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The Hartford's 'crown jewel' to shine brighter after renewal rights deal

The Hartford Financial Services Group Inc.'s recently announced agreement to acquire renewal rights to the small-commercial independent agent business of Foremost Insurance Co. Grand Rapids Michigan accomplishes certain strategic objectives for both the buyer and seller.

For The Hartford, the relationships with more than 5,000 agents and brokers associated with the book will further its efforts to boost its small commercial distribution capabilities. For the parents of the seller, Farmers Insurance Exchange, Truck Insurance Exchange and Fire Insurance Exchange, the deal facilitates a desire to focus on growth opportunities through their core captive agent structure.

"Small commercial continues to be a crown jewel of our enterprise," The Hartford Chairman and CEO Christopher Swift said at an investor conference, just days before the announcement of the renewal rights deal.

The Hartford's steadily expanding small commercial segment generated $3.71 billion in written premiums in 2017, up 5.3% from 2016. The segment accounted for 53.3% of the company's overall commercial lines written premiums for the year.

The renewals to be transitioned come on a book with about $200 million in annual premiums, which represented only a fraction of the commercial lines direct premiums written associated with the Foremost companies, and an even smaller portion of the commercial lines business across the Farmers exchanges and their affiliated property and casualty companies.

The Foremost subgroup, as consolidated by S&P Global Market Intelligence, produced $973 million in commercial lines premiums on a direct basis in 2016. The Foremost companies, which also offer landlord dwelling fire and specialty homeowners programs, generated $585.5 million of those premiums from the fire and allied lines.

The small-commercial independent agent book, as the parties described it, includes a businessowner's policy for property, general liability and umbrella along with commercial auto and workers' compensation. The Foremost companies' 2016 premium writings across the commercial multiperil, general liability, workers' comp and commercial auto businesses totaled $301.4 million. The balance of their direct business came from the inland marine, ocean marine and federal flood lines.

But the deal's announcement should not be viewed as any wavering in Farmers' commitment to the small business marketplace. The Farmers group identified small business insurance written through its captive agents as an area of "prioritized growth," Farmers President of Personal Lines Roy Smith said during Zurich Insurance Group AG's November 2017 investor day. Zurich Insurance is the parent of the Farmers exchanges' attorney-in-fact.

The Farmers exchanges and their affiliated P&C companies, excluding Foremost and the 21st Century group, produced commercial lines direct premiums written of $2.77 billion in 2016.

"There is really no clear leader in the U.S. for small commercial business," Smith said.

Farmers believes it has an opportunity to extend the footprint of its exclusive agents that are actively engaged in commercial lines. Just 26% of its exclusive agents accounted for 85% of Farmers' commercial lines gross premiums written, according to the Zurich investor day slide deck. Most of that production came from agents in California.

"We don't need to change our underwriting appetite at all or really the product structure we do," Farmers CEO Jeffrey Dailey said during the investor day. "We really need to figure out how we get more agents engaged in that marketplace."

Sharon Fernandez, head of business insurance at Farmers, said in a release that the renewal rights deal would provide the group with the flexibility to increase its focus and allocate additional resources to the small business segment as it is operated through the exclusive agency channel.

The Hartford, meanwhile, has been broadening its product capabilities in the small commercial segment, driven in part by its July 2016 acquisition of the parent of excess-and-surplus lines writer Maxum Specialty Insurance Group. That group generated direct premiums written of $157.5 million in 2015, the last full calendar year prior to its sale.

The Hartford has also been working to simplify the quoting process and expand the functionality of its small commercial digital service platform.

As with any acquisition of renewal rights, the actual amount of business that renews onto The Hartford's books remains to be determined and terms of the deal have not been disclosed.

In a hypothetical scenario where all of the Foremost business renewed, it would add only approximately 5.1% to The Hartford's 2017 small commercial written premiums and 2.8% to its commercial lines writings on a pro forma basis. As such, the company said that it does not expect the deal to materially impact its financial results.