Hanover Poised To Profit From Industry Distress | Insurer plans on growing specialty biz
FILE PHOTO
Fred Eppinger, chairman and CEO of The Hanover Insurance Group.
It’s not that Frederick Eppinger isn’t sympathetic to insurance companies like The Hartford Financial Services Group, which are facing strained balance sheets in the current financial market chaos.
He freely admits that The Hanover Insurance Group Inc., where he is president and CEO, hasn’t always been immune from that kind of stress: “We did a lot of things that people are doing today five years ago,” he said.
But, at the same time, Eppinger says his company, based in Worcester, is poised to take advantage of the situation by buying pieces of failing companies or just hiring away their employees.
On April 24, after rumors leaked out that The Hartford was trying to sell its property and casualty insurance business, Eppinger, who once worked for the Connecticut-based insurer, said a “couple dozen” of its employees called him to see if there might be a place for them in Worcester.
Bad Old Days
To understand where The Hanover stands now, you need to go back to before it was The Hanover. In the first years of this decade, Allmerica Financial Corp.’s life insurance division was dragging the company down, bringing on massive layoffs and a big stock market drop.
Then, just like today, the life insurance business, where policies often last for decades, was prone to riskier investment behavior than the property and casualty business where they’re often renewed every year. And it turned out the people in charge of life at Allmerica made some bad calls.
Eppinger, who grew up in Spencer and had relatives who worked for Allmerica, was following the company’s decline from his perch at The Hartford, where he was executive vice president. When Allmerica hired him to lead an attempt at recovery in 2003, he was aware that things there were rough, but until he showed up in Worcester he didn’t realize just how bad employee morale was and how disappointed the local community was in the company.
Then, he and his wife went to a party in town, and his wife mentioned what her husband did.
“The person went off at her for 15 minutes, talking about how bad the company was,” Eppinger remembers.
Allmerica began dismantling the life insurance business, and Eppinger set out to repair the damage. It helped, he said, that he was a local kid who could assure employers that he didn’t want to embarrass himself by causing more damage to an important Worcester institution. It also helped that Allmerica managed to make a little profit the first year he was there.
These days, most in the industry seem to believe that The Hanover has regained its footing, with some good cost controls, new management and the elimination of the volatile life business.
“I think they’ve gone from, I would say, being a bottom quartile company to a top quartile company,” said Clifford Gallant, an analyst who follows The Hanover for Keefe, Bruyette & Woods Inc.
Gallant said part of the company’s appeal these days is specifically that it’s radically changed its old approach and now makes very conservative investments. “Two years ago that actually didn’t look like a great idea because they weren’t getting the same investment returns that others were getting,” he said. “But in the last 12 months that’s turned out to be a good strategy.”
When it comes to stock prices, the company has done better than its industry in a rough climate. Over the past year, its stock price dropped about 35 percent, while the S&P Insurance Index fell 59 percent.
The company’s revenues rose slightly between 2007 and 2008, from $2.67 billion to $2.68 billion, and while its net income fell from $253 million to $20 million, that was mainly because of unusually high catastrophe and weather-related losses.
Buyer’s Market
These days, The Hanover can watch other companies struggle with an eye to its own growth. Since late 2007, it has acquired three specialty insurance businesses, including one that offers professional liability insurance for lawyers and another that covers chemical companies.
Eppinger said he anticipates ramping up such acquisitions in the second half of the year and the start of 2010, as stress on insurers increases and companies look to selling parts of themselves to keep enough cash on hand. Already, he said, there are plenty of companies looking for buyers.
“I bet you I get two calls a week of companies for sale,” he said, adding that he looked at 50 or 60 offers before ending up with the three recent acquisitions.
But Eppinger said he’s not just fielding proposals from small guys that are looking to mid-size players like The Hanover for a way out. He’s also got his eye on the big players that are coming apart at the seams, looking for little pieces of their businesses that might fit in with The Hanover’s plans for growth. He’s even been talking with the most famous failing insurer, American International Group Inc., about a tiny business that he could take off its hands.
Eppinger and outside observers agree that The Hanover isn’t looking for any giant deals. The three that it has made were each around $25 million.
“They’re not buying public companies, they’re not borrowing a lot of money or issuing a lot of stock to finance these purchases,” said Gallant.
Eppinger said the acquisitions are part of a larger strategy to grow the company’s specialty businesses. Since he joined The Hanover, that portion of the company has grown from $65 million to a projected $500 million, according to spokesman Michael Buckley. That’s still overshadowed by a $1 billion commercial lines business and $1.5 billion in personal lines, but it’s the specialty products that Eppinger is most interested in growing.
The CEO said the company has built “dozens and dozens” of specialty lines over the past few years, including products for moving and storage companies, assisted living facilities, schools and other specific sorts of businesses. It’s now looking at developing a product aimed specifically at hobby farms and at buying a business serving fuel oil dealers, among other things.
These sorts of product lines aren’t something that can be sold over the Internet. Instead, they can fill gaps for insurance agents that want to comprehensively cover all sorts of small and mid-sized businesses.
Several agents that work with Hanover said they’ve been impressed with the company’s willingness to try new things at a time when many carriers are pulling back.
“They are developing new products and new niches and they’ve really been aggressive in entering new markets,” said Mark Levine, executive vice president of commercial lines at Eastern Insurance Group LLC in Natick.
Ironically, Eppinger said, that kind of limited aggressiveness is possible only because The Hanover has learned from its past and adopted a general approach that is conservative at its heart.
“We’re about as close to a risk-free insurance company as exists in American right now,” he said.
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