160-Year Old Hanover Retaking Its Place as P/C Industry Leader

Eight out of 160 years of history played to varying degrees of success “We are at a milestone as a company. may not seem like a big deal but for since its founding 160 years ago. We’re now a couple years into the Hanover Insurance Group, founded expansion out West. With Chaucer “I tell people that one of the parts in 1852, the last eight years have we have the Lloyd’s connection of our journey right now is taking seen a series of big deals. again. I feel like it’s not a bad time our place again as one of the lead to step back and reflect on where Eight years ago in 2004, the $2.4 companies in the marketplace and we are and where we’re going and billion heavily personal lines super- it’s not the first time we did it,” why I think we’re going to be quite regional insurer was trying to regain Frederick Eppinger, CEO, told successful,” he said. momentum after a big venture Insurance Journal in a recent wide- into life insurance and annuities ranging interview. “I reflect on the last four years by its parent company at the time, with a horrible recession and all In excerpts from the interview with Allmerica Financial, went sour. the others things, the financial Insurance Journal’s Andy Simpson, crisis, and for us to be growing and Today, the Worcester, Mass.-based Eppinger discusses among other being upgraded and really thriving company has $4 billion in revenues, issues Hanover’s history, its recent in a difficult time, to me it all comes writes only property/casualty, acquisitions, his company’s regional together into a nice story about conducts business on a nationwide approach, his appreciation for inde- where the company is.” basis, underwrites a balanced pendent agents, and whether the book of personal, commercial and late Steve Jobs of Apple would have Hanover’s History specialty lines business, and is one made it in the property/casualty Hanover Insurance was founded of the country’s fastest-growing insurance business. in 1852 in Hanover Square in P/C insurers. After eight years of deals shedding New York City, which makes it In recent years, the company has the life and annuity businesses older than big players Allstate, been expanding its footprint, diver- then adding new property/casualty W.R. Berkley, Chubb, CNA and sifying its products, partnering with products and expertise by buying Travelers. It’s one of the 40 oldest select independent agents, adding business from OneBeacon and companies on the New York Stock international and excess/surplus London-based Chaucer and oth- Exchange — a fact the company capabilities, and earning strong ers, Eppinger thinks now is a good celebrated by the ringing of the ratings — executing notes it has time for Hanover to grow organi- bell on the floor of the NYSE on cally — and reflect.

Reprinted with permission from the Insurance Journal. April 3. Eppinger was joined on annuities in the late ‘90s. It got into to his hometown of Worcester and the bell platform by Marita Zuraitis, deep trouble, however, after the taking over Hanover in 2003. president of Hanover’s property/ stock market collapsed following casualty companies, and the com- the Sept. 11, 2001, terrorist attacks. OneBeacon Deal pany’s executive leadership team. The company began struggling Under Eppinger, the company left to generate investment returns the life business behind, focusing Hanover started as a fire insurance sufficient to meet the guaranteed instead on expanding and diversifying company. It later added auto, marine return it promised the holders of its property/casualty business largely and surety, then workers’ compen- its variable annuities. through acquisitions. sation, general liability and other casualty lines. It did business with Allmerica President and CEO While he has overseen about Lloyd’s in London as far back as John F. O’Brien, who championed eight acquisitions since he joined 1880 and did business in China the variable annuity sales, resigned Hanover, Eppinger’s deal to acquire back in 1920. in October 2002. In 2003, the the renewal rights to business from company made the big decision to OneBeacon Insurance Group in Hanover moved its headquarters to sell its fixed life insurance business 2009 was one of his biggest and central Massachusetts in 1969, the and in August of that year hired boldest. Hanover acquired the same year it expanded its business Eppinger to take over the company. renewal rights to $400 million in in the Midwest with its affiliation small and middle market business. with Citizens Insurance Co., based Under Eppinger, by 2005, the The deal enabled Hanover to not in Michigan. company had completed restructur- only expand its specialty lines and ing and reinsurance deals that led The insurer has weathered the 1872 middle market appeal but also to its eventual exit from the variable Chicago fire, the 1906 San Francisco advance its reach into western states. life and annuity businesses. The earthquake, the 1929 stock market company also returned to its prop- When the OneBeacon opportunity crash, and the 2004-2005 hurricanes erty/casualty roots and restored its came up, Eppinger said he saw three including Katrina. It also survived name, Hanover Insurance Group. advantages: good products, good the 2008 financial crisis — the only agent relationships and good talent. insurer in the country that had The Hanover Insurance Group its ratings upgraded during this is now the holding company for “The product side of it, to me, period by A.M. Best, Moody’s a group of insurers that includes was very intriguing,” Eppinger told and Standard & Poor’s. In 2011, it The Hanover Insurance Co., based Insurance Journal, referring to the survived a record $362 million in in Worcester, Mass., and Citizens fact that OneBeacon’s core business catastrophe losses. Insurance Company of America, was industry product lines from the headquartered in Howell, Michigan, old Atlantic Mutual. One of Hanover’s biggest challenges and Chaucer Holdings plc, based in its history had nothing to do OneBeacon also offered “advantages in London, and their affiliates. with its property/casualty business. for their spread and scale, particularly For a period starting in 1992, The current news of Hartford in small commercial, and they had Hanover came under the umbrella Financial Services getting out of the some depth of relationships with of Allmerica Financial, which life insurance and annuities business some agents in the West and really included State Mutual, one of the to focus on property/casualty is good agents that really helped us,” oldest and biggest life insurers. a déjà vu for Hanover veterans he said. In addition to selling fixed life including Eppinger, who himself “Then, just broadly, their talent, in products, Allmerica became one worked in Hartford’s property/ my view, was really extraordinary. of the hottest sellers of variable casualty division before returning

Reprinted with permission from the Insurance Journal. Part of what I wanted to get at was 50 percent, he said, but Hanover 13 categories that I’m interested the talent that they had in these sailed to an 80 percent renewal in, like energy and marine and geographies and these product areas.” on the business plus enough new aviation…. all interesting categories business from agents to cover for [that] are parts of the economy Eppinger had been looking into the 20 percent that did not renew that are growing, if you will, like expanding to the West and this deal with Hanover. alternative energy and stuff. It’s would give Hanover access to about really quite interesting,” he said. $100 million business there. “I would argue it’s all because the people came,” he said. Eppinger also sees Hanover using Believing that the people were key, its Chaucer connection to extend or Eppinger did something he thinks Eppinger said “it’s remarkable in supplement some of what Hanover not many other CEOs would have a soft market where people are already does for certain markets, done. Before a penny of revenue shrinking” that after just two years making it unnecessary for an agent had been put on the books, he Hanover already writes $400 to go to a wholesaler. For example, hired 165 of the OneBeacon people, million out West. Hanover writes a lot of marine right away. He also took on about In fact, the West has been so business but has not had the inter- 200 new agents in the deal. welcoming to Hanover that the national coverage needed for fine Taking on the expense of hiring company just announced it is arts; now with Chaucer it does. The people before knowing how much creating a second western regional same can be done with healthcare, business was going to be won is division to handle more business. political risk and others. risky. Eppinger said competition for “Well, now, we’ll do an extension renewal rights business is typically Chaucer of our product set to our partners fierce because “once you announce In July 2011, Hanover took another in some of these categories. So over one of these you put a bull’s eye on giant leap forward with its acquisi- time, what we’re going to be able that business with every competitor tion of Chaucer Holdings, a leading to do is just like we’ve done with in the world.” Every competitor Lloyd’s specialty insurance group, OneBeacon, create some solutions knows the accounts will have to in a $474 million deal. Chaucer out of those skills to provide to our transfer to another company so has expanded Hanover’s specialty agents,” Eppinger said. “It makes our they all go after them. capabilities and is providing additional product and geographic relationship more important with “It’s competitive business so usually diversification. the folks that we do business with.” it’s a little bit tricky. What our In Chaucer’s first six months as part agents did is they worked with us Chaucer writes almost $1 billion in of Hanover, it delivered $429 million policy by policy to make sure that property, marine, aviation and energy in net written premium, resulting in the insured knew the company and products, along with a personal and pretax income of $32 million. what we were trying to do. It was commercial motor business within the United Kingdom. a real partnership right out of the Business Mix gate. Again, for us, when history is Many of today’s Main Street risks Under Eppinger, the company has written on this decade and the next, have global exposures and Chaucer diversified its business along with it was a really critical step for us,” can help Hanover’s agents with expanding geographically. Eppinger said. these risks, according to Eppinger. Eight years ago in 2004, two-thirds The deal has paid off better Eppinger also likes several of the of Hanover’s business was personal than Eppinger thought it would. industries Chaucer serves. “Clearly, lines. Today its mix is almost one- Typical success on renewals is about it has some great skill sets in about third personal, one-third commercial

Reprinted with permission from the Insurance Journal. and one-third specialty. Personal craft, home care services, dwelling in 1852. By 1865, Hanover had lines is at 34 percent; commercial fire and umbrellas. The personal another 44 agents and by 1871, lines, 27 percent; U.S. specialty lines segment produces $1.5 billion it had 400. lines, 15 percent; and, thanks to the in business, 60 percent of which Successfully partnering with inde- acquisition of Chaucer, it also has is auto. Nearly 70 percent of all pendent agents is also a strategy 15 percent in international specialty personal lines is account business. that Eppinger believes will define lines. Reinsurance and some UK To manage this line, it has been Hanover’s future success. motor insurance make up the rest. implementing personal lines rate increases for several years and “We grow when other people don’t Hanover’s core commercial lines reducing concentrations of business grow because we solve more prob- business generates $1.1 billion in certain areas including Florida, lems for the typical agent than most in premiums targeting small and Louisiana and Rhode Island. companies. It’s as simple as that,” middle market accounts. The most Eppinger said. commonly written accounts have The company today is licensed to less than $250,000 of premium. sell property/casualty insurance The company has a total of about These products include a standard in all states and the District of 2,500 agents nationwide but many business owners policy (BOP), Columbia. It actively markets of those are legacy and heavily commercial packages, property, commercial lines policies in 36 personal lines agents. Hanover does general liability, workers’ states and in D.C and personal not necessarily want a lot of agents. compensation and umbrellas. lines policies in 19 states. It increasingly favors doing business with a select group. The company’s U.S. specialty More than 30 percent of its commercial lines business reached total business is in two states: The company has its deepest rela- $600 million in 2011. Specialized Michigan with 22.8 percent and tionships with about 800 top agents products include those for Massachusetts with 9.6 percent. to whom the company gives what marine, surety, industrial property, After Michigan and Massachusetts, Eppinger calls “franchise value.” professional liability, management its biggest states for business are This group of agents is responsible liability, healthcare and commercial New York, California, New Jersey, for $3 billion of Hanover’s $4 billion umbrellas and excess. Illinois, Florida, Connecticut, of business. They get an assurance Texas and Maine. that the company won’t appoint London-based Chaucer brings any nearby agents to compete even more specialty capabilities in Hanover’s geographic footprint is with them and they get the property, marine and aviation, and changing as it capitalizes on the new products and the attention energy as well as liability coverage inroads in the West made through from Hanover’s professionals for professionals, financial institutions the OneBeacon deal and deepens in local offices. and directors and officers. About 24 its relationships with select indepen- percent of Chaucer‘s nearly $1 billion dent agents in regions where it The strategy is about more than just in business is marine and aviation, sees opportunity. contracting with the best agents; it’s 22 percent is property, and 5 percent about giving them value. ‘As Simple As That’ is energy. “Our whole vision is that we com- Having independent agents In personal lines, Hanover stresses bine innovation and this franchise representing the company is a account-oriented selling of auto and value with agents with this notion strategy as old as the company homeowners along with additional of local adults that have authority. itself. Samuel Sage of Cleveland companion products for things like We give our professionals authority,” became the company’s first agent identity theft, valuable items, water- he said. “Sure we have efficient

Reprinted with permission from the Insurance Journal. models and we have automation increase. To me, that is just like they’re going to have a portfolio of like everybody else, but we’re not saying I’m going to do a hiring companies that they partner with one of the companies that says the freeze, where I can’t think about for their solutions,” Eppinger said. black box runs this place.” where I need people and where He said a lot of agents are interested I don’t. Everybody’s stopped While some small commercial in the professional lines, small thinking,” said Eppinger. lines carriers are centralizing their lawyers, accountants, not-for-profits, underwriting or decision-making, Instead, he said, Hanover will work private schools, churches and indus- Eppinger said Hanover is redistrib- with agents to re-underwrite and trial risks coverages that Hanover uting its underwriters to its various price these accounts to see “who has developed. regions. Each regional vice president needs the rate, who doesn’t need the Hanover also tries to be smart is responsible for about 40 to 50 rate, and can we solve the problem?” about which products it lets which agents and is available to work with agencies sell. them to solve problems. What Best Agents Are Doing Hanover has been emphasizing its “Instead of saying for private “Yes, a lot of it comes in automated, portfolio of specialty commercial schools, anybody can sell private like everybody else, but when you lines products in response to what schools, we say no, the agents that have a problem, when there’s a the country’s best agents want, actually know how to do that are kick out, when there’s a risk that according to Eppinger. the people that get the product, needs some discussion or alteration which our agents love because we have local underwriters. It’s the “When you look at the industry, that means that, for them, they’re complete opposite of everybody in almost every geography the best not competing against people or else,” Eppinger said. agents and brokers are doing the somebody going direct,” he said. same thing,” he said. “They’re saying “What happens is at the end of the what I need to invest in is areas of day there’s no machine that can ‘Silly Notion’ expertise. I’ve got to know things really understand the risk, particu- Eppinger spends a lot of time trying like not-for-profits or healthcare or larly on middle market or low end to understand agency economics whatever it is.” to middle market risk. You need and trends and is convinced inde- somebody that actually knows He said agents in all parts of the pendent agents have a bright future. the territory, knows the category, country are concluding that “just To think otherwise is “just crazy,” knows the risk.” being generic” is not the way to said the CEO, who, of course, be successful; rather they are saying would be crazy to pin his own This approach opens up opportuni- ”to really be the most successful company’s future on independent ties for Hanover to pick up business my folks, my producers, have to agents if he did not believe in them. when certain competitors under know things.” pressure in today’s market issue “[W]hat’s happening in the agency across-the-board decisions regard- That puts pressure on a carrier to channel is there’s some consolidation ing, for instance, small commercial be able to respond in the areas where within agents. But the stronger accounts. these agents decide to specialize. agents are getting stronger. I mean their ability to add value is getting “So there’s a lot of places where “You have to pick your spots. What better. My view is that the world is people have said no more X, you have to do is be clear on what not less complex; it’s getting more whatever line of business it is. you’re good at and what you’re not complex. And the notion that buyers Everybody’s going to get a 14 good at. The reason why they’re don’t need help is just crazy; it’s percent increase or a 20 percent independent agents is that obviously silly. It’s a silly notion,” he said.

Reprinted with permission from the Insurance Journal. He said from personal lines, to to Dowling & Partners, been the Book value per share took a dive in professional lines, to weather- fastest-growing P/C insurer. the financial crisis year of 2008 but related risks along with coverage since then it has been rising and in By year-end 2010, with OneBeacon variations and limits, people need 2011, Hanover achieved the highest in the fold, Hanover grew to be a more, not less, help. value ($56.24) in its history. $3 billion company; it was at $2.4 “You know, most of us don’t want billion in 2004, Eppinger’s first full Eppinger does not see additional to be experts in insurance. We want year at the helm. major acquisitions for Hanover in to run our business and live our the near future. Now is the time By the end of 2011, with Chaucer lives. What you’re seeing is that for execution. on board, revenues were $3.9 billion. agents have become more and more “Obviously, you think about the efficient providers of advice. I mean Hanover, like many P/C insurers, journey, there was the phase at the that’s what I believe. I believe that ran into some rough spots in 2011, beginning that was really fixing a the value that they provide is getting a year with record-setting catas- lot. Then we moved into building greater because they’re being more trophes worldwide. Hanover still out these capabilities and enhancing and more efficient in delivering it, posted net income of $37.1 million, the portfolio and the value proposi- and it’s more needed,” Eppinger although that was down 76 percent tions of our agents,” he said. “What told Insurance Journal. from 2010. The company’s combined I believe right now is we’re in a ratio for the year 2011 came in period of executing against the How’s Hanover Doing? at 104.6, about 10 points of that priorities as far as delivering value Despite the soft market, financial attributable to catastrophe losses to our partners. That’s going to crisis, recession and catastrophes, including higher-than-expected lead to a lot of additional growth.” Hanover has grown revenue for losses from floods in Thailand. But five straight years and, according even with that, it outperformed the industry average on combined ratio.

701-0372 (4/12) Reprinted with permission from the Insurance Journal.