The Hanover Insurance Group, Inc. NYSE: THG AIFA Insurance Conference Mark McGivney Senior Vice President, Finance March 5, 2007
Forward-Looking Statements and Non-GAAP Financial Measures Certain statements in this presentation may be considered to be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Use of the words "believes", "anticipates", "expects", projections, outlook, should, plan and similar expressions is intended to identify forward-looking statements. In particular, this presentation may include forward looking statements with respect to earnings growth, return on equity, anticipated price changes, anticipated premium growth, future dividends, expense management, improved underwriting margins, and operations models. Any statements regarding 2006 operations expectations are forward looking. The company cautions investors that any such forward-looking statements are not guarantees 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 annual report and other documents filed by The Hanover with the Securities and Exchange Commission and which are also available at www.hanover.com under "Investors". These uncertainties include the possibility of adverse catastrophe experience (including terrorism) and severe weather, the uncertainties in estimating property and casualty losses (particularly with respect to products with longer tails and with respect to losses incurred as the result of Hurricanes Katrina and Rita), adverse loss development, the ability to increase or maintain certain property and casualty insurance rates, the ability to improve renewal rates and increase property and casualty new policy counts, the impact of new product introductions (such as the multi-variate private passenger auto product), change in the current favorable frequency and loss trends generally being experienced industry-wide, investment impairments, heightened competition (including rate pressure), adverse and evolving state and federal legislation or regulation or regulatory actions, financial ratings actions, various adverse selections in underwriting activities, and various other factors. Also, the discussion in this presentation includes financial measures that are not derived from generally accepted accounting principles, or GAAP. The Hanover uses non-gaap financial measures as important measures of the company s operating performance, including total segment income, property and casualty segment income, measures of segment income and loss ratios excluding catastrophe losses and measures of net premium written, net premiums earned and loss ratios excluding reinsurance reinstatement premiums. Information regarding these non-gaap financial measures, including reconciliations to the most directly comparable GAAP financial metrics, is available in the investors section of The Hanover website at www.hanover.com. 3
The Hanover (NYSE: THG) $2.4B $2.6B 3,000 31 Market Capitalization Total Revenues Independent Agent Partnerships States with Local Agencies Markets Under the Hanover and Citizens Name 150 Years in the Business Delivering on Our Promises A regional property and casualty agency company committed to the Independent agency channel. 4
Our Full Complement Product Suite Total Net Written Premium of $2.3B in 2006 Broad Leverageable Commercial Lines Products NWP: $879M % of total Commercial Multiple Peril 40% Total Account Product Portfolio in Personal Lines NWP: $1428M Personal Auto % of total 69% Commercial Auto 22% Homeowners 28% Worker s Compensation 13% Ancillary 3% Specialty 17% Other 8% 5
Geographically Focused / Agency Driven Northeast Region Central Region Southeast Region Midwest Region Regional Distribution in place with expanded footprint Top four states: Michigan, Massachusetts, New York and New Jersey Increasing penetration in new geographies Unified operating model with shared infrastructure Scale to invest in product, service and partnerships Existing field presence Leadership added in the last 3 years
Our Vision and Strategy Remain Clear World Class Regional Property and Casualty Company Deep Partnerships with Winning Agents World Class Product and Underwriting Capability Responsive Service Delivery via Cost-Effective Operating Model Strong Financial Position World Class People Strong Culture of Execution
And Focuses Us on Improved Performance To Become a World Class Regional Property and Casualty Company What Does It Mean? Consistent top-quartile financial performance Consistent top-quartile products and services Top place to work for outstanding professionals
We have demonstrated our success over the last three years 9
Strong Earnings Improvement Income from continuing operations, net of tax ($ In Millions) $200 $192 $150 $145 $100 $50 $56 $77 * $0 2003 2004 2005 2006 Net Income $87M $125M $(325) 1 $170 * Impacted by Hurricane Katrina Losses 1 Impacted by sale of Life Company and Hurricane Katrina Losses 10
Strong Earnings Improvement P&C Pre tax Contribution (ex cats)* Pre-tax Segment Income ex-cats ($ In Millions) $400 $300 $200 $100 $177 $297 $418 $435 03 06 CAGR 34% $0 2003 2004 2005 2006 * Non-GAAP measure, reconciliation to the closest GAAP measure can be found in our Statistical Supplement posted on our website at www.hanover.com 11
Improved P&C ROE & Market Capitalization P&C Levered ROE* 16.00% 12.00% 10.8% 13.5% Exceeded our target of 12% in 2006 8.00% 4.00% 7.1% 5.0% 0.00% 2003 2004 2005 2006 Market Capitalization ($ In Millions) $3,000 $2,500 $2,000 $1,500 $1,631 $1,747 $2,243 $2,494 $1,000 $500 * Non-GAAP measure $0 2003 2004 2005 2006 12
Continued to Strengthen Our Balance Sheet Property and Casualty Statutory Capital ($ In Millions) $462M Increase since 2003 P&C Statutory Surplus $1,400 $1,300 $1,200 $1,100 $1,000 $900 $1,464 $1,205 $1,099 $1,002 2003 2004 2005 2006 13
Gaining Market Share while Maintaining Margins Turned around Personal Lines Growth 4% 2% 0-2% -4% -6% -8% 3.4% (3.3%) (7.2%) 2004 2005* 2006 Commercial Lines Growth Exceeded Industry Averages ($ In Millions) 10% 10.3% 8% 6% 4% 2% 4.5% 6.5% $0 2004 2005* *Excludes reinsurance reinstatement premium related to Hurricane Katrina, reconciliation to reported growth included in the Statistical Supplement posted on our website at www.hanover.com 2006 14
But Our Journey Is Far From Complete 15
Our Position Continues to Improve Building Our Foundation Fix balance sheet Re-underwrite business Fix coastal exposure and reinsurance gaps Invest in future business - Products -Platform -People 2003 2004 Creating a Distinctive Position Establish investment grade balance sheet Develop Partner Agents Create geographic spread Develop ability to write total accounts Create significant specialty business 2005 2006 Sustain Superior Performance Deliver top quartile performance Capture significant market opportunities 2007 16
Personal Lines Value Proposition The Total Account Writer Auto * Home * Boat * Umbrella Liability * Valuable Items Whole account focus aligned with agency Distinctive product sophistication backed by solid analytical team Easy to do business with technology, service, accuracy, problem resolution Local sales power devoted exclusively to Personal Lines 17
Value Proposition in Personal Lines Gives us Tremendous Market Opportunity.. Partnerships 2007 Focus Deepening our Relationship Significant penetration of 1000 agents across our footprint Building true partnerships with 200 of these agents 300 new agent appointments Product New Product Offerings Introduction of Connections Home Expansion of Toys capabilities through joint venture Service Constant Improvements Improving Responsiveness IVANS Transformation Station, TransAct Now 18
Commercial Lines Value Proposition The Best Partner for Growing Mid-Sized Agents Small Commercial * First Tier Middle Market * Marine * Bond * Umbrella * Niches A total solution operating model for accounts up to $200K Top-tier, local underwriting talent supporting our sweet spot ($25-100K) Broad risk appetite and specialty capabilities true problem solvers Unsurpassed responsiveness and customer service 19
Commercial Lines Value Proposition Resonates with Mid-Sized Agents Partnerships 2007 Focus Continue to Build Winning Partnerships Convert another 150+ Agents to Patner Agents Increase penetration with existing agents with broadened product offering Open New Markets: Minnesota, Wisconsin, Missouri Product Continue to Refine Product Set BonDirect, Small Account Platform, Builders Risk, Miscellaneous Professional Liability Offensive Use of Predictive Modeling Service Refine Operating Model to Continue to Improve Responsiveness Gain Scale Efficiencies -- Throughput 20
Improving Our Position in the Long Term Capabilities That Differentiate Us from Regional Competitors Agency Management A distinctive approach to identify and penetrate with growing agents Personal Lines Business A unique total account approach delivering value-added products and services to winning agents Commercial Lines Business Broad leverageable product lines that match the needs and lock-in mid-sized agents business Technology Innovative, efficient and scaleable automation designed for the high-touch/high-cost market segment Claims A scaleable claims competency with a high-touch approach to managing loss costs Financial strength - Leverage size and scale to create advantage against Regional companies Talent A talent pool unlike any Regional that allows us to pull this off 21
And By The Way These skills added to our responsiveness and local talent make us better than many of the nationals for winning agents
The Hanover Value Proposition National Companies THE BEST OF BOTH Regional Companies WEAKNESSES STRENGTHS STRENGTHS WEAKNESSES Little local market knowledge Limited touch Prominent market presence Attention to large agents and brokers Local response Strong agency relationships Narrow geographic scope Difficult to export success Limited talent Decision makers distant from agents Little flexibility Low cost/efficient servicing Superior technology Scale to invest Local service - Sales people with underwriting authority Higher cost operation Limited capital Difficult to do business Dictate terms Limited underwriting flexibility Broad product offering Focus on small to midcommercial market Broader individual account underwriting Basic product Super Regional Carrier The Hanover 23