The Hanover Insurance Group Inc.’s CEO Frederick H. Eppinger expects the western United States to be a key growth driver for the super-regional insurer in the next several years. Having just entered into a renewal rights agreement with OneBeacon Insurance Group, Worcester, Mass.-based The Hanover said the agreement was a natural fit because it allowed the company to pickup about $100 million worth of business in the West, and expand its footprint quickly in the region, as well as in specialty niches.
A western expansion is something Eppinger had been exploring for the past couple of years. “A number of our partner agents have asked us to do it, and it was just a matter of time … but given the disruption in the marketplace, some opportunities presented themselves, and we decided to accelerate [the western expansion] this year to make sure that by January 1, we could be on the ground in seven states,” he said.
The Hanover began writing business on January 1 in Arizona, California, Colorado, New Mexico, Oregon, Utah and Washington. And the company has opened offices in Denver and Sacramento and plans to open offices in Phoenix, Los Angeles, San Francisco, and Seattle.
“Our launch into the West is part of a strategic and disciplined approach to growth, which is enabling us to capitalize on our strong momentum, the increasing interest in our products and services outside of our current footprint, and a number of emerging opportunities with some of the country’s best independent agents” Eppinger said. “We are very excited about the progress we have made in the West, and about the potential for this renewal rights arrangement to accelerate our growth plans there. There are tremendous synergies between our western expansion initiative and this renewal rights arrangement.”
Through the OneBeacon agreement, The Hanover expects to acquire access to as much as $400 million in small and middle market commercial business nationwide at renewal, including industry programs and middle market niches. At the same time, the transaction will expand The Hanover’s segment, niche and industry program business, adding nearly 20 established programs to its portfolio.
As part of the expansion, The Hanover is planning to appoint 200 agents in the seven western states and has developed a suite of middle market, niche and specialty products for the region. Approximately 80 to 100 agents will be appointed out of the OneBeacon portfolio, but the remaining agents he expects will be new to the company.
“We have a value proposition with our agents that says we will invest in winning agents and innovation, and in product. We will limit the amount we appoint so they have franchise value, and they will have authority so they can be responsive,” Eppinger said.
The CEO said he is excited about the Western region because it presents some “very vibrant markets.”
“The economy’s been very difficult to some of those western markets, but the western markets also have real growth,” Eppinger said. “They also have, if you look at the profile of the agents, some of the best agents in the country in that there are some of the most sophisticated agents who are really good at selling expertise and insight in various areas. So we believe that that’s why our niches and our segmented business will work so well there, because there tends to be a very sophisticated customer base and a very sophisticated distribution.”
Compared to the East, the West is more geographically spread out, whereas the East has more compact volume. The Hanover has developed technology that will allow its underwriters to be remote and still keep in close contact with their agents. Eppinger said the breadth of the area and sophistication of distribution of the West made it an attractive place for his company to target. “If you look at those seven states, they represent 30 percent to 40 percent of the premium that we target in the whole country. And so the upside for us is enormous,” he said.
Meanwhile, Eppinger said he expects his company to take advantage of the industry’s down market, because his company has capital available to do so. Insurance companies were hit hard in the past couple of years when the down cycle in insurance coincided with an economic downturn, he explained. He predicted that prices in the insurance industry will start turning around — slowly — in 2010.
“The prices started turning in commercial in April because we do mostly smaller accounts,” Eppinger said. “But what I think you’ll see is that firming will be slower than people expected, and won’t be as extreme because of a continuous pressure from the lack of new jobs and exposures in many of these industries.”
The Hanover expects to take advantage of companies that are under strain or shrinking. More acquisitions are likely on the horizon, but none of the OneBeacon scale.
“We don’t have to do any acquisitions, but I fully expect given the disruption in the marketplace, we will continually look for that. … I think it’s going to be mostly small fill-ins around some of the specialty areas. We’re looking for a number of areas to continue to improve our capabilities,” Eppinger said.
The Hanover plans to expand in health care, assisted living, transportation, professional business, ocean, fidelity and small technology, for instance.
“We’re very big in niches,” Eppinger said. “One of the promises that I make to our agents is that no company will be more innovative in the next five years than us in the industry. We believe in taking expense risk. What I mean by that is we believe in building the capabilities and the insight, and building products from there, which means you invest a little bit more, you have a little bit higher expense ratio, but you don’t get into problems with getting into businesses you don’t understand.”
Eventually, the industry can expect The Hanover to have a mix of 50 percent commercial lines business, and 50 percent personal lines business. Currently, the company’s specialty business is growing the fastest, but Eppinger expects the commercial versus personal lines ratio to balance out over the next three to five years.
“In the West, we’re obviously leading with our commercial lines products, but I would imagine over time, as the market is disrupted on the personal lines side, we will take advantage of that as well,” he said. “Our vision is to become a world class super-regional. The super-regional isn’t multi-location. What I mean by super-regional is to bring together the best of the national companies, which means scale and product capability, with the best of the regional companies, which is about responsiveness and local knowledge.”
Listen to a podcast of the full interview with The Hanover’s CEO Fred Eppinger at Insurance Journal TV at https://www.insurancejournal.tv/videos/3189/
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