2012 Annual Meeting of Shareholders Building On Our Distinctive Position To Achieve Long Term Success

Transcription

1 2012 Annual Meeting of Shareholders Building On Our Distinctive Position To Achieve Long Term Success May 15, 2012 To be used only in conjunction with the Annual Meeting to be held at 9:00 a.m. ET on May 15,

2 Forward Looking Statements and Non GAAP Financial Measures Forward Looking Statements: Certain statements in this presentation, including responses to questions, contain or may contain forward looking statements as defined in the Private Securities Litigation Reform Act of Use of the words believes, anticipates, expects, projections, outlook, should, plan, confident, guidance, on track to, promise, line of sight, will and similar expressions are intended to identify forward looking statements. In particular, this presentation includes or may include forward looking statements with respect to the ability to continue to improve our financial performance; underlying loss ratio trends; projections or estimates of 2012 net written premium and segment income per share; improved market and economic conditions; building momentum in Personal and Commercial Lines profitability improvement; the pricing environment and the company s ability to increase rates in domestic P&C and in Lloyd s businesses; competitive position, including with respect to agents; net written premium growth and retention; new business growth; future prior year reserve development and reserve adequacy; the impact of seasonality; the impact of various agency and exposure management actions on net written premiums and segment income; GAAP and accident year loss ratios; expense ratio and expense improvements from improving scale; adequacy of capital to rating agency expectations; product margins, including with respect to specialty businesses; expected contribution of Chaucer Holdings plc ( Chaucer ) to consolidated earnings, including expected segment earnings for the full year 2012, and Chaucer s earnings accretion; net investment income and the effect of lower yields on future net investment income; and the expected impact of product geographic and account based mix changes on future growth and profitability. The company cautions investors that neither historical results and trends nor forward looking statements are guarantees of or necessarily indicative of future performance, and actual results could differ materially. Investors are directed to consider the risks and uncertainties in our business that may affect future performance and that are discussed in readily available documents, including the company s earnings press release dated April 30, 2012, the Annual Report, the Form 10 Q for the three month period ended March 31, 2012 and other documents filed by The Hanover with the Securities and Exchange Commission, which are available at under Investors. We assume no obligation to update this presentation, which, unless otherwise noted, speaks as of March 31, These uncertainties include the uncertain U.S. and global economic environment, the possibility of adverse catastrophe experience (including terrorism) and severe weather, the uncertainties in estimating catastrophe and non catastrophe weather related losses, the uncertainties in estimating property and casualty losses, accident year picks, and incurred, but not reported loss and LAE reserves, the ability to increase or maintain certain property and casualty insurancerates, the impact of new product introductions, adverse loss and LAE development for prior years, changes in frequency and loss trends, the ability to improve renewal rates and increase new property and casualty policy counts, adverse selection in underwriting activities, investment impairments, the impact of competition (including rate pressure), adverse and evolving state, federal and, with respect to Chaucer, international, legislation or regulation, adverse regulatory or litigation actions, financial ratings actions, the risks that the company will not achieve the benefits from the Chaucer transaction and those inherent in Chaucer s business. Basis of Presentation: Prior periods were restated for the effect of the company s adoption of the new Deferred Acquisition Cost ( DAC ) methodology. See Book Value and Other Items on page 6 of the press release dated April 30, 2012 for more detail. Non GAAP Measures: The discussion in this presentation of The Hanover s financial performance includes reference to certain financial measures that are not derived from generally accepted accounting principles, or GAAP, such as total segment income, segment income after taxes, combined ratios and loss ratios excluding catastrophes and/or development and accident year loss ratios excluding catastrophes. A reconciliation of non GAAP measures to the closest GAAP measure is included in either the press release or statistical supplement, which are posted on our website. The reconciliation of accident year loss ratio and combined ratio excluding catastrophes to the April 30, 2012 nearest GAAP measure, total loss ratio and combined ratio, is found on pages 6, 8 and 10 of the statistical supplement. Segment income after tax (segment income after tax per diluted share) is a non GAAP measure. It is defined as net income excluding the after tax impact of net realized investment gains (losses), as well as results from discontinued operations for a period divided by the average number of diluted shares of common stock. The definition of other financial measures and terms can be found in the Annual Report on pages

3 A Period of Significant Opportunity For The Hanover 2011 was a challenging weather year for The Hanover and the industry, but we made significant progress on our journey Over the last seven years, we have completely transformed the company, creating a much stronger organization and a much more distinctive i i franchise Our current product portfolio and distinctive position with the best distributors now positionsus to deliverstrong financial performance through the cycle Current market disruption will likely create opportunities that we can capitalize on to create additional value and grow profitably We are financially well positioned to demonstrate improved performance over the next 12 to 24 months, and to move toward top quartile performance 3

4 We Remain Focused On Building A World Class Company Deep Partnerships with Winning Agents and Brokers Our VISION World Class Property and Casualty Company World Class Product and Underwriting Capability Responsive Service Delivery via Cost Effective Operating Model Our Strategic Focus: A more differentiated t d product portfolio in more attractive areas of the industry A more distinctive market position in our businesses with strong underwriting acumen and risk management expertise A value proposition that creates a strong, differentiated position with winning agents and brokers Strong Financial Position World Class People Strong Culture of Execution Deep, talented team The financial i flexibility and strength thto capture opportunities Our Goal: To Deliver 11 13% ROE Through hthe Cycle 4

5 Public Company Performance ( ) 2.5x We Have Become A Better Company, And 2.0x Overall llindustry Average* Challenge Top Quartile rage P/B Five Year Ave 1.5x 1.0x THG THG 0.5x THG ( ) Source: Company Research * Insurance Information Institute 0.0x 0.0% 5.0% 10.0% 13.0% 15.0% 20.0% Note: Hanover data excludes capital losses from sale of life company. Five Year Average ROE ( ) 5

6 We Are Poised To Take The Next Step EXPAND CAPABILITIES AND REACH New geographies US U.S. Specialty portfolio National operating model Industry solutions LEVERAGE CAPABILITIES & IMPROVE RETURNS Enhanced financial performance Penetration of Specialty Penetration of top agents Establish Chaucer Specialty REPAIR & FOCUS IMPROVE CORE CAPABILITIES AND POSITION Demonstrate the value of The Hanover partnership Invest in Core Commercial and Small Commercial offerings Build Personal Lines account offering Focus portfolio; sell life; re underwrite weak P&C business Return core products to profitability Upgrade talent and core systems 6

7 In 2011, Weather Adversely Impacted Results But, We Continued To Out Perform The Industry Combined Ratio Ex Catastrophe Combined Ratio 115.0% 4.6 pt decay 110.0% 105.0% 103.8% 100.1% 100.0% 104.7% 109.1% 105.0% Flat 99.7% 100.0% 95.0% 94.5% 94.7% 101.0% 0% 95.0% 90.0% 90.0% 85.0% 85.0% 80.0% The Hanover Industry 80.0% The Hanover Industry 2011 highest catastrophe losses in history $362 million 10 pts. on combined ratio 7

8 $5.0 ($ in billions) Company Revenue Growth Solid Progress Toward Our Goals $600 $4.4-$4.74 $4.5 $500 $472 $4.0 $3.5 $3.0 $2.7 $2.8 $3.2 $3.9 $400 $300 $200 $100 Earnings Power Pre Tax P&C Segment Income Ex Cat ($ in millions) $369 $388 $439 $126 $2.5 $60.00 $50.00 $ E Q Book Value Per Share Company Shareholder Equity $57.65 $3,000 ($ in millions) $54.74 $55.67 $2,750 $2,579 $49.72 $2,460 $2,484 $2,500 $2,359 $2,250 $ $37.08 $2,000 $1,887 $1,750 $ Q $1, Q

9 And, Increasing Shareholder Dividends Shareholder Dividend/Share $1.40 $1.20 $1.20 $1.00 $1.00 $1.13 $0.80 $0.75 $0.60 $0.40 $0.25 $0.30 $0.40 $0.45 $0.20 $ E 9

10 Outlook Strong: Quality Of Business Significantly Improved The Hanover Positioned for Improved Financial Performance I. A better mix of business Line of business Geography Better pricing and underwriting II. Businesses with more distinctive, competitive position III. The Hanover s value proposition leads to preferred shelf space 10

11 Portfolio Has Been Completely Repositioned More Like Top Quartile Companies Top Quartile Better Mix Than Industry The Hanover Mix Change Less Attractive Lines of Business 82% 56% Less Attractive Lines of Business 88% 60% Most Attractive Lines of Business 18% 44% Most Attractive Lines of Business 12% 40% Overall Industry Top Quartile Competitors* The Hanover 2004 The Hanover Now * Composite of relevant publicly held insurance companies that have achieved top quartile over last cycle (Berkley, Travelers, Chubb). 11

12 Today, We Have A More Balanced And Diversified Book Of Business Business Mix Specialty 3% * Commercial Lines 31% Personal Lines 66% $2.2 Billion Net Written Premium Personal Lines 36% Commercial Lines 26% U.S. Specialty International 15% Specialty 23% $4.1 Billion Net Written Premium * Chaucer annualized 12

13 We Also Have Improved Our Underwriting And Pricing Capabilities Loss and LAE Ratios 90% 85% 80% 75% 70% 65% 60% 55% 50% Loss and 90% And Better In All Significant Lines* LAE Ratios 78.8% 81.1% 80% 73.5% 75.1% 72.1% 66.9% 66.0% 70% 64.2% 60.2% 57.9% 60% 55.6% 56.8% The Hanover (U.S. Domestic) U.S. Industry The Hanover (U.S. Domestic) Industry 50% 44.7% 40% 30% 20% 23.9% 10% 0% HO * Five year average loss and LAE ratios ( ) PPA CA CMP IM WC Surety Source: Industry Data SNL Financial 13

14 And Importantly, We Have Created A Distinctive Position In Most Of Our Businesses 2011 Business Profile Personal Lines 36% U.S. Commercial Lines 26% Strong offering for attractive account segment Consistent delivery of pricing while holding retention Growing attractive business segment growth markets Middle Market 13% Personal Lines 36% Small Commercial 13% Small Commercial Building leading position for Main Street accounts Unique operating model positioned for consolidation Middle Market Distinctive industry solutions for lower end middle market Franchise value driving significant share shift International Specialty 23% Portfolio of Specialty business with distinctive industry positions Strong performance track record 80% of business achieving pricing increases * Net written premium with Chaucer annualized International Specialty 23% $4.1 Billion* U.S. Specialty Lines 15% U.S. Specialty 15% Strong portfolio of attractive Specialty lines Operating model geared to enhance retail agent economics 14

15 Chaucer Adds A Very Distinctive Part To Our Platform Strong underwriting franchise in attractive areas of Specialty Lines that we can grow (attractive track record) Significant expertise can diversify our business mix and earnings scale Access to Lloyd s and a very capital efficient operating model offers additional future opportunity 15

16 Lloyd s Has Become Strategically Important To Major U.S. Insurers % Names % UK insurance industry 60 % % U.S. insurance industry 30 10% Bermudan insurance industry % Worldwide insurance industry 0 Capital of 13.8bn provided to underwrite in 2011 Source: Lloyd s Annual Report

17 Chaucer Is The Right Fit For Our Focus Specialty Business U.K. Motor Reinsurance 60% 65% 5% 23% 35% 12% Areas of Future Opportunity Aviation Roughly 13 Energy areas of Marine specific Specialty Liability opportunity Lloyd s Mix Strong cross cycle ROE Smaller reinsurance position Chaucer Mix Specialtyfocused; in attractive segments Focus areas of expertise more leveragable Strong, stable team 17

18 Our Vision Leads To Preferred Shelf Space Our VISION Deep Partnerships with Winning Agents and Brokers World Class Property and Casualty Company World Class Product and Underwriting Capability Strong Financial Position World Class People Strong Culture of Execution Responsive Service Delivery via Cost Effective Operating Model The Best Partner Because: I. Intense Focus on Product Innovation (Industry Solutions) II. True Commitment to Partnership (Franchise Value) III.Unparalleled Local Responsiveness and Expertise Strong Value Proposition To Agent Partners 18

19 Driving Momentum With The Best Retail Agents Agent Segments Penetration 100% = 2.4B 100% = 4.1B The Best Partner Because: I. Intense Focus on Product Innovation (Industry Solutions) II. True Commitment to Partnership (Franchise Value) III.Unparalleled Local Responsiveness and Expertise Most Vibrant Segments Small Agents Mid Sized Local Agents Regional Agencies Super Regional Agencies Top 10 Small Agents Mid Sized Local Agents Regional Agencies Super Regional Agencies Top Premium* Value Proposition * Net written premium, 2011 with Chaucer annualized Share Shift With Best Agents 19

20 Best Agents In the Country Responding 50% ($ in millions) Top 100 U.S. Agents % 50% Growth with IIABA/Reagan Best Practice Agents % 40% 30% 30% CAGR 20% 10% 0% 10% 2% All Carriers** THG CAGR 20% 10% 0% 2% All Carriers** 14% THG Driving Share Increase With Best Agents 20

21 Industry Dynamics 21

22 Carriers Stress Will Create Opportunities Soft market results / pressure on balance sheets Insurance Companies Additional capital stresses Solvency II Risk Models Risk Management Difficult economy and Workers Compensation difficulties Less capital available for troubled companies Lower investment returns Tougher weather; greater cost for geographic concentration and lack of scale Significant disruption from re underwriting and repricing 22

23 Changing Market Beginning To Drive Pricing and Re Underwriting 120% 110% 100% 90% 80% 115.8% Decaying Industry Performance 107.5% 100.1% 100.8% 98.4% 95.7% 92.6% 105.1% 101.1% 102.2% 109.1% E Changing Pricing Environment % Price Increases 2011 Q4 Over 2010 Q4 Percentage Change (%) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2.0% 2.0% 2.1% 2.2% 2.3% EPL Comm ml Auto D&O General Liability mbrella U 2.7% Cons struction 30% 3.0% Bus. Inter rruption 5.7% mercial operty Com Pro 7.5% Workers' Comp Source: Dowling Model Book, March Source: Council of Insurance Agents and Brokers; Insurance Information Institute. 23

24 Well Positioned For Financial Improvement And Profitable Growth We are very well positioned to capitalize on this disruption Broad product portfolio with strong underwriting capabilities Very attractive business mix and significant pricing leverage Strong position with Top 1,000 agents with growing momentum Strong financial flexibility Hanover Renewal Pricing: Commercial Improving Retention: Commercial Improving 7% 6% 5% 4% 3% 3% 4% 6% 85.0% 82.5% 80.0% 77.5% 83% 85% 2% 2% 75.0% 1% 72.5% 0% Q2 '11 Q3 '11 Q4 '11 Q1 ' % Q1 '11 Q1 '12 24

25 Significant Opportunity To Improve Performance Over Next Months Value Drivers Increase in Performance Gro owth Grow profitable business through h winning i agents and brokers (current new business mix) Leverage line of business and geographic investments Improve margin through pricing and targeted re underwriting of marginal business Improving Mix 25

26 Summary Challenging time in our industry But, disruption causes great opportunity for those that are financially strong and bring distinctive value to the market While 2010 and 2011 brought challenges, we demonstratedourour financial strength and continued to build our distinctive position Chaucer transaction further enhances our scale, geographic g and product diversity, propelling us toward our long term goals Our objective over the next 12 to 18 months is to create an even more valuable franchise by dli delivering i our enhanced capabilities to independent agents, improving our financial strength and position, and creating value for our shareholders 26

27 Thank You 27