The Hanover Insurance Group, Inc. (THG) Earnings Call Transcript & Summary

Great. Good morning. It's Meyer Shields again, KBW. Our next panel is with Hanover. We have President and CEO, Jack Roche. We have CFO and EVP, Jeff Farber. We also have Oksana Lukasheva from Investor Relations, whose help, as always, in putting this panel together has been indispensable. We're going to start off with a few comments -- introductory comments from Jack and Jeff, and then we'll jump into Q&A. And as always, I encourage everyone on this chat to submit questions that you want me to ask to make sure that we're getting the information with regard to The Hanover that you're actually looking for. And we'll be checking that, we call it the dashboard, over the course of this session. So with that, I'm going to stop and turn it over to Jack and Jeff.

Thank you, Meyer. And I'll just take a second, if I could, to introduce myself, and then we'll talk a little bit about our company and look forward to some Q&A. I joined The Hanover about 15 years ago as part of a company transformation. We were kind of a generic regional insurer with a desire to be more relevant and to create a more investable company. I've been in the insurance business for 35 years, running P&Ls and field operations for most of that. But again, joined The Hanover 15 years ago, attracted to the firm, frankly, by its strategy and its aspiring culture. And we'll talk a little bit more about that. Prior to assuming the CEO role 3 years ago, I was responsible for running most of the U.S. operations, commercial lines and personal lines, field operations and had a close relationship with our Chaucer folks overseas at that time. I'll talk a little bit about this transformation that I alluded to at Hanover. I think we're all very proud of what we've been able to accomplish over the last decade, plus creating a much more distinctive, diversified and high-performing company. As I said, we were kind of a regional carrier, predominantly in 5 or 6 states, heavily invested in personal lines and smaller commercial, not a lot of expanded footprint or specialized capabilities. Today, you fast forward to 2020, we're roughly a $5 billion revenue shop with a well-balanced portfolio, including personal, core commercial and specialty lines. We believe we're very well positioned and have elevated ourselves with the best agents in the country based on our capabilities as well as our talent and our unique and sophisticated agency partnership approach, which I'm sure we'll get into. Our value proposition for those agents is that we bring a broad set of relevant and distinctive products and capabilities, all delivered through the independent agency channel. We focus on the preferred sectors of the business, and we deliver specialized offerings in whatever sector we choose to play. We are not a generic insurance company. We do not play where monetization lives. We believe we've created a strong franchise for a select group of agents, and we bring a very unique partnership approach that includes an open book test, if you will, an ability to share analytics and to present consultative tools to agents that are unmatched in the industry. We believe we create a great alternative to some of the larger companies who are quite good at what they do, but frankly, are a little less focused on the distributors' success, maybe a little distribution-agnostic as we go forward. And so we try to play to that and say that we can be that great alternative. We are focused on a select group of agents, like I said, and really trying to create these authentic partnerships that are mutually beneficial. Last but not least, we think our value proposition to investors is quite strong also. We have a proven track record of delivering top-quartile ROEs, and we're very focused on earnings growth. We have an outstanding group of talented professionals that we've assembled from some of the better companies in our industry. And we're all excited about building this company and creating additional value. As I said, we have a diversified franchise, we have a broad-based profitability within the firm. We're not making outsized margins in one particular part of the business and subsidizing another. But last but not least, we have significant headroom to grow. And we believe that the position we've created with those distributors is what's going to allow us to take this company to the next level based on these strategic relationships, and we're excited to share more of that with you today.

Excellent. Let me start with a short-term question because we're going through a period -- and everyone said this, but it's true -- that's unprecedented. So getting more information in terms of what the economy looks like and what near-term expectations for your insurers and, therefore, for Hanover. Can you talk us through what you've been seeing month to month, week to week, if that's relevant? And the application of a short-term strategy to that economic reality?

Yes, Meyer, I agree with you that this is a time to not be too insular, to really be very externally focused, to understand what's going on, not only in the economy, but in the dynamics of this property casualty industry. And I personally have spent a preponderance of my time getting external, talking to agency principals, talking to, frankly, a lot of the consultants and insure tech firms that surround us, talking to our Board members on a more regular basis, trying to get their insights on what's happening in other industries. And together, as we rallied with the partner group, which is our executive team, we've really come together and decided that the collaboration that we've established within our firm needs to get further intensified. At the end of the day, this is going to be a complicated navigation through a very dynamic time, and no one person is going to have all the answers. So we have come together and focused on really 3 major areas. Our risk and portfolio management, where we are looking at every aspect of our portfolio, both from a defensive perspective, but also from an offensive perspective. I hope we'll be able to get into that. We're also incredibly focused on helping agents optimize their operations, their financial wherewithal through this. This is a time for us to show the authenticity of our partnership strategy. And we believe we're living those values today. And last but not least, we committed to further driving our technology and digitization and looking for transformational opportunities that really are more in the mid-range as opposed to the long range. This is a time to get a little bit more shortsighted, a little bit more intense on how we manage through this time, but not just in terms of producing top-quartile returns, which we're committed to doing, but also making sure we don't miss the opportunity to show some agility and really embrace some of the changes that we think is coming upon us today. And the team that I alluded to earlier is such an important part of that. We have brought professionals from every good company in this industry. And so getting those folks to really come together and think through this dynamic time and push themselves on their thinking, I think, is super critical. And we're working really hard at it.

Excellent. That's right. And is it fair to say -- I don't want to put words in your mouth, but we're seeing an uptick. I don't know whether you say V-shaped or even that class of definition is appropriate. But broadly speaking, does it feel like your insurers or agents are in a period of economic recovery?

I think that we are definitely -- there's a sense of relief that the intense economic conditions that came upon all of us have stabilized somewhat. I don't think anybody is naive to believe that we're out of the woods or that things are crystal clear. But I have been very impressed with, at least within this industry, how people, agents, brokers, other companies have been able to move to a remote environment, focus on what needs to be done, what are the things that really matter in the short-term and to leverage the technology and the tools that are available to run pretty sophisticated companies. Economically, we are seeing some level of stability, but obviously, it varies. It varies by geography. It varies by sector. And I think we'll get an opportunity to talk later about this, but I believe that that's critical because this is not going to hit the economy in an even way. You're going to have -- we're all going to have to be able to realize that there are industries that are not going to go back to the way they used to be. And that can both have an economic effect, but it also can have an operational or an insurance exposure effect. So we're maniacally focused on that.

One of the elements of the response that Hanover is undertaking is a business mix shift. We've talked about this on previous conference calls. And one of the outcomes is a reduced exposure to some classes that are maybe particularly pandemic-sensitive and then growth in other areas. I was hoping you could talk us through the status. Where is this initiative right now? Should we think about it in terms of lines of business? Should we think about it in terms of industry exposure? And what does the Hanover book look like when we get back to whatever the next phase of normal is?

Yes, Meyer. I'm glad you asked that question. Because what I want to do is make sure I put it in perspective is that we've been on this journey to try to rebuild the company and to make it more relevant and to make it more distinctive. And so we've always had to look at our geographic footprint, the sectors, the line of business. Because in our business, as you know, what you look like in each geography is different because of the exposures that get presented, because of catastrophe weather issues, legal climates. So I think of what we've been doing over the last few months as that next intense level of portfolio management that is part of what we've been doing as a firm over the last decade. I think we were fortunate in that some of the things that we anticipated 3 and 4 years ago around social inflation and higher litigation rates motivated us to become less penetrated in some of the service sectors, the restaurants, the hospitality, the retail, particularly in major metropolitans. I think you can remember us talking actively on earnings calls about that really felt like a difficult place to make a living until some of these liability trends became more understood. That's obviously serving us well. And so we're pushing further on that and asking ourselves what percentage of restaurants or hotels or other hospitality businesses are going to be healthy when this is over, how quickly can we get back to something that will allow them to be economical and to have decent margins? And we're also looking at these geographies and asking ourselves, can we see a strategy that is -- that will allow us to generate good margins? So we're -- I think we feel well positioned in moving not only the defensive measures that we've talked openly about, but some of the offensive measures here. There are emerging opportunities that are getting intensified by this environment we're in. And we're just as focused on the growth opportunities as we are on the kind of defensive measures.

So let's move on because I think it's an important point. There's certainly an aspect of your strategy that's been critical. And it's been working, I think, in a demonstrated sense with regard to increasing your share among agents. And I was hoping, can you talk about how that's playing out both in the long term and its relevance in the short-term period of -- hopefully short-term period of economic disruption? What are the strengths? Are there any challenges that are bringing forward?

Sure. Well, you know that when you decide as a company to focus your efforts with a subset of the agents and, in particular, on the higher-quality agents, large and small, you have a different set of requirements. You have to be -- you have to have real specialized capabilities. You have to have really good talent. And you have to be able to underwrite well enough to deal with some of the negotiation power that comes from some of those more sophisticated distributors. But in doing so, if you do that well, you really put yourself in kind of a brand category that gives you some real advantages. And I think those advantages are going to be particularly important as this pandemic and the economic fallout are going to further accelerate the concentration, if you will, of how those agents place their business. I think there will be a flight to quality. I think there will be a desire, particularly in the flow businesses of personal lines and small commercial, to put less -- put more with less because of their capabilities and their ability to flex their operating models to be able to be a more wholesome provider to those sectors of the business. I think you know that's what we've worked really hard on is both in personal lines, becoming that great account writer for the Middle America and upper middle market client. For small commercial and the lower end of middle market, being an account writer with some real industry orientation and some expertise. All of these things that we've been working so hard on now, I think, put us in an enviable position as these agents decide to really lean on these strategic partnerships. And I can tell you, in the last 3 or 4 months, we are having even more dialogue about market consolidations, which are driven by not only agents realizing that they have to service those clients more economically, but that all markets aren't created equal. And the coverages we built, the service center that we've built, frankly, the operating models that we have when somebody decides to consolidate markets, are really top rate. And so when somebody goes through that process of figuring out how they're going to skinny down the markets and do so in a way where their clients get benefited by that, that really does skinny down the playing field. And the other part of this, I think, that we've talked openly about that affects even our specialty businesses is that, over the last decade and a half, the business has become quite fragmented. If you look at the playing field, many of the carriers have had very specific strategies. I want these specialty lines. I want -- I'm a workers' comp-oriented market. I'm a cherry picker of the better business in the distribution system. I think we're now getting to the point where everything is going to get more clients in. It's going to be less about what the carrier wants, and it's going to be more about what the customer wants. And when you're a high-quality agent, you start to assemble accounts back together, you start thinking about who can add value. And I believe we're starting to see additional pieces of evidence that we put ourselves in a good position to capitalize on that trend.

You have a very timely example of that coverage portfolio, I think, with today's announcement of the home business product that Hanover is introducing. Can I get you to talk for a couple of minutes about what that actually entails? It seems superficially to be very COVID-related as more people work from home. [ Is that what it ] looks like in the real world?

Yes. Certainly in the personal line space, I mean, I always talk about this with people thinking of personal lines, as you know, as half of the property casualty business. And it's not one big thing, right? I think Chubb showed people a long time ago that if you focus on the high net worth, you could create a nice business, and you could do something quite different than somebody that's going after low limits, auto policies for very price-driven consumers. And again, those are all viable businesses, but they require different capabilities. So 6, 7 years ago, when we recommitted ourselves to being an account player and getting -- and first and foremost, putting and trying to synchronize our home and auto pricing algorithms so that we could be a more stable and more thoughtful market for personal lines customers, that was the chassis with which we could build from. And it's much harder than people know. After a decade and a half of multivariate pricing and predictive modeling, I think the independent agency system and many carriers lost their way on what personal lines is really all about. It's serving the customer. So we're building on that proposition, like you said, with The Platinum Experience, which is our broad-based approach bringing accounts together, rounding out umbrellas and toys where appropriate, and then putting Prestige in place where you say for that consumer that wants some additional coverages, that has some smart home capabilities, that has maybe some additional exposures and is willing to pay a little bit more for that, that we built that Prestige approach on top of The Platinum Experience. And we greatly upgraded our platform to the agents through our point-of-sale as well as some of our self-help tools to the consumer themselves. So all of that is playing, I think, to our advantage. We -- if you look at the results in the Personal Lines business, we have some of the best pricing that's out there. And yes, there's some competition. But I think we're proving today that when you do that well, you don't have to have outsized rate increases. You can have more consistent appropriate rate increases that help you have a stable book of business, create that tenure in the book of business, and it really helps your relationship with agents because they need that stability on the personal lines and small commercial books of business. They can't spend too much time churning the book of business.

Excellent. I think I want to spend -- we're trying to get examples of technology capabilities, investment strategies from all of the companies because we're beyond the point where technology is this abstract concept. And we're at the point now where it is a real differentiator between companies and their appeal. Can you talk about -- I know spend has been hovering at around $200 million. What are we seeing? What are we going to see as the output of these, what I'll call, technological differentiators for Hanover?

Sure. Yes. Our technology and, frankly, capabilities beyond technology have been a big part of our focus in terms of how do we modernize the company, but how do we actually become more efficient and more effective at meeting these new and improved customer preferences and desires. So I would tell you, first and foremost, that $200 million is over several years. And it started with some of the additional legacy transformation issues that all companies had to deal with. But we're well past that, and we have now -- we're through most of the what I would call the platform modernization phase. We replaced our Personal Lines system. We're substantially through our small commercial system replacement. We replaced our billing system, our commission system, our claims system. So when you look at this company, we're not catching up to the past. We're -- we have substantially gotten ourselves to a position where a disproportion of our investment dollars now are focused on digital capabilities, data and analytics capabilities that can enhance our business across the value chain and other areas that, frankly, can help us either be more appealing to the consumer, more operationally efficient or can lower indemnity because of being better at getting insights and predicting losses into the future. So our team has been really huddled around that. And we have brought in some talent to really help that. We have a new digital officer from outside of our industry. We have a new data analytics leader from outside of our industry. We upgraded our security team. We have brought in people inside of claims, both from an analytics perspective as well as an innovation perspective. So it's not just spending money on the systems. It's spending money on the people and the capability that allow you to embrace some of the new opportunities, whether they're coming to us organically or whether they're coming to us through tech firms. You should think of us as having the chassis now that allows us to play in a much more modern and, frankly, agile way. This summer, we've been going through a series of what we call summer sessions where we take the mic from the business unit leaders and we give it to the enterprise leaders that are running each of these capabilities for the firm, and they're telling us what's the status, how do we stack up against the competition, where should we go next. So it's a really exciting time in the firm where we're taking the matrix that we built and really, I think, using it to our advantage to define how we can further improve the company.

Should we look that that manifests itself most prominently in revenue growth? Should we look at it in terms of continued expense ratio improvement or some other facet? I'm not in any way disputing the merits of what you're doing. I'm just hoping you can help us understand where we should actually look to see the benefits for Hanover and its shareholders.