Hartville Group, Inc. (HTVL)
Interview with:
Russell Smith III, Chairman and CEO
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affordable pet health insurance solutions.

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With a niche market and focused marketing techniques Hartville Group is poised for growth

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Pets health care plan

Hartville Group, Inc.

7551 North Main Street
North Canton, OH 44720
Phone: 370-305-1352

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Russell Smith III
Chairman and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
Senior Editor

May 2003

Bio of CEO,

W. Russell Smith, III, President
The primary driving force behind Hartville Group is its founder and President, Mr. W. Russell Smith III, a licensed insurance broker who has been heavily involved in the pet insurance business for the last nine years. During this period he developed a pet health insurance plan-1997-that was underwritten by American Home Assurance Company, a member company of the American International Group (AIG).  This was the first insurance plan to provide coverage for preventive pet care in the United States. Prior to 1997, Mr. Smith as early as July 1993 began an in-depth study into the pet insurance marketplace while working part-time within the financial services industry. Mr. Smith is an experienced executive with over thirteen years in the financial services industry. He devised and directed a strategic operating plan that redirected a credit union servicing a Fortune 500 company into full service banking. Mr. Smith graduated Summa Cum Laude from Florida Metropolitan University with a Masters Business degree in Administration/Accountancy. He also holds a BA in Business and Finance from Eckerd College.

Company Profile:
Hartville Group, Inc.(OTC”HTVL), headquartered in North Canton, Ohio is a holding company specializing in niche insurance product line companies with limited competition due to specialization, which afford sizeable underwriting returns such as pet health insurance, equine, farm/ranch and animal mortality. The Company, through its pet insurance marketing subsidiary and provider of the Petshealth Care Plans, is presently among the largest pet health insurance companies in the United States. The company mission statement is: Protecting the human-to-animal bond by providing affordable insurance solutions.   Hartville believes the key to success in the US pet health insurance market is efficiency and ingenuity in operations. Hartville while having alliances with various service providers is a full reinsurance company with the capability to underwrite 100 percent of the program risk.

Hartville combines four distribution channels as its core strategies, which are electronic-point-of-sale in grocery and pet super stores; Internet (www.petshealthplan.com); take-one brochures in veterinary practices; and endorsement from the pet celebrity “Garfield”.

The plan is affordable and complete plan for pet owners with plans starting under $10 per month.

The plans pay 80% of all veterinary costs and medications received for any covered illness or injury following the annual deductible of $100.
Plans Coverage per incident / year
Basic Care Plan $1,500 / $8,000
Value Care Plan $3,500 / $11,000
Choice Care Plan $5,000 / $13,000
Plans provide pet owners:
- Freedom to use any veterinarian in the US
- Risk free 30-day free trial
- Coverage for illness common in certain breeds
- No benefit schedules, plan pays 80%
- No pre-checkups required
- Simple claim filing and timely payment
- Coverage for preventive care, e.g., vaccinations
- Few heath care exclusionsSERVICE PROVIDERS

Hartville Group Member Companies
Petsmarketing Insurance.com Agency - A marketing and managing general agency specializing in the solicitation of the Petshealth Care Plan--its trademarked Petshealth Care Plan--since December 1997. Licensed in more than 45 states.

Hartville Insurance - A reinsurance company that is registered in the Cayman Islands, British West Indies managed by Caledonian Bank (Best Review February 2002). Global Reinsurance Cayman edition reported that the Hartville Insurance Company is a classic example of captive insurance meets new technology, and demonstrates the flexibility and innovation in the insurance market (October 2001).

Hartville Equestrian, Inc. - Future equine, farm / ranch and animal mortality insurance division.TUNITY

CEOCFOinterviews: Mr. Smith, where was Hartville Group when you became its CEO and what changes did you orchestrate?

Mr. Smith: “Hartville Group was set up as a holding company, with its primary mission to provide insurance related products in niche animal related markets. The company focused on horse insurance, dog and cat, which is your pet industry and some products in the farm and ranch arena, which range from animal mortality to a variety of animal-related livestock coverage. The company first commenced in late 1997, marketing a health insurance policy for dogs and cats; that was through its Ohio Insurance subsidiary, Petsmarketing Insurance.com Agency. It brand labeled the product “The Petshealth Care Plan,” which features the Garfield and Odie, comic strip characters who add a little humor and endorsement to the product. The policy, when it was first made available to pet owners actually was the first plan to provide wellness coverage to dog and cat owners. Up until then, which goes back about twenty years from 1997, the only insurance products that were available in the pet market place were just accident and injury and some had limited wellness coverage. There was no single plan that was all-inclusive that covered routine care vaccinations and things. Our policy was the first one to introduce that in the marketplace and it is probably one of the most comprehensive plans available to pet owners today.”

CEOCFOinterviews: You recently went public, why now?

Mr. Smith: “We were a private company up until just recently. We ventured into the public arena to improve the opportunity for the company to raise capital. Hartville Group’s overall mission was to ultimately be the complete reinsurer, if not reinsure 80% of the risk of the policies that it sold. In order to do that, the company needed to increase its surplus reserves at its reinsurance company. The objective of that is the pet industry historically is a good line of business and it generates good underlying profits. Up until now, the company has been forced to share that risk with other reinsurers in what is called a “quota share treaty arrangement.” The company has been sharing some of its profits with others, which is not a bad thing.  As we move forward, however, we want to increase its earnings for its original investors and now it is public investors. The way to do that is to raise capital, increase the asset base of its insurance company and retain more of the risk.”

CEOCFOinterviews: About how much of your business is in the pet area and how much in the horse and farm area?

Mr. Smith: “Right now. 100% of our business is in pet insurance component. We look to venture into sometime mid-summer this year and commencing late fourth quarter in possible 2004, we are going to enter the farm and ranch programs.”

CEOCFOinterviews: How does pet insurance for your dog and cat work?

Mr. Smith: “It works similar to the medical plans for you; the plan covers 80% of all medical costs for illness or injury; the pet owner would pay a $100.00 deductible. If you were to go to the veterinary clinic, you would pay the vet his bill and then submit the claim for reimbursement. That would come into our company and we would process the claim and reimburse the pet owner. It is the traditional indemnity insurance plan.”

CEOCFOinterviews: Where does the wellness care component come in?

Mr. Smith: “Wellness care is all wrapped into the one major medical care policy. We have encouraged wellness by having all of our policies cover spay and neutering of pets, basically to improve the health and well being of the pets. The Wellness Care Coverage ranges from our middle policy, which is the “Value Care Plan” and our high-end plan, which is the “Choice” plan. These provide coverage for not only routine vaccinations and annual exams, but if you had a dog, it would cover your DHLPP vaccine series, puppy boosters, heartworm testing, and our highest plan even covers the actual heartworm medications, flea treatment medications and dental cleaning. Those are all provided on an annual basis and each individual pet owner is encouraged to take their pet in and have all their shots up-dated and their dog or cat checked out. It is our hope that by encouraging wellness care for pets this will help reduce and minimize future problems.”

CEOCFOinterviews: Are there vets that are tied into your plan?

Mr. Smith: “There were a number of publications by the American Veterinary Medical Association, where they polled a number of pet owners for a variety of questions, and one of those was the freedom to choose their own veterinarian. If pet owners had to choose or were forced to change their clinic, 90% of pet owners want that freedom to decide. Moving toward a managed care or HMO environment is not something we are going to do. We are going to let the pet owners go to any clinic they want whether it is a specialist or not; we will accept their claim, process it and reimburse them accordingly.”

CEOCFOinterviews: How do you sell your pet insurance?

Mr. Smith: “There have been recent editorials about companies wanting to make the healthcare plan part of employee benefit packages and there are a number of independent insurance agents that would like to promote this plan. We have focused our resources on a few core things and those things are what we do best. We first identified that even though this is an insurance policy, we must market the product like any other pet merchandise that a pet owner would buy for their pet. We have done that by three basic things; we have literature in a little more than 4000 veterinary practices in take-one stands that display the information when pet owners come in. They can pick up a brochure and review the policy and then call us and inquire about the coverage. We are hoping to be in about 50-60% of the small animal exclusive practices in the United States. There are about 20,000 practices in the United States now.  The second realm we are gong into, which all companies are now in, is the Internet. We have done some key word searches and banner ads and links on a number of pet sites. We have found the MSN pet site particularly successful and we will continue to purchase key words and run pop-up banner ads on that pet-related site of theirs. Probably one of the foremost programs we look to increase and amplify, and what we pay more attention to, is the marketing through the major grocery stores and pet super stores. There are two companies which provide a vehicle for us to do that; one is the electronic check-out messaging, as you buy products, it generates a number of coupons at the register, which give the pet owner information about pet insurance when they check out. We generate a coupon, which gives pet owners a dollar off pet food just for calling our insurance company and inquiring about the policy. There is a company called “Smart Source,” that has the instant “take one” coupons in the pet food aisle and they have a number of grocery store ‘in-store’ stands. We know a pet owner shops each week for dog and cat related products and we are going to make our information available in these stores throughout the US and we are going to give them incentives, which range from fifty cents to a dollar off any brand of pet food, just for inquiring about the pet insurance.”

CEOCFOinterviews: Are there regulatory requirement in the pet insurance industry?

Mr. Smith: “Yes, health insurance, even though it is for cats and dogs, falls under the property and casualty regulatory requirements of all the state insurance departments; pets are considered property. It is a property and casualty policy. In that regard, the policy is issued on an annual basis and runs from a one year to one year and then it renews. The insurance company that the policy is underwritten by must be licensed and admitted in that state in order to do business. The policy much be filed and approved by each state insurance department. Hartville Group’s pet insurance agency’s subsidiary, the insurance agency is licensed in the various states; we have a number of agents in our company that hold licenses as well. It is a highly regulated business, which provides benefits to us. Since we have been in business (we started doing all the filings and licensing in early 1996) we have somewhat of a protection because of the time involved for one to file a policy, get it approved and secure appropriate insurance licenses; that is about an eighteen to twenty-four month process. That creates some barriers to entry.”

CEOCFOinterviews: Is there much competition now?

Mr. Smith: “Presently, there have been a number of small independent agents, which have drafted a policy and found a few select insurance companies with which to underwrite the policies. There was one in Indiana called “Preferred Pet Health Plus;” we acquired them about a year-and-a-half ago when they lost their underwriter. There was the Premier Pet Insurance policy that was underwritten by AIG and in September (2002) we acquired this business and are moving those insureds over to the Petshealth Care Plan. Besides ourselves there are two other companies, one is VPI (Veterinarian Pet Insurance) out of California; its majority owned by the Nationwide Insurance Group. They are the oldest insurance company and go back about 20-23 years. We feel we are very competitive with them by the fact that our policy provides many benefits that their policy doesn’t or has some limitations. There is a new company, which has entered the US market.  They are out of Canada; I think it is called “Pet Health Inc.” and they offer a product called “Pet Care.” They are relatively new in the states. I would say out of three companies, the group we look at as the most competitive is the group out of California.”

CEOCFOinterviews: It sounds like you have a marketing approach that is very different from theirs, and may be targeted just right!

Mr. Smith: “Yes, VPI has historically focused its efforts and energies toward the veterinary industry; they have relied exclusively on practitioners recommending the product to clients. They assist the industry in its trade shows and on-going education. They spend an enormous amount of time building that relationship, which I’m not saying it’s a bad thing; it is good, but it’s something that is slow in coming. You will eventually generate a lot of sales but you are looking at a long run before you see some real benefits from your efforts and what the impact will be. They have been at it for twenty years and over that period of time they have certainly grown their business to a meaningful market share, so the strategy has worked. We do the same thing; we to have a presence in clinics and basically when pet owners come in they see our product and theirs. We want to compete with them in the same arena but we also want to be a little diverse and go a different route, which would be the retail stores.”

CEOCFOinterviews: Is there much dispute, as there often is with health are policies, over what is covered?

Mr. Smith: “The health insurance policy of dogs and cats is more straightforward. The policy does not cover any kind of elective procedures such as docking of tails and cropping of ears. Those elective procedures we don’t cover, which is similar to human medicine; they don’t cover elective. Our policy does not cover organ transplants or experimental surgeries. From the health aspect, our policy will cover any illness, whether from cancer to cataracts; all of that is covered under one policy. The only things that are not covered are congenital defects, which are present at birth. For the most part, all hereditary things are covered, such as hip dysplasia.”

CEOCFOinterviews: Is the pet health care industry an untapped market?

Mr. Smith: “Yes, for the most part, 60% of all U.S. households have a dog or a cat or both. Pet owners spend annually in excess of 10 billion dollars each year just on veterinary care for their pets. There was a survey done by the American Animal Hospital Association and they indicated that 81% of pet owners think of their pet as family or even children. There are probably less than 1% of pet owners that have insurance in the US and the reason that is so low is because of lack of awareness. Historically companies have not done much in the way of marketing because it is very capital intensive to market a policy nationwide.   It has been the niche companies that have evolved. The large insurance companies such as Allstate, State Farm etc., have opted to not get into this niche arena because of the time that it takes to educate, inform and build that product awareness. Most companies have focused their resources on other more readily available returns such as Auto, Home and Life insurance. Pet insurance, with consumers spending over 10 billion dollars a year offers is a substantial market. But, one must take a long-term approach to this market and it will ultimately generate sales in the long run.”

CEOCFOinterviews: Please tell us about boarding and kennel policy you will be introducing.

Mr. Smith: “It comes back to the awareness and how we increase the exposure of this product. One of the strategies was takes advantage of boarding kennels, which have a good occupancy year-round. We have contacted The American Boarding Kennel Association and are going to be making a policy available to the kennels. When pet owners come in and board their pet, they will have an option similar to when you rent a car; you will check a box if you want the option of insurance. There will be a small one-time deductible and the policy will cover 100% if your dog or cat were to become ill or be injured at the clinic. The kennels are benefited because they don’t have to self-insure or cover it themselves. There is some income potential for the boarding kennel. What it does is provide our company with names of pet owners and what kinds of pets they have. In turn, we mail the pet owners more information on our traditional policies so they can continue coverage when they take their pet out of the boarding kennel. It is a vehicle to provide coverage but ultimately provide us with leads so we can continue to market the policy and increase awareness.”

CEOCFOinterviews: You raised capital recently; will that hold you to get to the point where you need to be?

Mr. Smith: “Presently, we write around six million dollars in premium annually. In 2003, we look to increase that to around twelve million in premiums. As we look forward, our ultimate goal is to grow the business up to about forty or fifty million in annual written premiums. As we increase our sales, we are constantly going to be in the capital markets seeking to raise capital, not for marketing costs but to increase the company’s insurance reserves. As we write more and more risk and we want to retain 60 and 80% of that risk and in order do that we have to increase our reserves. The company will be going back into the market to raise somewhere between five and ten million dollars in the next twelve to eighteen months.   Probably in the third year, we will look to raise another ten or fifteen million. That capital is to be put towards surplus and reserves so the company can maintain its writing retention and underwriting profits.”

CEOCFOinterviews: You have an easy to product. It must make it easier to go out and raise money than some of the other products out there!

Mr. Smith: “Anyone can pick up the phone and talk about a dog or cat. Most people have had a pet and have had veterinary bill or at least know someone who has. This is something that people can understand and relate to. It is a company that can be easily explained to a potential investor.”

CEOCFOinterviews: What would you like to say to shareholders and potential investors?

Mr. Smith: “The pet insurance has been very successful worldwide. The U.K. writes presently in excess of 500 million dollars in premiums for dogs and cats. The policies in Canada have been very successful and when you step back and look at the entire market, the largest market in the world is the U.S. The first question that comes to investor’s minds is if it is that successful worldwide, why has it not been that successful in the US. A little bit of insight for the shareholder is that it is not that our market does not exist; it has been the commitment on the part of an insurance company to stay with the market, to educate, inform and make the sale. Most companies have been focused on a quick return and they want to see sales. In short insurance companies wanted sales to ramp up quickly. In the last ten years, companies that have been in the pet insurance arena have made strides and milestone. All of that is paying off now. We are in the market at the right time too not only to reap the benefits of our efforts but of our predecessors’ as well. Over the next three to five years, there is going to be some good returns for the companies that are in this business.”


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