AGM 2019

May 14, 2019

Slides

Good morning, ladies and gentlemen. Welcome to the annual meeting of the shareholders of The Hanover Insurance Group. My name is Kevin Condron. I am the chairman of the company's board of directors. With me is Jack Roche, President and Chief Executive Officer of the company. As chairman, I will serve as the presiding officer and lead the formal part of our meeting this morning. After we have concluded the formal part of the meeting, Jack will provide a brief presentation, and we will have an opportunity for questions and comments. We are transmitting the audio portion of our meeting and the slides through a webcast posted on our website for the benefit of interested parties. At this time, I would like to call the meeting to order. In addition to Jack and me, the other directors in attendance are Kevin Bradicich, Jane Carlin, Cynthia Egan, Dan Henry, Wendell Knox, Kathy Lane, Michael Price, Joan Ramrath, and T. Taggart. I would ask the board members to stand together to be recognized as a group. The company's tabulation agent, Mediant, has delivered an affidavit of mailing, establishing that notice of this meeting was duly given. A copy of the notice of the meeting and the affidavit of mailing will be filed with the minutes of this meeting. All shareholders of record at the close of business on March 18th, 2019 are entitled to vote at this meeting. A representative from Mediant is here today and has been appointed Inspector of Elections. The inspector has informed me that the company has received valid proxies representing a majority of the outstanding shares. Accordingly, a quorum is present. The board has proposed three items for consideration, discussion, and voting, all of which are set forth in the company's proxy statement. They are as follows. First, election of directors. I have been nominated to serve a two-year term and Mr. Price, Joan Ramrath, and Roche have been nominated to serve three-year terms. Consideration of an advisory vote on executive compensation, the so-called say-on-pay vote. Third, the ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the company for 2019. At this point, I would like to ask for a motion with respect to each of the proposals. Moved. Representatives of PricewaterhouseCoopers are in attendance at today's meeting and will be available for questions during the discussion period. I'd now like to open the floor for discussion by shareholders of those particular proposals now before the meeting. Following the discussion, we will distribute ballots to any shareholder who wishes to vote in person. If you are a shareholder of record of March 18th, 2019, and have a question regarding just these three issues, please raise your hand and be recognized. Please state your name, indicate whether you are a shareholder or hold a valid proxy before asking your question. If you have questions or comments about matters other than these three issues or wish to propose other matters, time will be allotted in just a few minutes. Are there any shareholders who wish to speak on these three issues? If there are no further discussion regarding these proposals, which were set forth in the company's proxy statement, I declare that the polls are now open for receipt of votes by ballot. If you are either a shareholder of record or hold a valid proxy and you want to change your vote or vote for the first time, please raise your hand and one of the ushers will provide you with a ballot. Anyone wishing to vote? I declare the polls closed for voting. I've been informed by the inspector that the nominees for election to the board of directors have been duly elected. The advisory proposal on say-on-pay has been approved, as has the proposal regarding the independent auditors, in each case, by more than 97% of the shares voting. Before we close the formal part of the meeting and move to management's presentation and session for questions, is there any other business to properly come before the meeting? Again, there will be time for questions in just a few minutes. Since there's no further business on the agenda, the business meeting is adjourned. We will now turn to the management presentation, followed by questions and comments. In October of 2017, your board faced the most difficult task that any board faces in the selection of a new CEO. We could have had a search committee and done a national search, but the board was very comfortable that we had internally a candidate who was ready to lead The Hanover to new heights. I'm very proud to say that the board had made a great decision. Jack Roche has, over his period as the CEO, done a marvelous job. It's my distinct privilege to introduce our CEO and President, Jack Roche. Jack. Thank you very much, Kevin. Good morning, everyone, and thanks for joining us. I am very pleased to have the opportunity this morning to update you on the state of our company, our competitive position, our strategic focus, and our prospects going forward. To also put our recent performance into perspective and to share some insight into our efforts to build a premier property and casualty company, one that is recognized as a leader in our business, as an employer of choice, and a responsible corporate citizen. For those of you who earn a living in the property casualty business, or for those of you who invest in our company or our industry, these are very interesting, dynamic, and frankly, exciting times. Our industry is undergoing fundamental and pervasive change. The world we ensure is becoming increasingly complex, creating new risks and exposures, and even new markets, requiring much more advanced and specialized underwriting skills, broader risk management capabilities, and more efficient capital allocation and management strategies. The game is clearly changing. Consider the implications of increased litigation and complex regulation, the globalization of our economy, demographic shifts and changes in customer behaviors and expectations, advances in technology and consumer connectivity, climate change, cybercrime, driverless cars, and smart homes. Think about the applications for predictive modeling and advanced analytics, artificial intelligence, telematics and drones, cloud and web-based solutions, and mobile applications. With our industry undergoing unprecedented change, now more than ever, success is determined by a company's ability to anticipate and react to market forces quickly, efficiently, and effectively, and to turn challenges into opportunities. Over the past decade, we have successfully repositioned our company, building the competencies and capabilities we need and taking our place among the leaders in our industry. As we advance our efforts to take our company to the next level, we are confident we have what it takes to separate our company from the pack, to manage change to our advantage, and to compete with the best in our business and win. Our company is in excellent financial condition, has a proven and distinctive business strategy and a clear focus, broad and deep partnerships with the most respected agents in our industry, and the talent and drive needed to deliver significant value for our shareholders and our key stakeholders. We made important strides forward during 2018, continuing the positive momentum we have established and setting the stage for sustained success going forward. Our financial performance once again reflected the inherent strength of our company and effectiveness of our strategy. During the year, we delivered after-tax operating income of $292 million, up from $193 million in 2017, an adjusted operating return on equity of 12.6%, placing us in the top quartile of our industry. We achieved record revenue and operating income in our domestic business and a strong underwriting performance with a 91% ex-CAT combined ratio. At the same time, we made important strategic progress across the organization. We expanded our unique distribution platform, selectively adding new partners. We enhanced our technological and analytical capabilities and capitalized on emerging market opportunities. We continued to invest in our successful personal lines account strategy, our flagship small commercial business, our targeted middle market industries, and our growing specialty lines business. We brought a determined new focus to our efforts to drive innovation across our businesses, helping our partners meet evolving customer needs and preferences. We sold our Lloyd's International Specialty business, Chaucer Holdings Limited, to focus exclusively on the expansion of our proven and distinctive domestic business. Ultimately, the Chaucer sale generated total proceeds of approximately $935 million, up sharply from the $480 million we paid for the business in 2011. Chaucer generated strong earnings during the seven years we owned the business, proving to be a very profitable investment with an internal rate of return of nearly 20%. The transaction also generated approximately $840 million of deployable capital. Concurrent with the sale, our board approved the return of approximately $450 million to shareholders in the form of an accelerated stock plan and a special dividend. The remaining capital will be deployed between organic and inorganic business investments and other capital return options, all in the best interest of our shareholders. We sustained this strong positive momentum across our company during the first quarter of this year. Our business performed well in the quarter, delivering overall results consistent with our expectations. We posted an operating earnings per share of $1.96, a combined ratio of 95.8%, an operating return on equity of 11.6%, and an adjusted operating return on equity of 13.1%. Growth in the quarter at 2.7% was intentionally tempered by pricing and mixed management strategies intended to improve overall profitability. Excluding the impact of these underwriting actions, we generated growth of 4.3% in the quarter. With those actions now mostly taken, we expect growth to gradually increase throughout the year. With a solid financial foundation, strong competitive position, clear strategic focus, simplified operating structure, and our focus on the future, our company is truly on the move. Our goal is to be the premier property and casualty company in the independent agency channel. A company that delivers value for its partners, customers, shareholders, employees, as well as the communities where our employees live and work. With that lofty but very attainable goal in mind, we continue to advance the three key tenets of our strategy while building a culture where the best people in the industry want to work. First, we are leveraging the strength of our unique agency-centered distribution strategy. We are building our company around the needs of our partners, providing them with high-quality products and services, and limiting appointments and the availability of our products and services to a select group of approximately 2,100 agents. As a result, we are providing our partners with distinctive offerings in their markets, helping them set their agencies apart from the competition. We also are expanding our risk appetite and our presence in geographic markets of opportunity, extending the coverage our partners need, along with unequaled market insight and proprietary analytics to help them grow their businesses. Our objective is simple, to be a carrier agents highly value, and one they increasingly depend on to help them grow profitably and achieve their most important goals. Second, we are providing our partners with market-leading specialized capabilities, with differentiated product offerings in each of our business segments. Our broad and specialized portfolio makes our company even more relevant to our partners, helping them grow profitably across the personal, commercial, and specialty markets. In personal lines, we have established a leading position as an account writer, enabling our partners to differentiate their agencies from direct and captive writers. In commercial lines, we are focusing on small to midsize accounts, developing distinct specialties in less commoditized market sectors such as healthcare, life sciences, and technology. In specialty lines, we continue to build out our portfolio, significantly expanding our market presence and exceeding target returns, partnering with the top retail agents and brokers in the domestic market. Third, we are driving innovation across our businesses, identifying emerging customer segments, leveraging data and analytics, creating business solutions that help our partners acquire and retain more digitally inclined customers. We have formed partnerships with insurtech firms to enhance accessibility and service, launched a new customer acquisition platform, deployed a new agency quoting platform, leverage analytics and telematics to give our partners a competitive edge in this new digital age. We are committed to continuing to invest in innovation and digital capabilities across the independent agent value chain, from the customer acquisition phase all the way through to the claims and service. Our efforts in each of our key strategic areas of focus are paying off. Our largest franchise agents continue to increase their business with us, and as major consolidators in our business, now generate more than half of our total premiums. Last but not least, I would like to talk about our culture. As we continue to build our business, strengthening our competitive position and enhancing our brand in the marketplace, we also are focused on being an employer of choice. A company where talented and dedicated professionals want to work, and one that makes its employees and its constituents proud. We recognize that our team is our most valued asset. We have developed a unique, collaborative culture that fosters innovation, that encourages inclusion and diversity, promotes personal growth and development. At the same time, we are committed to deliver on our promise to be socially responsible to govern our actions with integrity. We continue to deliver on our longstanding commitment to healthy and positive community building, supporting a wide range of causes in our home communities, protecting the environment. We also encourage employee volunteerism throughout the enterprise. We adhere to our strict code of professional conduct and ethical business practices, holding employees throughout the organization accountable. Our compelling culture has been recognized by Forbes magazine as one of the America's best places to work, by the Human Rights Campaign Foundation as a best place to work for LGBTQ equality. As we look ahead, we fully expect the property and casualty business will continue to be defined by change, the pace of the change will accelerate in our economy and in society overall, in consumer behaviors and expectations, in the competitive makeup of our industry. We recognize that change will create uncertainty and new risks across our industry. More importantly, however, we see opportunities in a dynamic marketplace. Our company was built to thrive in a changing environment. As we take our business forward, we will leverage our experience and market insight, the unmatched quality of our agency network, our deep, mutually beneficial relationship with our partners, our agility and our ability as a midsize company to react and respond quickly to emerging market trends, our financial flexibility and our strong balance sheet, and our well-diversified book of business. Our company is on the move, and we are very excited about our prospects. We are well-positioned to capitalize on the opportunities ahead, delivering sustainable revenue and earnings growth, and achieving target returns. We have every confidence we will continue what we have started, to build a company and a brand that is recognized as one of the very best in our business over time, delivering significant value for you, our shareholders, and all of our stakeholders. Thank you very much. Thank you very much, Jack. We'd open the floor for questions. Thank you. Sure. Is it on? All right. Thank you, Mr. Chairman. My name is David Menasian. I'm representative of Carpenter Union Pension Funds that hold shares in Hanover Insurance. The question that I want to raise today is gaining a lot of attention in leading academic circles. It's being reported a lot in the business press, and that is around the growing concentration of mutual funds ownership, particularly passive index funds. For instance, BlackRock and Vanguard have at least a level or above a 10% ownership of the outstanding shares, and that's cumulatively about a 20% ownership position. I guess I'm curious on your view or the board's view on this growing concentration of ownership by mutual funds and its impact that it may have on corporate governance. Specifically, is it gearing companies in general to move towards a short-term thinking, or does it really help promote a long-term strategic perspective? Lastly, are there any conflicts of interest that average shareholders should know, given that these same investment companies are administering and also investing the corporate retirement funds in the companies where they hold a large ownership position? Thank you, David. That's an outstanding question. As always, you come with very good questions. We appreciate that. You raise a very important matter. U.S. corporations and our financial systems are threatened by the possibility of large shareholders acting inappropriately. Those large shareholders have the potential to disrupt long-term thinking. I'm very happy to report to you that our two largest shareholders, both Vanguard and BlackRock, have been very supportive of our long-term growth plans. They've publicly gone out of their way to encourage our long-term thinking, both for our corporation and for others. Last year, you may recall that Larry Fink, the CEO of BlackRock, wrote a very interesting letter to CEOs about long-term thinking and encouraged them to think of a longer term and that was the most likely way to success. Long-term strategy was strongly recommended by Larry. Likewise, Vanguard, just a few weeks ago, announced that it would grant proxy voting responsibilities to their portfolio managers, provided that they take into consideration each individual company's long-term growth plans. When members of the management and I spoke to Vanguard earlier this year as part of our ESG outreach, Vanguard was most interested in discussing the long-term strategic direction of our company and the board, and particularly with respect to the board's oversight of risk management. Again, part of that long-term view. Now, look, if activist investors were to enter the picture, it would be our responsibility to underscore our long-term plan to create value. If we did it persuasively, we would expect those funds to support us. No one is advocating a perpetual right to exist, but a right to make the case that management and the board have a viable plan to create value, sustainable earnings growth, consistent with our responsibilities to all of our stakeholders. To sum up our view, I'd say that we have not perceived this to be a problem. We recognize that the onus is on us to prove our continued value as much as it is on investors to stay with us over the long term. The last part of your question, we see no conflicts by companies like Fidelity, which administer our 401 plan and pension plans and have funds which invest in our stock. We have not seen any cross-selling or like activities. I can't imagine that any regulated fund manager would breach his fiduciary duties by connecting these activities. I hope that's a fair answer to your question. That is a very fair answer, I appreciate the back and forth, and sharing that back and forth that you have with these investment companies. That does go a long way. If I may just make a comment both as a long-term shareholder, we appreciate Hanover's long-term perspective, and I think that's very clear on the business report and what we've seen. Then also as a community leader, I sit on the Worcester Redevelopment Authority, which I know, Mr. Chairman, you're well aware of. I just want to comment about Hanover's also, I think, long-term sort of engagement in the Worcester community and how much you've focused on helping the downtown thrive. I think you guys were really in there with a vision very early on for the Worcester Renaissance, I think a lot of the great things that we're seeing here wouldn't have been possible without your participation. Thank you for acknowledging that, thank you for your support. Anyone else? There being none, thank you very much. Yes? Thank you. Mr. Chairman, my name is Ted Khanna. I'm a shareholder. I chose not to submit a shareholder proposal today, but I do appreciate the opportunity to speak to you as both a citizen and a shareholder, a Worcester citizen and a shareholder. I'm a community activist with a longtime interest in environmental development and preservation issues here at the city. I'm here today simply to request that we work together to forge a more collaborative relationship between Hanover and the many citizens who care about downtown Worcester. I believe that Hanover's City Square development can benefit from the input and ideas of the community, I also believe the community would benefit and learn from greater participation in the process of downtown redevelopment as well. I hope for a productive dialogue with Hanover in the coming year, and I hope it will yield positive results both for Hanover and for downtown Worcester. Thank you. Thank you for coming and sharing that today. Like you suggested, we, like you, strongly believe in the community, have been very active in trying to make a difference in our community, not just in Worcester, but in Howell, Michigan, and the other communities where our people live and work. We've been engaged in the community, and we'll continue to do that. I'm well aware of that. Just to get here today, I drove past City Square and what remains of Worcester Center, Plumley Village. There's a long history of both Hanover and its precursors participating and doing great things for Worcester, and I'm well aware of that and appreciate the importance of it. This is just for fun, just to let you know that I also know my history. There's something else that came out of this building when I was a kid that's become a cultural icon. It's one of my favorites. Thank you. Thank you for coming and sharing that. Thank you. Thank you. Thank you for the history lesson. Any other comments? The meeting is adjourned then. Thank you very much.