective underwriting and opportunistic business development. With those comments, I'll turn it back to Jack.
Thank you, Jeff. On a standalone domestic basis, we are a focused company with approximately $4.3 billion in premiums expected in 2018, split roughly at 60% commercial and 40% personal lines. We have significant prospects for profitable growth in each of our business segments. These include our market-leading personal lines account business and our small commercial portfolio, which together represent more than half of our domestic written premium. Both are high-growth markets for us and produce returns well above target capital hurdle rates. Additionally, we have a strong position in the highly specialized lower-end middle market sector, as well as the specialty segment, where we are the carrier of choice for retail agents. Together, these businesses are generating very attractive returns and represent meaningful growth opportunities. We will continue to invest in these opportunities and leverage our higher return businesses moving forward.
We have demonstrated solid accelerated growth over the last several years, delivering approximately 8% premium growth in our domestic business in the first half of 2018, driven by solid market position with our distribution partners and insight into attractive business opportunities. Our underlying loss and expense ratios also improved over the same period, a testament to our underwriting expertise and pricing discipline. The U.S. insurance market will continue to present very attractive new opportunities. We believe we can further leverage our product and distribution platforms, capitalize on our market position, and deliver above-average premium and earnings growth. Our three strategic priorities remain the same. First, we will continue to build on the strength of our distinctive distribution strategy, leveraging our existing partner relationships.
We also will continue to fill in some of the under-penetrated geographies and underutilized capabilities with select new agency appointments. Second, we will continue to expand our growing specialty and market niche capabilities, enhancing our product offerings and responsibly expanding our risk appetite. For example, we have identified a number of specialty opportunities in the small private financial institutions market and other specialty sectors that are relevant to our agent partners. Third, we will continue to grow our businesses through innovation while maintaining a flexible and responsive business model. Our goal is to innovate in ways that help us acquire more customers and serve them more holistically. We have a number of initial pilots that will eventually present opportunities for growth and serve as an expansion of our agency value proposition. In addition, we strive to improve our underwriting and risk management, leveraging new data analytics and technology capabilities.
All of our innovation projects are use case-based and have transparent financial parameters that are subject to disciplined review process. In closing, we are pleased with the outcome of the Chaucer review and sale process from both a strategic and financial standpoint. Strategically, this transaction will enable us to double down on our proven distribution approach, further develop our specialized capabilities, and focus on innovation, helping our partners grow. Financially, it reduces our exposure to extreme global catastrophe events and frees up capital to invest in higher return businesses, ultimately enhancing our shareholder value creation. At the same time, we fully expect Chaucer to continue to be an industry leader and benefit from its association with a high-quality and highly rated organization committed to building a significant presence in the international specialty market. We would now be happy to respond to your questions. Operator?
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question today comes from Christopher Campbell with KBW. Please go ahead.
Hi, good morning, gentlemen. How's it going?
Great. Good morning.
Great.
I guess my first question is, I think, Jeff, you had mentioned limitations on buyback. How should we be thinking about just Hanover's ability to repurchase shares with the proceeds? What would the timeline be, and how would that be dependent on the closing date?
I think we'll probably give much more visibility on that as we get to the closing. Given the float and the volume, we still have ample ability to be active in share buybacks. There's obviously a natural limitation. We'll give you more visibility as we get closer to the closing.
Got it. Would the $85 million pre-closing dividend that Hanover has already received, would that be available for buybacks immediately?
I think, overall, we are in the market, and we participate in buybacks, and there's a certain amount of excess capital that we maintain on a regular basis. Overall, that we've told you about the deployable capital that we expect to have as a matter of the deal, which is $825 million-$875 million. I think given the season that we're in, it's probably not wise to be overly active in using up capital. As we get closer to closing, I think it'll be more transparent to you.
Great. That's very helpful. Just kind of circling another capital management one too, just on the regular dividend going forward. You have higher ROEs, you're guiding to on the long range, and then more underwriting leverage. Should we expect to see your dividend yield rise and then higher payout ratios?
We've maintained a relatively constant payout ratio over time. That payout ratio, we typically have adjusted our dividends once a year in the fourth quarter. Since that time, you've seen taxes come down. Therefore, our payout ratio has declined. We will revisit our dividend, obviously with the board as we get to year-end. We'll make appropriate decisions thereon.
Okay, great. Just another now more just on the growth of the business. What organic and inorganic growth ops are you thinking about? What would be the timeframe for getting those going?
Yeah. Thanks, Chris. We're very excited about the trajectory of our business in the U.S. As you've seen, we continue to generate more than acceptable returns on that business. We also have probably the best agency followership that we've had, certainly, since I've been here. The combination of those two things have got us some momentum that allows us to continue to penetrate our current capabilities. Our small commercial and personal lines franchises are generating terrific returns. We've got nice upper single-digit growth. Increasingly, as our middle market and specialty portfolio matures and generates acceptable and in some cases, very strong results, we find even more opportunity to penetrate with our existing agency plan in those sectors. As you can imagine, as we've been working through this process of a possible Chaucer sale, we've been working diligently to come up with kind of what's next.
What industry sectors can we pursue? What lines of business would be a natural next extension? How could we accelerate growth, frankly, at our most profitable businesses and geographies? I have charged Bryan and Dick to really bring us that full transparency of the additional growth opportunities, both in our existing capabilities as well as some of the next steps that we can take. We've lined that up pretty aggressively in front of ourselves, at least in terms of choices. We also had our field leadership team here this week as part of our annual drill around understanding the growth in each trajectory and how the business is maturing. We had a terrific three days that brought us, I think, the highest level of transparency that we've ever seen.
Our commitment is to make sure that the additional growth opportunities that we put in front of us will be accretive, that we're focused on profitable growth, and that as we get closer to close, we hope to further unveil some of the investments that we're going to make that will accelerate that profitable growth. We've already disclosed, I think, in our last quarter, things like extensions into financial institutions, some work we focused in on the retail E&S space, some expansions in our management liability and professional liability risk appetite. Of course, some accelerated growth in our personal lines and small commercial businesses now that they're generating such terrific returns. We won't underwhelm you with our transparency around how we're going to take advantage of the position we've put ourselves in.
Great. Then just, is there some quantum of the $825-$875 deployable capital proceeds that would be used for these types of reinvestment in the core businesses?
Well, I think as we've said in the past, right now we're generating more than adequate capital through our returns to fund our current organic growth opportunities. If we are able to accelerate that growth, we still have a little bit of room without having to dip into the excess capital position. I think the short answer is yes, that if we can, while maintaining the right financial discipline around those growth opportunities, if we can find the ability to take that next step, that we fully expect to use some of that deployable capital to fund that. Additionally, as you know, we've become pretty competent over time on small-to-mid-size inorganic acquisitions. We expect that we'll see more of that activity emerge.
If we don't see it as an inorganic capability, we certainly see increasing opportunities to look at talent moves as different companies change their focus and present some opportunity for us to build our capabilities with very talented people from our competitors.
Okay. Well, thanks for all the answers. Congrats on the transaction.
Thank you, Chris.
The next question comes from Matthew Carletti with JMP. Please go ahead.
Hey, thanks. Good morning.
Good morning.
Just a few questions, I think maybe just following on Chris' kind of capital questions. Following on the inorganic, can you give a little more color around, you mentioned kind of small to mid-size potential bolt-ons, if they make sense. Can you give some parameters around that in terms of how we should think about your appetite size? I think that broadly in the market, there's some peers that have gotten some capital and gone out and made some very big acquisitions, and I think there's a little bit of fear around exactly what your appetite might be. I think if you could give a little color around that'd be helpful.
Yes, Matt, I appreciate the question. I think if you look at us historically, what we've tried to do is to identify small acquisitions, renewal rights deals or kind of team build-outs that meet several key criteria. A, they have to have the potential to be accretive in a relatively short period of time. We also look at the range of outcomes that surround those businesses. Some businesses may be profitable for the top quartile players, but the bottom quartile players generate substantially less desirable results. It's not just what the potential returns are, but what the range of outcomes around those returns. We also importantly match that up against our distribution strategy.
While everything we do doesn't have to exclusively fit into our franchise approach, the real bullseye of our target is capabilities both inorganic and organic that we can build out that add to our proposition to the best agents in this country. As we go through, you won't see us do anything highly transformational. We don't see an opportunity to throw a long pass and hope that we score a touchdown. We would rather really move the ball down the field in a consistent pattern to what we've done in the past and build on the profitable growth that we have in the U.S.
Okay. Very helpful. Thank you. Just a couple others. I guess the other one is as we think about not the growth side of what you might do with capital, but the capital return side. Appreciate your comments on how quickly you could put capital to work, a buyback versus a special dividend. Can you comment a little bit on how you view valuation of the shares when you make that decision, how you think about valuation in a buyback scenario versus a special dividend?
Yeah. This is Jack Roche. I'll let Jeff Farber kind of answer the specifics to that, but very consistent with the way we've been talking about this over the last several quarters, actually, as we announced the potential sale of Chaucer, that we plan to have a very balanced approach towards capital deployment. Looking at those organic and inorganic opportunities, as we said, that we fully expect that we will deploy a good portion of that capital through capital management strategies.
Jeff Farber has put together a very thoughtful kind of framework that we're working from, we'll do that, not only kind of build on that, but what you can expect as we get closer to close, we can be increasingly transparent about what we're going to do immediately versus what we would do over a period of time that would be required to us to deploy that capital efficiently and effectively. Jeff Farber?
Just to add a few thoughts to that. We have a very detailed capital framework and plan that we go through, capital management, if you will, plays a very important role in that. I believe stock buyback will be a meaningful portion of that. Certainly, we can't be completely unaware of where the stock is and what the value is. We look at things in terms of a payback period. We kind of consider that. I think about price to book value and where our ROE is and where our stock is certainly trading, I feel very comfortable currently that
Stock buyback can be a very meaningful portion of capital management and capital deployment in total.
Okay, great. One last one. You mentioned the cat hurdle that's built in there and in part for what's held back. I noticed you didn't put a number on that, I can understand that. Can you put any parameters around this for it? Is it look back at what your average cats have been over a number of years, that's a good proxy, or how should we think about the ballpark of what's been built in versus what might be excess?
Sure. Happy to do it, Matt. The contingent consideration is based on a phase-out that kicks in at 10% of net earned premium. Our plan for the year at Chaucer is 8% of net earned premium. Through June year to date, the cat ratio was 4.3%. There's an additional $65 million in the second two quarters of the year or the second half of the year, or 15% of that portion of the year in terms of a cat ratio, slightly higher than 15 to get to the 10%. In addition, notwithstanding cats that are imminent or what have you, we're looking at potentially considering some reinsurance that might protect us at a reasonable level.
Okay, great. Thank you very much for the answers, and congrats and best of luck.
Thank you.
Thank you.
The next question comes from Larry Greenberg with Janney. Please go ahead.
Good morning, and thank you. Just following up on the capital discussion a little bit. You guys mentioned that you lose some diversification benefits with the transaction, but you also lose a decent bit of tail risk. I know that premium to surplus, premium to equity is a pretty crude metric these days, but on the domestic side, you do run higher than a lot of your peers do. I'm just wondering if you could discuss holistically how you look at the capital requirements net net, pre and post-transaction, and give us a little bit of color on that.
I'll let Jeff speak to that specifically, but, Larry, thanks for the question, because I think what you know, having followed us for some time, is that the whole strategy of this firm is to diversify over time to generate better and more consistent returns, but also to bring a much more distinctive offering to our agency partners. You can expect us over time to continue to do what we've been doing, and that is improve our geographic spread to get into more distinctive categories, but also more casualty-oriented. A big part of our plans going forward is how do we continue that journey? How do we continue to make the weather less relevant, frankly, to our results? Clearly, to your point, we have to be conscious of our current state. Jeff, do you want to respond to that?
Sure. Larry, we have a lot of capital masters, so to speak, that we have to pay attention to. We have S&P, we have Moody's, we have AM Best. We have our own economic capital, which one might say is the true north of how we look at it on a model basis. We've said before that S&P has been our binding constraint, what we wanted to do is we say, give or take $950 million of proceeds, the range of both net proceeds and deployable capital was $825-$875. After taxes and costs and a variety of things. There ends up being a fair amount of that capital which is deployable. From a leverage perspective, Moody's tends to focus a little bit on leverage.
Moody's has an interesting calculation where they include, they don't do quite as crude a calculation as we might, which is premium to surplus. They actually include reserves in the numerator of that ratio. Because Chaucer has much higher reserves, the Moody's leverage calculation actually goes down without Chaucer, even though a crude premium to surplus ratio would be lower at Chaucer than it would be domestic, as you said. We've considered all those factors, and we feel very comfortable with our deployable proceeds. We've got good relationships with the rating agencies, and we feel very comfortable with our views of capital.
Okay. Thank you. Just one numbers question. Jeff, I think you said that you have built in a 4.2-point cat load for the back half of the year pro forma. Can you break that down between the third and the fourth quarter?
When do we have that, Oksana? It's a little bit higher in the third quarter. It's not materially higher. Given that cat load, obviously the tail risk is much higher in the third quarter. The AAL, the average annual load, isn't a lot higher. We can provide that. I know we provide it. Didn't we give the third quarter on the second quarter earnings call?
Yeah, I think you said 5.7%, which would obviously include Chaucer.
Okay. We'll share that with you shortly. I just don't have it, unless you have it, Oksana.
I don't have it.
No, we'll come back to you on that. I just don't have it at my fingertips.
Yeah, based on what we've already disclosed, it's really going to just be math, right? The 15% that Jeff is referring to includes some of the shortfall, if you will, in the cat in the first half of the year, and then we've already talked about what the third quarter is. It should be easy enough for us to disclose how that works out for what the original cat loads were for the second half of the year, and how that got benefited, if you will, by the shortfall in cats for Chaucer in the first half of the year.
Yeah. We'll share that number. It's not more than 50 basis points difference between the third. We'll come back to you with that number. What do you think it is?
Excellent. Thank you.
Oksana, I guess we do have it. It's 4.8% for the Q3 domestically.
Super. Thanks.
4.8%. Sure.
Again, if you have a question, please press star then one. The next question comes from Wayne Akambo with Monarch Partners. Please go ahead.
Oh, yes. Good morning. Just on the timing of the proceeds, I'm interested to know will you be sitting with the net proceeds for some length of time before you redeploy them? Or do you see the redeployment of the proceeds simultaneous with using them for some other transactions?
What we have been trying to articulate over the last two quarters is that we are going to use a very balanced approach. It is our intention to be consistent with the close, to be articulate about some immediate capital management commitments that we would make, as well as some provisional views for over the next couple of years. We would be even more definitive of that if it wasn't for what Jeff referenced earlier is the kind of float and trading volume that challenges us a little bit to make sure that we don't destroy value in that excess capital by returning it too quickly. We will have a very balanced approach. What Jeff also articulated is we're going to be very transparent about it.
Once this deal closes, we will have separated out what we believe to be the deployable capital versus the capital required to run our U.S. domestic business. As we get to each quarter, how much of that we have returned back through the various methods and what's left, and over time, increasingly put forward the ideas that we have to use some of that capital organically and inorganically.
We've been preparing for this for some time. As you can imagine, it's important to shareholders, it's important to us, so we're very focused on it. Everybody can pick their own number. It certainly would take a meaningful amount of capital like this, two or three years or some period of time to be able to deploy all of it. You can certainly expect that a meaningful portion would be deployed or managed in short order, and so the sort of weighted life of this capital would be meaningfully lower than the period that we were just talking to on an average basis.
Just one last question. If you're sitting with that capital for a month or two months, do you find yourself at all vulnerable to be acquired? Because sitting with that much capital makes it that less expensive for the buyer, right?
Well, listen, as we've said before, when challenged with that question, we understand that there's always a vulnerability in an industry where there's consolidation going on. We have a pretty high confidence, though, that our improved performance and growth trajectory in the company makes us a very investable asset. We believe that while we have to be conscious of the best interests of our shareholders, that the best way for us to remain independent is to continue to deliver high-quality results and above-market growth. We think that short-term excess capital position, as long as we're very clear about how we're going to deploy it, will not be our vulnerability.
Great. Thank you.
This concludes our question and answer session. I would now like to turn the conference back over to Oksana Lukasheva for any closing remarks.
Thank you very much for your participation today. We are looking forward to talk to you at our third-quarter earnings call. Bye.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.